EU ups pressure on US over tax reform with second letter to Treasury Secy

BRUSSELS, Dec 12 (Reuters) - The European Commission told U.S. Treasury Secretary Steven Mnuchin on Tuesday a planned tax overhaul in the United States could "seriously" hamper trade and investment flows across the Atlantic.

A letter from the Commission to Mnuchin, seen by Reuters, expressing the concerns follows one sent to him on Monday by the finance ministers of Germany, France, Britain, Italy and Spain setting out similar views.

In a further escalation of the transatlantic row, European banks said on Tuesday the U.S. tax reform, which is expected to be passed by the end of the year, could distort financial markets "in a major way".

The EU executive's letter, signed by four commissioners in charge of finance, economy and trade, said the planned overhaul "contains elements that risk seriously hampering trade and investment flows between our two economies", and would likely be in breach of international trade rules and commitments.

The U.S. reform, which would slash corporate tax rates from 35 to 20 percent and significantly revise deductions, could be incompatible with World Trade Organisation's rules, because some of its provisions would discriminate against foreign business in the United States, the Commission said.

Brussels also reiterated EU ministers' concerns that the planned measures could result in export subsidies that are not allowed under WTO rules.

"Tax regimes are becoming a flash point in trade relations again", said Simon Evenett, a trade professor at the University of St Gallen in Switzerland.

He added the U.S. move was part of a broader global trend to "using national tax systems to favour local firms when they export and to discourage outsourcing."

The EU Commission also pointed to the risks for European financial firms in the United States, which could be hit by double taxation and face problems in meeting global capital targets.

Banks echoed these concerns. Some of the planned measures "could severely affect foreign financial institutions operating in the U.S.," a spokesman for the European Banking Federation told Reuters on Tuesday.

The draft provisions "would challenge the ability for these financial institutions to effectively hedge the risks," he added. The commission also said the U.S. overhaul could breach global commitments on the taxation of intellectual property agreed at the Organisation for Economic Co-operation and Development. (Reporting by Francesco Guarascio and Tom Miles, Editing by William Maclean)