Proposed US corporate tax reform would fall foul of WTO

A PROPOSED US corporate tax reform would almost certainly contravene international trade rules if implemented, lawyers said, risking the biggest dispute in the history of the World Trade Organisation (WTO).

With signs growing that the US may become more protectionist under President Donald Trump, European business groups said the tax plan – which could impose de facto import tariffs of up to 20 percent – raised the danger of a trade war.

Republican members of Congress are pushing to replace the existing tax on corporate income with one linked to turnover. This would allow firms to deduct their costs for purchasing goods and services produced in the US, but would give no such deduction for purchases of imports.

Trump has criticised the complexity of the plan, but also said such a measure could help to cut the US trade deficit.

Kevin Brady, head of the tax-writing House of Representatives Ways and Means Committee, brushed off suggestions that it would fall foul of the WTO regulations.

While there were “1 000 different opinions on whether this is WTO compliant”, Brady said he was confident the reform did comply with the body’s rules.

However, six trade lawyers with experience in litigating WTO disputes said they believed the plan would likely be deemed an unlawful subsidy on domestic goods, export subsidy or a de facto tariff on imports.

All the lawyers, based in the US, Britain and continental Europe, said the “destination-based cash flow tax” would fail WTO rules on more than one legal basis. So serious were the breaches that any challenges might be handled under WTO mechanisms that allow legal processes, which normally take years, to be short-cut, they said.

“It would be plainly WTO-inconsistent,” said Philippe De Baere, Brussels-based partner at Van Bael & Bellis. “It has manifest violations which could even justify the use of the expedited procedure for dispute settlement in the WTO,” said De Baere.

Trade experts said any legal case would be the biggest WTO dispute ever, since it could involve all products imported into the US and all US exports. Previous WTO cases have involved narrow market sectors or individual companies.

European business groups

said the plan threatened to upend the international system of trade rules, and expressed hope that their governments could help to persuade the US not to adopt it.

The Ways & Means Committee declined to answer detailed legal questions about the plan. A spokesperson for the WTO said the organisation didn’t comment on whether planned taxes conformed to its rules.

The House Republican plan involves abolishing corporate income tax and replacing it with a tax of 20 percent levied on revenues, less allowable deductions.

A “border adjustment” would be applied whereby companies which import products for resale or use in a manufacturing process would not receive a tax deduction for the cost.

Domestic purchases and labour costs could be deducted while US exports would be exempt from the tax.

No major economy has adopted a corporate cash flow tax. Former Bank of England governor Mervyn King is among those to support such a tax, saying in a 1987 study that it could reduce excessive corporate debt and encourage better investment.

King, who retired from the bank in 2013, said this week he still believed the idea had its merits – provided “it does not have to have the impact on imports that seems to be implied by the proposed scheme in the US”.

Lawyers said the impact of the border adjustment and deductions for US costs meant that imports would face an effective tariff of up to 20 percent. “The total tax rate on the 100 percent domestically-produced good is going to have a lower effective tax rate than the rate on the import,” said Scott Lincicome, counsel with White & Case in Washington.

That would breach Article 3 of the General Agreement on Tariffs and Trade, which is policed by the WTO.

This allows signatory states to impose permitted tariffs on goods entering their country, but precludes them from treating a domestic item more favourably than an imported one when it comes to internal taxes like sales or income taxes. – Reuters