President Trump wants to kill the incentive for US multinational to stash profits in foreign countries where the tax rates are lower. He might be surprised to learn that so does much of Europe.
It might even make sense for Europe and the United States to team up in the effort to prevent tax avoidance. “We are concerned about that just like you are,” Marian Harkin, an Irish representative in the European Parliament, tells Yahoo Finance. “We should work with the US to see how can we find ways that will have global impact. You never know what Donald Trump will do, and maybe this is something he will do to make sure companies pay their fair share of tax.”
Trump doesn’t favor new laws to prevent US firms, which currently hold roughly $2 trillion in profits in foreign countries, from moving their money around. Instead, he wants to slash the tax rate on US business income from the current 35% to 15%. That would undercut federal tax rates in most other developed nation’s, except for Switzerland (where it’s 8.5%) and Ireland (12.5%), creating a strong incentive to bring profits home. It might even tempt foreign companies to seek ways to shift income to the United States.
While there’s a large mismatch between the high US rate and the lower rates in several other countries, there are also large mismatches between the tax rates within Europe itself, which range from Ireland and Switzerland at the bottom to 25% in Spain and the Netherlands, 33% in Belgium and nearly 35% in France. A few key countries are also notorious for lax rules that essentially make them tax havens, most notably Luxembourg.
The European Union has tried to curb the use of tax havens by publishing a list of the worst offenders, a kind of shaming strategy that has essentially failed to change anything. The Organization for Economic Development is working on a broader set of guidelines for dozens of countries that would prevent profit shifting for the purpose of tax avoidance. The United States has participated in that effort, but enforcing many OECD guidelines would require new laws passed by Congress.
That’s where opportunity could arise for Trump. New legislation on taxes seems certain within the next two years, since Republicans who control the House, the Senate and the White House have vowed tax reform that cuts rates and simplifies the rules. Trump hasn’t indicated any desire to coordinate with Europe on tax reform, and has in fact been somewhat dismissive of the EU, praising the UK for its “Brexit” vote to leave the union last year, for instance.
But Trump sometimes warms to new ideas (and people) as he gets familiar with them. So Europeans who favor a unified crackdown on profit shifting might want to get on Trump’s calendar. “Then,” says Harkin, “we wouldn’t be looking across the Atlantic at each other enviably.”
Confidential tip line: email@example.com
Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman