Europe groups fear being caught in US tax crackdown
Snow falls on a statue of Albert Gallatin, former U.S. Treasury secretary, outside the U.S. Treasury in Washington, D.C., U.S., on Monday, March 3, 2014. Temperatures plummeted across the U.S., bringing snow, grounding flights and closing schools and government offices as a late winter storm zeroed in on Washington, sparing New York City a direct hit. Photographer: Andrew Harrer/Bloomberg©Bloomberg
Snow falls on a statue of Albert Gallatin, former U.S. Treasury secretary, outside the U.S. Treasury in Washington, D.C
European multinationals have launched a rearguard effort in Washington to prevent them becoming unintended victims of a US crackdown on tax-driven international mergers.
As the Obama administration finalises plans to curb “tax inversion” deals, big European companies that typically stay out of US politics – including Nestlé, Royal Dutch Shell, Airbus and BASF – are alarmed at the risk to their own US divisions.
US companies are using inversions to shift their addresses to countries with lower tax rates, reducing their US tax bills and putting their non-US earnings beyond the reach of the American authorities.
In recent weeks a little-known lobby group has arranged for executives from European multinationals to voice their concerns directly to administration officials and lawmakers, according to a person with knowledge of the meetings.
The deals have been condemned by some Democrats and Republicans as acts of “desertion” and the Obama administration is expected to unveil executive action to curb them as early as this week.
Jack Lew, the US Treasury secretary, said on Sunday that while the White House wanted to overhaul the whole corporate tax system, “there is one loophole that should be shut down immediately – inversions”.
The European multinationals have played no part in inversions. But they are concerned that moves to limit the economic benefits of the deals would increase their US tax and borrowing bills because they have the same structure as inverters: a foreign-domiciled parent controlling a US subsidiary.
Alex Spitzer, a senior tax executive at Nestlé in the US, said badly-designed executive action or legislation risked deterring investment by the Swiss food group in US factories and jobs.
“The concern is that when they are going after inversions it will have unintended consequences, creating disincentives for inbound investment, which is important for our economy,” he told the Financial Times. “It’s a baby and the bathwater issue.”
Eric Toder, co-director of the Tax Policy Center, a non-partisan think-tank, said European companies should be nervous. “Once there’s a focus on how inverted companies are avoiding tax, there will inevitably be a focus on other foreign-based companies doing the same thing.”
Royal Dutch Shell, the Anglo-Dutch oil group, and BASF, the German chemical company, said they backed lobbying on the issue managed by the Organization for International Investment (OFII), a trade group for foreign businesses in the US.
A spokesman for Airbus, the European aerospace group, said: “It’s important that any legislation or other action be carefully crafted with an eye to ensuring investments in the US are not discouraged.”
Thirteen inversion deals have been announced since the start of 2013 – including Burger King’s $11.4bn acquisition of the Canadian coffee shop chain Tim Hortons – and are together worth $178bn, according to Dealogic.
European concerns centre on rules that enable US subsidiaries to take loans from their foreign parents and deduct the interest payments from US taxes. They have long been used by multinationals to facilitate cheap borrowing from head office.
Nancy McLernon, chief executive of OFII, said: “It feels to me that we are in this white hot political environment that is spurred on by a couple of [inversion] deals – and policies made in that environment always tend to over-reach.”
Tax experts are divided over whether the Obama administration has the authority to act against inversions on its own.
Democratic lawmakers have proposed several pieces of legislation to crack down on inversions, but there is no hope of a bipartisan deal to change the law until after congressional elections in November.
Although the Obama administration has sought to attract foreign companies as investors and employers, European multinationals do not have the same natural clout in Washington as their US rivals.