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Shifting Sands: The Costly Price of Retroactive Taxes in Europe

Actions by the European Commission are drawing attention from the highest levels of the U.S. government as concerns rise about the disproportionate scrutiny of U.S. based companies, the impact on the U.S. Treasury, and the potential undermining of long-standing international tax standards.

In recent months, the European Commission has handed down decisions in two cases involving tax arrangements reached between individual European Union (EU) Member States and Starbucks and Fiat Chrysler Automobiles, respectively. These investigations, led by the European Commission’s Directorate-General for Competition (DG COMP), examined whether the tax agreements violated European “state aid” rules. EU state aid rules are intended to prevent governments from giving unfair advantages to certain economic participants over others. Under EU law, the cases hinge upon whether the agreements generate broad economic benefit for the countries in question, which is allowable, or if they bestow limited benefit, which is not.

In each case, the company negotiated an agreement with a sovereign government that offered tax incentives for business investment to boost their economies. However, as Commissioner Margarethe Vestager announced, the Commission found that both arrangements violated the state aid rules and ordered multi-million dollar, retroactive repayments.

U.S. policymakers have taken note. Just this week, the Secretary of the Treasury Jack Lew sent a letter to Jean-Claude Juncker, the President of the European Commission, raising a series of concerns regarding the actions of DG COMP. His letter follows statements made by U.S. Members of Congress voicing the same concerns.

While we respect the EU’s competition and other legal authorities, these decisions create huge uncertainty, and are likely to have a chilling effect on commerce and the EU’s ability to grow its economy. The implications of these decisions should concern policymakers on both sides of the Atlantic. News reports have warned that U.S.-based technology companies will likely be the next targets. Today, we await additional decisions from the Commission, with even larger retroactive repayments expected.

When it comes to taxes, everyone expects the system to be fair and predictable. Given the complex, global nature of modern business, companies deserve clear “rules of engagement” in their dealings with foreign governments, and assurances that they will not be subject to retroactive penalties for legal agreements they made with a country.

Like it or lump it, we live and work in a global economy in which technology’s ever-expanding reach – particularly via the Internet – continues to lower barriers to opportunity for entrepreneurs and enterprises. This means businesses of all sizes need more, not less, certainty.

The Commission’s decision should spark policymakers in both the United States and Europe to take a step back and approach these issues with a long view, recognizing that the tax policies on both sides of the “pond” are in need of an overhaul if they are to be fair and promote economic growth.

In Europe, this means clarifying the rules of the road in a manner that increases certainty and promotes growth and innovation. In the United States, it means modernizing the U.S. tax system to allow companies to operate globally in an efficient manner.

The technology sector is more than a golden goose; its innovations will launch entirely new industries and underpin the solutions for many of society’s largest challenges. Yet, the decisions made by our governments about how to treat technology firms, whether in the tax context or otherwise, will have a significant impact on economic growth and job creation. A long view is what is needed, not short-sighted actions that retroactively penalize.

Public Policy Tags: Tax Policy