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Treasury to EU: Back off on tax probes of US companies

U.S. Secretary of the Treasury Jacob Lew
Philippe Lopez | AFP | Getty Images
U.S. Secretary of the Treasury Jacob Lew

There's a giant pot of corporate gold sitting outside the United States, and the U.S. Treasury and the European Commission are squabbling over how to get their hands on it.

American multinational corporations have stashed more than $2 trillion in profits and assets outside to avoid paying what many companies argue are unduly high U.S. corporate tax rates.

Over the past few years, the European Commission has opened investigations into a handful of those companies, including Apple, Starbucks and Amazon, to determine whether they owe taxes to European countries.

But the Treasury Department, in a "white paper" released Wednesday, said those investigations have gone too far.

The paper attacked the legal approach the EU is using to determine tax liabilities on American companies, saying it targets "income that (European) Member States have no right to tax under well-established international tax standards."

The paper also argued that taxes collected by European countries could, in effect, come right out of the pockets of American taxpayers. That's because taxes collected by European countries could be deducted from any future payments to the Treasury.

"That outcome is deeply troubling, as it would effectively constitute a transfer of revenue to the EU from the U.S. government and its taxpayers," the paper said.

The report urged the European Commission, the executive arm of the EU, to "return to the system and practice of international tax cooperation that has long fostered cross-border investment between the United States and EU Member States."

And it warned that the U.S. "continues to consider potential responses should the Commission continue its present course."

The Treasury's latest salvo comes as the European Commission is finalizing a probe into allegations that Apple struck a sweetheart tax deal with the Irish government to avoid U.S. taxes. A decision in that case is expected next month.

Apple is among dozens of U.S. companies that use various tax strategies to shift money among subsidiaries around the world and avoid paying U.S. taxes. Those strategies include moving assets to countries with low tax rates or booking sales in a tax haven that didn't actually happen there.

Apple has defended the practice, saying it's perfectly legal.

"It is the current tax law," Apple CEO Tim Cook told The Washington Postearlier this month. "It's not a matter of being patriotic or not patriotic."

The Apple case prompted Senate hearings and calls for corporate tax reform. Last year, the Obama administration proposed a one-time "tax holiday" that would let American companies repatriate offshore profits at a reduced tax rate.

Corporate tax reform has also been proposed by the Organization for Economic Cooperation and Development, a policy group, which has issued recommendations to overhaul global tax laws and treaties to better capture untaxed corporate profits.

The stakes are high in the tug of war between the U.S. and EU over offshore corporate cash, estimated at more than $2 trillion by Citizens for Tax Justice. That's enough to wipe out the U.S. budget deficit if it was subject to U.S. taxes, according to the group.

At least 358 large U.S. companies collectively maintain 7,622 separate overseas subsidiaries holding $2.1 trillion in profits, the group said in a report last year. The estimates come from corporate regulatory filings.

Despite widespread calls for U.S. tax reform — including the White House proposal for a "tax holiday" for companies that bring cash back home — the overhaul remains mired in the complex web of special interests that such an revamp would require.

A similar effort on a global scale would be even more complex. While some of the OECD's recommendations could be implemented by individual governments with changes to their tax laws, others would require new tax treaties between countries.