WASHINGTON: Conflict over trans-Atlantic tax practices escalated this week as Treasury Secretary Jack Lew complained to European Commission President Jean-Claude Juncker that American firms are unfair targets of state-aid investigations.

Lew wrote Juncker on Thursday saying the tax probes are hurting international efforts to crack down on corporate tax evasion. He said European Union inquiries are creating “disturbing international tax precedents” and seem to target US-based firms without sufficient justification. The letter raises the US concerns to a higher level, building on previous comments from a senior Treasury tax official.

The EU is pursuing investigations of member nations’ tax arrangements with companies including Apple and McDonald’s. The commission “appears to be adopting an entirely new legal theory and applying it retroactively in a broad and sweeping manner,” Lew said in the letter. “We respectfully urge you to reconsider pursuing these unilateral actions and instead focus on our collective work.”

Lew said the United States already is working to stamp out the practice of American companies moving their revenues overseas to avoid paying taxes at home. At the same time, “well-established international tax standards” don’t give the EU a right to increase levies, his letter said.

“US multinationals generally do not conduct the cutting- edge research and development that creates substantial value in the European Union, and as a result, comparatively little of their income is attributable to their European operations,” Lew said.

Apple, McDonald’s and Starbucks are already subject to EU investigations, and EU Competition Commissioner Margrethe Vestager last month signalled she’s willing to add Google parent Alphabet’s recent 130 million-pound ($188m) tax deal with the UK to her growing list of investigations. At the same time, the EU has maintained it’s not singling out US-based corporate titans.

In response to Lew’s letter, the Brussels-based commission insisted its actions aren’t targeted and are in line with the bloc’s longstanding principles. “EU law applies indiscriminately to all companies operating in Europe — there is absolutely no bias against US companies,” the EU’s executive arm said.

Vestager last month announced a probe into Belgian pacts with mainly European firms, seeking to recover as much as 700 million euros ($793m) in tax breaks for at least 35 companies, including Anheuser-Busch InBev and BP. Responding to Lew’s letter, the commission said its tax-ruling decisions have so far mostly sought to recoup taxes from European companies.

EU laws allow nations to set their own tax rates and require unanimous approval of overarching tax regulations. In addition, the commission monitors government benefits to corporations to make sure different types of firms can compete fairly.

If the EU continues to crack down on the tax letters that its member nations offer companies, US firms may decide to take their business elsewhere, said Ryan Dudley, an international tax partner at Friedman LLP in New York, in a telephone interview. He said countries offer individual tax rulings to companies to provide certainty to employers, not as a means of evading their own tax laws. Cross-border companies use this guidance to choose where to put down roots, Dudley said.

“Where there’s uncertainty there’s going to be an unwillingness to engage in business,” he said. “If the components of the business that they put into Luxembourg or any other country will be taxed favourably, and any taxpayer who puts components of their business into Luxembourg is taxed in the same way, I don’t see how that’s state aid.”

Bloomberg-The Washington Post Service

Published in Dawn, February 14th, 2016