Governments in Paris, Berlin, London, Madrid, and Rome sent a joint letter to U.S. Secretary of the Treasury Steven Mnuchin in mid-December 2017 warning him of the risk of tax treaty violations arising from the tax reform under discussion in the United States.

If Donald Trump is relying heavily on the tax reform submitted to Congress in autumn − to rebuild his image − he is sending shudders through Europe’s capitals. The topic, in early December, was put on the agenda of the Ecofin Council that brings together the 28 EU Ministers of Economy and Finance.

It is not only the prospect of the U.S. corporate tax rate going down from 35% to 21% that keeps European ministers awake; this drop is part of a global trend that has seen OECD average tax rates drop to 23% in 2017, and even France eyeing 25% by 2022.

U.S. multinationals getting “unfair” advantages

U.S. tax reform is, above all, revolutionizing the taxation of American multinationals. Trump aims to overturn rules that have been in force since J.F. Kennedy; profits made abroad by U.S.-based multinationals are taxed in the United States only if and when those profits are repatriated to the United States.

New rules would apply immediate territorial taxation by taxing all profits, repatriated or not, at 14%, while imposing safeguards to prevent these profits from escaping to tax-friendlier jurisdictions. Measures which, according to Paris and Berlin, could violate World Trade Organisation (WTO) non-discrimination rules as well as bilateral tax treaties designed to avoid double taxation.

Certain unconventional tax rules could conflict with U. S. tax treaties and significantly impede international trade, warns the letter to the U.S. Treasury signed by the French, German, British, Spanish, and Italian finance ministers.

New excise tax penalizes intra-group purchases from Europe

The tax reform also introduces a 20% excise tax on payments for goods and services from U.S. to foreign entities of the same group. “Given that half of our trade corresponds to intra-group flows, this could seriously hamper trade and investment flows between our two regions,” protest EU ministers.

Intra-group financial transactions would also be affected by a 10% minimum “tax against the erosion of the tax base,” which is interpreted by EU ministers as “blatant discrimination in favor of intra-US transactions.”

Finally, the tax reform provides for a preferential rate of 12.5% on income from intellectual property abroad, which amounts to “subsidizing exports in relation to local production,” according to European governments, pointing to a violation of OECD guidelines on combating tax evasion.

It remains to be seen whether Congress will listen to European warnings, keeping in mind that the tax reform in the U.S. is very important to the President, anxious to pamper to big American companies.

It is interesting to note that the ‘Brexiting’ United Kingdom remains united with the chorus of the “failed Continentals” in protesting purported American moves. Weren’t bilateral “special relationships,” in particular with Trump’s U.S., among the key goals of leaving the European Union?