U.S. Tax Code May Allow Dramatic Retaliation In E.U. Apple Case

August 31, 2016, 11:30 PM UTC
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(Reuters) – U.S. tax law gives the Obama administration power to double tax rates for European companies should it choose to dramatically escalate a dispute with the European Union over Apple’s tax bill.

Experts said the administration was unlikely to take such a drastic measure, and even if it did, courts might strike down that action because of treaties.

Section 891 of the U.S. tax code, passed in 1934 but never used, allows the president to double tax rates for citizens and corporations of any country the administration considered was discriminating against U.S. companies.

The U.S. Treasury on Wednesday declined to comment on whether Washington was considering such drastic measures, which Democratic and Republican lawmakers have proposed putting on the table due to what they see as overreach by the European Commission in a tax grab targeting American companies.

The European Commission on Monday ordered the U.S. technology giant to pay up to $14.5 billion in back taxes to Ireland.

“This is an option that is viable only in the minds of a handful of analysts who seem willing to put the entire global trade order at risk,” said Edward Kleinbard, a professor at the University of Southern California in Los Angeles.

Treasury Secretary Jack Lew has said the European Commission action appeared highly focused on U.S. companies but did not mention measures the United States might take. A Treasury spokesperson on Tuesday said the department would work with the EU to prevent erosion of tax bases.

Legal scholars considered it highly unlikely Washington would take drastic measures against one of the country’s closest allies and biggest trading partners.

“This is crazy talk,” said Daniel Shaviro, professor of tax law at New York University.

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Lawmakers including Republican Senator Orrin Hatch and Democratic Senator Ron Wyden have pressed the administration to consider implementing Section 891 over the European Commission moves to scrutinize how U.S. companies minimize their tax bills in Europe.

Georgetown University law professor Itai Grinberg drew attention to the obscure tax code provision in January on the website taxnotes.com. The next month Grinberg appeared before a House of Representatives committee laying out the case for invoking Section 891.

The Treasury’s Assistant Secretary for Legislative Affairs, Anne Wall, told lawmakers in a letter in March the department was reviewing the provision.

It was unclear whether treaties with European countries since 1934 would supersede the provision if it were challenged in court.

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