Last week, the finance ministers of Europe's five biggest economies — Germany, France, the UK, Spain and Italy — wrote an anxious letter to their American colleague, US Treasury Secretary Stephen Mnuchin, and copied it to all senior Republican politicians in the Congress and Senate.

The letter's thrust: The draft US tax bill, if passed as written a week ago, would represent a break with global fair-taxation rules as applied to corporations, and represent a thinly disguised form of trade war.

"The United States is Europe's single most important trade and investment partner," the finance ministers wrote. "It is important that the U.S. government's rights over domestic tax policy be exercised in a way that adheres with international obligations to which it has signed-up. The inclusion of certain less conventional international tax provisions could contravene the US's double taxation treaties and may risk having a major distortive impact on international trade."

A day later, a similar letter was sent to Mnuchin by the European Commission's four most senior economic officials and made many of the same points.

Keeping mum

The two letters didn't get much of an answer — at least not a public one, though quiet edits to the bills taking European concerns into account may be happening behind the scenes.

Draft federal legislation in the US always exists in at least two separate versions: one drafted in the Senate, and the other in the House of Representatives. The "conference process" is the negotiation that reconciles the differing House and Senate versions of a draft bill. It's due to come to a close this week.

Read more: Ireland to finally start reclaiming Apple back taxes

Three specific measures were brought up in the European letters.

Excise tax

First, the House bill proposed a new "excise tax" of 20 percent, levied on payments made when an American company buys goods or services from a foreign subsidiary or "affiliate" — unless the subsidiary elects to treat the payments as income in the US.

The European finance ministers argued that this measure would break WTO rules because it levies a tax only on foreign goods and services, not on the equivalent domestically produced goods and services. They said it also amounts to "double taxation," because it would effectively tax the profits of non-US-resident companies — after they already paid taxes on those same profits in their home countries.

Read more: Paradise Papers: Apple shifted billions offshore to avoid tax

"Bearing in mind that almost half of transatlantic trade is intra-company trade, this risks seriously hampering genuine trade and investment flows between our two economies," they wrote.

Watch video 01:43 Share EU ministers tackle tax havens Send Facebook google+ Whatsapp Tumblr linkedin stumble Digg reddit Newsvine Permalink https://p.dw.com/p/2opFw EU ministers tackle tax havens

Base erosion tax

Second, the Senate bill featured a "base erosion and anti-abuse tax" (BEAT) provision. "Base erosion," or more properly "base erosion and profit shifting" (BEPS), is a technical term referring to various accounting schemes corporations use to legally shift profits from where they're earned, to ultra-low tax jurisdictions.

To take a common example: Multi-national corporations often establish their formal headquarters in a tax haven, assign their intellectual property to that headquarters, and then establish contracts requiring all the company's foreign subsidiaries to pay an exorbitant "licensing fee" for the use of the corporate logo or other corporate intellectual property.

Global elite named in Paradise Papers Bono and Nude Estates U2 frontman and activist Bono was one of the highest-profile players named in the papers. In an elaborate web of financial transactions, Bono invested in a Maltese company called Nude Estates that was involved in a shady deal over a Lithuanian shopping mall. Malta is famous for its liberal tax policies. A spokesman for the singer denied any wrongdoing.

Global elite named in Paradise Papers US commerce secretary President Donald Trump's Secretary of Commerce Wilbur Ross was listed in the papers for his interests in the Russian gas company Sibur. Ross has now been accused of failing to disclose his Russian connections to Congress during his confirmation hearing, though Ross has argued that as the company is not one facing US sanctions, he was not obliged to disclose them.

Global elite named in Paradise Papers Queen's private estate in hot water Queen Elizabeth II is provided an income by her private estate, the Duchy of Lancaster. According to the Paradise Papers, the duchy invested 10 million pounds ($13 million) in offshore accounts in Bermuda and the Cayman Islands. The estate has said that the investments are legal.

Global elite named in Paradise Papers Formula One champion Reigning Formula One champion Lewis Hamilton reportedly avoided taxes on his private jet through an elaborate tax avoidance scheme, according go the Paradise Papers. The leaked documents show that Hamilton received a £3.3 million tax refund in 2013 after his plane was imported to the Isle of Man, a low tax British dependency located off the western coast of England.

