There is a major difference between Europe’s latest decision against Apple and the Obama administration’s efforts to limit multinational companies’ tax avoidance practices, Treasury Secretary Jacob Lew said.
“The answer is not to reach into each other’s tax base,” Lew said Oct. 6 at the Peterson Institute for International Economics when asked about a possible contradiction between administration policy and its opposition toward the latest ruling from the European Commission (EC) on Ireland’s special tax deal for the Cupertino, Calif.-based company’s Irish operations.
{mosads}The Treasury Department has been a staunch opponent of the EC’s investigation of member countries providing questionable tax benefits to U.S. companies, including the commission’s latest decision: Apple must return around $14.5 billion to Ireland. In August, the EC ruled that Ireland’s special tax deal or “state-aid” for one of the largest companies in the world was illegal.
At the same time, Treasury has been working on foreign financial reporting initiatives that aim to limit corporate tax-avoidance strategies. One major undertaking is the base erosion and profit shifting (BEPS) project led by the Organization for Economic Cooperation and Development (OECD). Over 100 countries and jurisdictions, including those in Europe, are implementing BEPs, according to the OECD website.
In that sense, Lew said the U.S. government and the European Commission both agree that large multinational companies shouldn’t be able to game the “international tax system to avoid paying taxes anywhere or pay at a low rate that it is offensive to our [economy].”
Sovereignty at issue.
The disagreement lies on the idea of “having one sovereign entity reach into another sovereign entity’s tax base and change tax laws retroactively, which is what we believe the state-aid decision did,” Lew said.
So the commission’s latest action is “fundamentally inconsistent with the whole notion of how we work on tax policy together internationally and each of us independently,” Lew continued.
The secretary highlighted that much progress has made been made over the past four years in the BEPs project than what others have attempted to do in the last 20 years. He said that kind of policy is a much better approach than the EC’s state aid cases.
“Dealing with issues like transfer pricing, dealing with how to coordinate our systems — I think the answer is more work like that and less kind of reaching into each other’s areas,” Lew said.
The secretary continued to acknowledge that the federal government needs to fix the “broken” U.S. tax system, which is pushing domestic companies to pursue certain business practices to avoid the high U.S. corporate tax rates, such as moving their base to countries with lower tax rates or stashing U.S. profits in so-called foreign tax havens.
A broad bipartisan approach would be a minimum tax rate on U.S. companies’ repatriated foreign earnings, but no agreement has been made yet due to the current political climate, Lew said, adding that discussions, however, “have laid the groundwork.”
If there is a low and a high rate, then “you’re in a place where traditionally our political systems … can find a compromise,” the secretary said.
The total amount of U.S. corporations’ foreign earnings have increased to $2.6 trillion from $2.3 trillion in 2012, according to recent data from the Joint Committee on Taxation. The House Ways and Means Committee released the estimate on Sept. 29.
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