Transatlantic Tensions Rise Over Digital Taxes

A giant digital sign at Facebook's corporate headquarters campus in Menlo Park, Calif., on Oct. 23, 2019. JOSH EDELSON/AFP via Getty Images

WASHINGTON—The dispute over digital services taxes has increased after Washington pulled out of global negotiations last week, triggering fears of a new trade war between the United States and Europe.

U.S. Trade Representative Robert Lighthizer said that Treasury Secretary Steven Mnuchin withdrew the United States from negotiations that seek to rewrite cross-border tax rules for digital trade.

“We were making no headway, and the Secretary made the decision that rather than have them go off on their own, he would just say we’re no longer involved in the negotiations,” Lighthizer said June 17, during a hearing before the House Ways and Means Committee.

Mnuchin sent a letter dated June 12 to his peers in the UK, France, Italy, and Spain, the Financial Times reported. In the letter, he expressed concern that the talks had reached an “impasse.”

“This is a time when governments around the world should focus their attention on dealing with the economic issues resulting from COVID-19,” he wrote, urging countries not to rush difficult negotiations.

He also warned that the United States would retaliate if countries take unilateral measures on digital services taxes.

Lighthizer announced on June 2 a probe into digital services taxes that are being implemented or considered by a number of U.S. trading partners, including the European Union, the UK, Spain, and Italy.

The United States vowed to “take all appropriate action” to protect U.S. companies and workers against tax discrimination, Lighthizer said in a statement.

The rapid growth in online sales around the world forced governments to determine how to tax transactions online in a country where companies sell goods and services without having a physical presence. These companies include e-commerce marketplaces, social media, cloud services, and other web-based services platforms.

The Organisation for Economic Co-operation and Development (OECD) has stepped in to coordinate talks among more than 130 member countries. The negotiations have been going for months to rewrite tax laws with a goal of reaching a solution by the end of the year. The objective of these talks is to prevent conflicting policies that have arisen unilaterally in consumption and digital services taxes.

French Finance Minister Bruno Le Maire called Mnuchin’s letter “a provocation.”

“It’s a provocation towards all the partners at the OECD, when we were centimeters away from a deal on the taxation of digital giants,” he told France Inter radio.

In January, the French government suspended its plans to implement digital taxes until the end of the year. In May, however, Le Maire said that Paris would go ahead with digital taxes this year, regardless of progress toward an international deal.

Individual countries have been implementing their own digital services taxes (DSTs), which are applied to revenues rather than profits. These taxes only focus on companies that have significant global and domestic earnings, so they mainly affect large American firms such as Amazon, Apple, Facebook, Google, and Microsoft, according to the Information Technology and Innovation Foundation (ITIF), a U.S. think tank.

“Although on the surface, DSTs offer equal treatment to all firms, distinguishing only according to their size and business model, most of the burden falls on a small set of foreign companies, mostly based in the United States,” ITIF stated in a report, calling it “bad policy.”

“A 3 percent tax on revenues equates to a 23 percent tax on profits for a company with a margin of 15 percent, but a 63 percent tax for one with a margin of 5 percent.”

In response to Mnuchin’s letter, European Economic Commissioner Paolo Gentiloni said that the EU would go ahead with taxing digital services if there’s no global deal, according to Reuters.

“I very much regret the U.S. move to put the brakes on international talks on taxation of the digital economy. I hope that this will be a temporary setback rather than a definitive stop,” Gentiloni said.

And if a deal proves impossible this year, he said, “we have been clear that we will come forward with a new proposal at the EU level.”

According to a report by the Tax Foundation, countries rely on “novel, but distortive and discriminatory, approaches to taxing digital businesses. These policies have the potential to lead to an economically harmful tax and trade war and should be avoided.”