Recently, a letter was sent to the U.S. Treasury from five European ministers of finance warning that some international provisions within the TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Cuts and Jobs Act (TCJA) are out of line with international norms. The ministers identified three provisions in the House and Senate versions of the bill that could violate international rules. Although the concerns of the five ministers are valid, it is unclear whether these rules directly violate any international law. As such, the House and Senate should not change these provisions in the current bill. Instead, they should wait for international organizations to adjudicated the TCJA international rules to determine if they, in fact, violate international conventions.
In a letter to Treasury Secretary Mnuchin, the finance ministers of the largest five countries in Europe–England, France, Germany, Italy, and Spain–warned that the base erosion and international rules in the TCJA are less than conventional and could impact international trade. The ministers cite the excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. on payments to foreign-related companies in the House version of the TCJA and the Base Erosion and Anti-Abuse (BEAT) and Global Intangible Low Tax Income (GILTI) provisions in the Senate version as the most likely to cause issues with the international community.
The letter argues that the excise tax on payments to foreign-related companies in the House bill would effectively double-tax companies engaged in transatlantic trade. The discrimination against foreign goods could lead to a dispute with the World Trade Organization (WTO). However, for the WTO to directly intervene, the tax must be declared a barrier to trade. In this case, the excise tax would have to be ruled equivalent to a tariffTariffs are taxes imposed by one country on goods or services imported from another country. Tariffs are trade barriers that raise prices and reduce available quantities of goods and services for U.S. businesses and consumers. . But given a firm could avoid the tax by either declaring the transactions between companies Effectively Connected Income (ECI) or purchasing similar goods and services from unrelated companies, it is not clear that the WTO would rule the provision a barrier to trade.
There were similar arguments in the BEAT provision. The ministers argue that the provision would double-tax companies, particularly international financial groups. They point out that this provision would tax activities required by U.S. banking regulations, which would disadvantage foreign financial institutions. They warn that this could constitute unfair trade practices.
The GILTI provision offers lower rates on income earned abroad. The ministers argue this is effectively an IP regime unlike those sanctioned by the OECD. They note that the GILTI does not have the “nexus” rules, which state that for a lower rate to apply to IP income the IP must be developed in the country where the IP is domiciled. Without the nexus approach, the ministers argue that the GILTI is effectively an illegal export subsidy.
The letter addresses several possible problems with these provisions that should be addressed. However, those involved in reconciling the House and Senate bills should not exclude these provisions for the final bill for the reasons mentioned by the ministers. First, there is considerable uncertainty whether these provisions violate international rules. If these provisions run afoul of international conventions, the WTO and OECD have processes by which disputes can be adjudicated. Following these conventions of dispute resolution gives each side an opportunity to argue its position and provide expert analysis. It is through these debates that international rules are improved and amended.
Second, after the bill has been signed by President Trump, there are two more possibilities to amend the TCJA. Congress often passes technical corrections to large and technical bills such as the TCJA. Loose definitions within the provisions could be amended to functionally eliminate issues that could cause problems with international organizations. Second, many provisions in the TCJA refer to the U.S. Treasury to define specific rules. Treasury will have the opportunity to mitigate the friction between the TCJA, U.S. tax treaties, and the international community when regulars for the TCJA are written.
The European ministers have valid concerns about the TCJA, but their concerns should be addressed after the bill has passed. For now, EU countries would be better off developing research to bolster their arguments when the provisions are adjudicated and when Treasury is writing regulations. If these provisions prove to be problematic for the U.S. economy, they will be repealed soon enough. Until then, the TCJA’s provisions need more research than warnings.
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