Dec 12, 2017 | 19:22 GMT

4 mins read

EU: Europe Weighs In On U.S. Tax Reform Debates

As legislators in the United States struggle to develop a workable compromise from two different tax reform plans, leaders across the Atlantic are voicing their disapproval of both versions. On Dec. 12, the finance ministers of Germany, France, Italy, Spain and the United Kingdom sent a letter to U.S. Treasury Secretary Steven Mnuchin in which they expressed their concerns about the contents of both the Senate's and the House of Representatives' bill. The letter articulates that the countries are worried various reform components would break international treaties and undermine trade between Europe and the United States, and in it the ministers threaten retaliation if the reforms come to pass.

The group of finance leaders are concerned primarily about three elements of the different bills. The first is the Senate's proposal for a corporate tax cut from 20 percent to 12.5 percent for income derived from exported goods, which the United Kingdom believes is a violation of World Trade Organization (WTO) rules that prohibit countries from using tax policies to make exports cheaper or imports more expensive. The second is a "base erosion and anti-abuse tax," also in the Senate bill. The third is the House's planned 20 percent excise tax on financial transactions, which would also apply to U.S. firms that import goods from its own factories abroad. This last measure is likely a way for the American government to recover taxes from European countries with a considerable U.S. corporate presence, such as Ireland.

The finance ministers' letter amplifies existing friction between the United States and the European Union on the subject of trade. In 2016, the union launched a legal case against U.S. company Apple to claim taxes in Ireland that the U.S. government also felt were its due. Then in early 2017, U.S. President Donald Trump kicked off his time in office by complaining about Germany's trade surplus with the United States. And though the president has shifted his attention elsewhere in the months since, the trade relationship between the United States and Europe remains strained.

The letter also complicates U.S.-U.K. relations. When the United Kingdom decided to leave the European Union, it naturally began focusing its attention on strengthening ties with the United States — a strategy it has long employed as a means of balancing out Europe's influence. But this has been easier said than done, given how unpopular the U.S. president is within the United Kingdom. Trump has still not made a visit to the country, despite traveling to many other nations that could be considered less friendly to the United States, such as China. And Washington's recent decision to apply significant duties to certain planes made by Canadian aerospace manufacturer Bombardier has also negatively affected London; Bombardier provides 4,000 jobs in Northern Ireland, a region of major significance during Brexit negotiations. By contributing to the letter of concern to Mnuchin, the United Kingdom is again in a position of opposing the United States, further complicating attempts at a trans-Atlantic partnership.

Ultimately, the European Union's letter will do little to shape U.S. tax reform. The most likely form of retaliation Europe could take would be to make a case against the United States at the WTO, but even if the bloc wins, there is no guarantee that the United States would be willing to acknowledge the ruling. Indeed, the world's largest economy might prefer to challenge the system instead — and the European Union is far more worried about the consequences of a disrupted WTO than is the United States. Furthermore, the factors that shape U.S. tax reform are primarily domestic; outside voices rarely have a major influence. Successful tax reform would be seen as a crowning achievement for the current U.S. administration, and given the difficulty that Congress has had so far in agreeing on a draft of the reforms, representatives are unlikely to be willing to make changes for the sake of the European Union.

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