EU State aid recoveries from tax rulings should be prospective only, US official says

by Julie Martin

The US government is trying to persuade the EU Commission that it is inappropriate to require EU States to recover “retroactive” tax from multinationals upon a finding that illegal State aid was provided through overly-generous private tax rulings, Robert Stack, Treasury Deputy Assistant Secretary for International Tax Affairs, told two US Congressional committees on December 1.

Speaking at separate hearings held by the Senate Finance Committee and the House Ways and Means Subcommittee on tax policy, Stack said that it is unfair to impose tax retroactively in the EU State aid cases because the EU Commission is using a novel theory to impose tax that no one expected. Stack said a prospective remedy would fix the behavior, which is the purpose of the Commission’s challenge.

Stack also told both Congressional panels that Treasury has not yet determined whether amounts recovered from multinationals by the EU States would be considered creditable foreign taxes for US tax purposes. If so, the burden of the State aid recoveries would be borne by US taxpayers, Stack said.

Stack said that while the EU Commission set the Netherlands’ recovery in the Starbucks State aid case at “a relatively modest 30–40 million euros,” if other State aid decisions impose retroactive recoveries, amounts could be substantially larger — perhaps totaling billions of dollars.

Lawmakers, including US Senator Rob Portman (R-OH), expressed concern about the possibility of such an outcome. The tax reform deals under consideration by Congress to transition the US international tax system to a territorial tax system rely on funds from a deemed repatriation, Portman said. That deemed repatriation would be a lot smaller if there are large offsetting foreign tax credits from State aid recoveries, he noted.

Lawmakers on the House Ways and Means Committee panel expressed concern that the OECD/G20 base erosion profit shifting (BEPS) plan agreements will encourage US companies to transfer high value jobs overseas. According to Gary Sprague, counsel for the Software Coalition, this concern is valid.

The UK’s 10 percent tax rate for IP box income and Ireland’s likely 6.25 percent rate “are very powerful incentives,” Sprague said. As BEPS rules now require a direct connection between the amount of income that can be taxed in an IP box and the R&D activity performed in country, there is an incentive to move R&D functions to these countries, Sprague said.

Sprague also said that BEPS changes to transfer pricing rules will encourage US multinationals to locate high value jobs outside the US to “solidify” foreign structures located in low tax jurisdictions so as to better withstand tax challenges from market jurisdictions.

Martin Sullivan of Tax Analysts said that if BEPS succeeds, multinationals will no longer be able to shift profits with minimal disruption to their activities, but will instead need to shift jobs and capital investment to lower their taxes. Sullivan said  BEPS increases the likelihood that countries with low corporate tax rates will attract jobs at the expense of high-tax jurisdictions, like the US.

Sullivan said the US should adopt a very low corporate tax rate of maybe 10–15 percent, but to avoid impeding growth, should not offset the revenue loss by rolling back corporate investment incentives.

Instead, the US should follow the lead of European nations and find alternative sources of revenue, such as a VAT or higher taxes on shareholders, Sullivan said. The tax burden on capital should be moved away from mobile corporations that can move outside the US, he said.

– Julie Martin is a US tax attorney and a member of MNE Tax’s editorial staff.