The Finance Ministers of France, Germany, Italy, Spain, and the UK have sent a joint letter to U.S. Treasury Secretary Steven Mnuchin voicing concerns over certain aspects of the House and Senate tax reform plans. In particular, the Finance Ministers have concerns with three measures summarized as follows:

The excise tax (House bill)

This proposal provides for an excise tax of 20% on payments to foreign affiliated companies, unless the related foreign corporation elected to treat the payments as income effectively connected with the conduct of a U.S. trade or business. Given that this measure would impact on genuine commercial arrangements, and would do so only where payments are being made for foreign goods and services, it could discriminate in a manner that would be at odds with international rules embodied in the WTO. The measure would also be inconsistent with existing double taxation agreements on the basis that it would impose a tax on the profits of a non-U.S. resident company that does not have a US permanent establishment.

Base erosion and anti-abuse tax (BEAT, Senate bill)

This provision would also be poorly targeted at erosion of the U.S. tax base, and would impact on genuine commercial arrangements involving payments to foreign companies that are taxed at an equivalent or higher rate than the U.S. This is most evident in the financial sector where the provision appears to have the potential of being extremely harmful for international banking and insurance business, as cross-border intra-group financial transactions would be treated as non-deductible and subject to a 10% tax. This may lead to significant tax charges and may harmfully distort international financial markets.

GILTI (Senate bill)

The Senate proposal provides for a preferential tax regime for "foreign-derived intangible income". In essence, income from the sales or licensing of goods and the provision on services for use outside the US that is deemed to be in excess of the return from tangible assets will benefit from a reduced corporate tax rate of 12.5%. The proposed incentive would subsidize exports compared with the domestic consumption. It could therefore face challenges as an illegal export subsidy under WTO Subsidies and Countervailing Measures Agreement rules. The design of the regime is notably different from accepted IP regimes by providing a deduction for income derived from intangible assets other than patents and copyright software, such as branding, market power, and market-related intangibles. It would not be compatible with the BEPS consensus that has been approved by more than 100 states and jurisdictions worldwide. Furthermore, in deviation of the agreed nexus approach, the proposal will provide benefits to income from IP assets that are in no direct connection with R & D activity.

Click the following link for the full text of the letter as published by a third party.