The European Commission last week moved one step closer toward implementing a series of tax and regulatory proposals aimed directly at American businesses. This proposal is a thinly veiled tax grab at U.S. businesses and workers that will make it even harder for American businesses to operate across the world and could leave taxpayers on the hook for billions in retroactive payments.
This plan is being developed based on the Organisation for Economic Co-operation and Development’s (OECD) base erosion and profit shifting (BEPS) project, a broader effort by tax collectors in many countries to surreptitiously extract more revenue from businesses operating across the world.
The European plan includes an information-sharing regime that will allow countries to trade sensitive tax information with each other and will designate many existing tax arrangements as “illegal state aid.” This could completely overhaul how business taxes are applied by unilaterally overriding existing tax agreements held between the U.S. and many of its trading partners and could force U.S. companies to pay taxes retroactively.
Clearly, the impetuous behind this proposal is to force U.S. businesses to pay more in taxes. Officials in the EU have their eye on up to €70 billion (roughly $75 billion) they say businesses – the majority of them American – owe in additional taxes each year. In reality, the plan will allow EU states to tax income that they never had any right to tax in the past.
Treasury officials have already challenged the EU plan, which will be implemented in a two-year window once approved by the 28 EU members. Top Treasury official Robert Stack expressed concern that U.S. taxpayers will be left on the hook to pay for EU aggression and called into question the “basic fairness of the proceedings.”
This tax grab has also drawn bipartisan attention from Congress, led by Finance Committee Chairman Orrin Hatch (R-Utah) and Ranking Member Ron Wyden (D-Ore.) who share Treasury’s concern that the plan is discriminatory and will hit American businesses and taxpayers.
Given this bipartisan agreement, Congress and the Obama Administration should vigorously defend U.S. companies from this European aggression. But lawmakers should also be proactive and look to ease the burden that the American tax code places on business competitiveness.
The average rate in the developed world is 25 percent, and countries like the United Kingdom, Germany, and Canada have rates even lower rates. The American corporate rate – at almost 40 percent is an outlier, and must be reduced substantially to compete with the rest of the modern world.
In addition, the U.S. is one of the few remaining developed countries to have a worldwide tax system. This means that all businesses profits of an American business are taxed, even profits earned and taxed overseas. Although companies are allowed limited tax deferral on foreign earned income through a tax credit, this system nevertheless creates needless complexity.
This combination of an abnormally high tax rate and an outdated worldwide taxation system creates an environment that squeezes American businesses. Conversely, fixing these problems will provide the economy with a much-needed boost by encouraging stronger economic growth, more jobs, and higher wages.
Given the imminent European tax grab, Congress and the administration must double down to defend American business interests from this aggression. At the same time, there is urgent need for Congress to reform the ineffective tax code that is crushing U.S. business.