Shortly after the announcement, a U.S. Treasury spokesperson issued a statement saying the “actions could threaten to undermine foreign investment, the business climate in Europe, and the important spirit of economic partnership between the U.S. and the EU.”
The Treasury’s comments echo similar views expressed by a group of bipartisan senators, who questioned the “fairness” of the EC’s investigation in a letter sent to Treasury Secretary Jack Lew in January.
The letter asked the Treasury to consider whether U.S. companies were being subject to “discriminatory or extraterritorial taxes” as defined by IRS code section 891. The senators proposed that the code would allow the U.S. to “impose a double rate of tax on citizens and corporations of foreign countries engaging in discriminatory taxation.”
“If the U.S. were convinced that they are discriminating against U.S. companies in this respect, then 891 is a weapon,” Columbia Law Professor Michael Graetz, who served in the Treasury under President George H.W. Bush, told ABC News.
But, Graetz said the U.S. was right to wait before reacting because using section 891 could be an extreme move.
“I think the Treasury is properly cautious about using Section 891, even though it does appear that the European Commission is singling out U.S. companies,” the professor said. “If the European Commissioner is discriminating, answering by discriminating yourself is not the right way to go.”
The problem, he said, is that section 891 is a blunt instrument that doesn't really respond to the entity in direct conflict with the U.S. position –- namely the European Commission’s Competition Commissioner.
“891 requires imposition on European companies -- and they’re not the bad guys,” he said. “If you deploy 891, there is a question of the appropriateness of the targets.”
The U.S. isn’t left totally on its back foot though.
According to the professor, Congress could look at provisions within U.S. tax law that favor European companies.
“Congress can create new remedies, it’s not like there’s nothing that can be done,” he said. “There are some provisions in the U.S. tax code that are rather generous to foreign companies, particularly to their treatment of debt and royalties, so it may be that this will inspire Congress to tighten some of the legislation enacted many years ago.”