It is almost 30 years since President Ronald Reagan signed a major US tax reform bill into law and since the late 1990s in particular, the corporate tax system has been massively abused by large American multinational firms. From early 2009, President Barack Obama has made a number of proposals to reform the corporate code but they neither got traction in the Congress or serious engagement from the president. Now in the last year of his administration, one of his Treasury secretaries has threatened to use a never-used 82-year-old law that would impose retaliatory double taxes on European Union companies and individuals.

 

In January, in a letter to Jacob Lew, US Treasury secretary, signed by the top Republican and Democratic members of the US Senate Committee, Orrin Hatch (Republican), Ron Wyden (Democrat), Chuck Schumer (D) and Rob Portman (R), said they were alarmed by European regulators'  actions in using state-aid rules to investigate past tax deals made by Apple, Amazon and Starbucks, with the Irish, Luxembourg and Dutch authorities. European companies Fiat Finance, BP PLC and BASF SE, are also being investigated.

The senators claimed that US companies are being unfairly targeted and they asked the administration to consider invoking Section 891 of the Internal Revenue Code.

Also in January, Itai Grinberg, a law professor at Georgetown University and former Treasury lawyer, wrote an article for Tax Notes International and suggested that the 1934 law should be used as a “plausible source of leverage” on the European Commission:

True, tax rates have never doubled under section 891, and many tax lawyers have never heard of section 891. In an important sense, however, Congress intended these results: Section 891 was designed to create a deterrent that would discourage foreign governments from discriminating against US citizens and businesses. Thus, when the rule of law works as it should abroad, Section 891 simply does not come up. Maybe it is time for Treasury to study section 891, if only to remind our friends in the European Commission that it is the law of the United States.

In February Grinberg said in congressional testimony:

Our singularly high corporate tax rate and worldwide system are severely out of line with international norms. These EU investigations highlight yet another negative consequence of having such broken and aberrant international tax rules. Our international tax system is allowing American

Allowing for loopholes, the effective rate is typically much lower than the federal rate of 35%: General Electric (GE), the American industrial conglomerate ex-the troubled GE Capital division, had an effective rates of 17 and 18.9% in 2014 and 2013.

Siemens of Germany, its chief global rival, had rates of 27% in 2014 and 28% in 2013%.

Pfizer and Apple's effective tax rates misleading fictions

This is an election year and the US Senate Finance Committee is a magnet for corporate money — details of their 2014 bonanza are here — and Secretary Lew and his deputies will be looking for jobs next January.

Lew is a former Citigroup executive.

In a letter sent to members of the Senate Finance Committee last week, Anne Wall, Treasury's assistant secretary for legislative affairs, said that no president has invoked Section 891 since it was enacted in 1934, but “nonetheless, we are reviewing this provision and its history closely.”

It's use now by the Obama administration would be a weird foretaste of a President Trump in action.

Margrethe Vestager, European Commissioner for competition, last month in a letter told Secretary Lew that EU state aid rules apply to all companies operating in Europe, large or small, and irrespective of whether or not they are European companies.

Lew had earlier written to Jean-Claude Juncker, president of the European Commission, stating that the Commission's state aid investigations approach "creates disturbing international tax policy precedents.”

Last year the Commission ordered Belgium to recover €700m from companies that benefited from an “excess profits” tax scheme. Vestager also issued rulings on what she termed “selective tax advantages” for Fiat in Luxembourg and Starbucks in the Netherlands.

In her letter to Lew, dated 29 February, Vestager defended the Commission’s use of its state aid power to police special tax deals, saying the move is about the “enforcement of fair competition.”

The state aid rules “are a fundamental necessity,” Vestager wrote, stating that “since 1999, the Commission has adopted around 170 decisions ordering recovery of illegal state aid from individual companies and only a handful concerned US companies."

We should not allow misunderstandings of our respective legal and institutional frameworks to arise. Despite the constructive engagement between ourselves and staff on these matters, your letter suggests that there is still some way to go.

“Don’t hold your breath,” Commissioner Vestager told reporters in Brussels on Monday, according to Bloomberg, about the timing of decisions targeting Apple and online shopping giant Amazon, whose tax affairs in Luxembourg are also under intense scrutiny. "I’m just warning you.”

US - European Union, tax, state aid, Apple

US giant firms and Europe's new response to tax fraud

Ireland's defence of Apple in EU state aid tax case is a sham

Just 10 firms paid 50% of record Irish corporation tax in 2015

Pic on top: President Ronald Reagan, surrounded by Members of Congress from both parties, signs the Tax Reform Act of 1986 on Oct. 22, 1986