Global elite named in Paradise Papers Germany's former chancellor Gerhard Schröder, leader of Germany from 1998 to 2005, was named for his management role at the Russian-British energy firm TNK-BP in 2009. The company was registered in the tax haven British Virgin Islands. In 2013, TNK-BP was bought by Russian energy giant Rosneft — where Schröder is now the independent director of the board.

Global elite named in Paradise Papers Colombia's president caught According to the papers, Colombian President Juan Manuel Santos is listed as the director of two offshore companies in Barbados. He previously claimed to have severed ties with them in 2000 when he became minister of finance.

Global elite named in Paradise Papers Lifestyles of the rich and famous Not all of the revelations in the Paradise Papers necessarily detail illegal activity. But they do shed light on some of the strange investments and luxurious possessions of the world's elite, including Microsoft co-founder Paul Allen's yacht. Besides Microsoft, other US companies like Apple, McDonald's, Facebook and Walmart were found to have ties to Appleby.

Global elite named in Paradise Papers Madonna medical supplies One of the odd investments listed in the Paradise Papers is singer Madonna's stake in a medical supply firm. Actress Keira Knightley was also found to have stock in a Jersey-based real-estate firm. Author: Elizabeth Schumacher



The licensing fee is set at a rate that cancels out the net revenues of the subsidiary corporations, leaving them paying no taxes in the countries where they actually produce or sell goods or services. The net effect of this "profit shifting" scheme is the erosion of the tax base of these countries — hence "base erosion."

Base erosion — or protectionism?

The EU finance ministers said that: "Preventing base erosion is an important goal," but "the provision appears to have the potential of being extremely harmful for the international banking and insurance business, as cross-border intra-group financial transactions would be treated as non-deductible and subject to a 10 percent tax. This may … harmfully distort international financial markets."

The finance ministers concluded that "some of the proposed measures could constitute unfair trade practice and may discourage non-US financial institutions from operating in the US."

Lower taxes on income from intangibles

Finally, the Europeans criticized a proposal in the Senate bill for a preferential tax regime for "foreign-derived intangible income."

Read more: US broadside leaves WTO meeting in tatters

In essence, when US companies earn income outside the US via licensing fees, those fees would be taxed at a reduced corporate tax rate of 12.5 percent (compared to a proposed 21 percent federal tax rate for other corporate profits).

The Europeans wrote that this would subsidize exports compared with domestic consumption, and could face challenges as an illegal export subsidy under WTO rules.

Moreover, "the design of the [proposed] regime is notably different from accepted IP [intellectual property] regimes by providing a deduction for income derived from intangible assets other than patents and copyright software, such as branding, market power, and market-related intangibles."

In future, US corporate taxes would be about 25 percent — meaning companies may invest more in the US instead of Europe

Legitimate concerns

Are the criticisms from Europe justified? In a word: Yes, according to the experts consulted by DW.

Clemens Fuest, the president of the Ifo Institute for Economic Research in Munich, said: "The European Commission's criticism of the US tax plans is justified. The proposed measures would disrupt international trade and lead to double taxation."

Tobias Hentze, an economist at the German Economic Institute in Cologne, told DW that he was worried the tax reforms could be the spark for the next round of a "race-to-the-bottom" of jurisdictions competing to offer corporations ever-lower tax rates.

If the reforms go through, Hentze said, the US will go from being a high-tax to a low-tax country. Until now, the tax burden on companies has been significantly higher in the US, with a tax rate of 39 percent, compared to 30 in Germany or 34 in France.

America First, again

The US also proposes to play unfairly by taxing profits that have already been taxed in Europe, Hentze said, concluding: "The underlying message to multinational companies is: If you produce here in the US, you will be spared the double taxation."

Read more: Opinion: Donald Trump's policies have fed China's rise as world power

The reform package provides further incentives for companies, too. With the creation of a so-called patent box, US legislators want to incentivize companies like Apple to register their patents and trademarks in the US, by means of a preferential tax rate on profits generated (12.5 percent). A fair tax regime, in Hentze's view, should not offer tax rebates for certain types of profits.

"However, countries like Ireland or the Netherlands already do that too," Hentze pointed out. "Therefore, the indignation of EU finance ministers is not very credible on this particular point."