Last year’s proposal on a digital services tax from the Paris-based OECD had the potential to be a big victory for multilateralism. The scheme would have established a new “taxing right” for countries based on the proportion of sales a company made in their territory, in addition to a global minimum rate. This would have updated the global system of tax treaties for an era when multinational companies — especially in the digital sphere — can sell goods and services around the world but base their activities for tax purposes in low-tax jurisdictions.
This week’s decision by the US government to pull out of talks over the future of taxing Big Tech is therefore to be lamented. In a letter sent to the finance ministers of the UK, France, Italy and Spain, US Treasury Secretary Steven Mnuchin told his counterparts that discussion had reached an “impasse” and if they “choose to collect or adopt” taxes of their own, the US “will respond with appropriate commensurate measures”.
The breakdown in transatlantic negotiations is a missed opportunity to reform international taxation. A trade dispute risks further damage to European and US economies as they try to recover from the coronavirus lockdowns.
For now, European countries should seek to hold the line and maintain the truce reached earlier this year. In Davos in January, Mr Mnuchin and his French counterpart Bruno Le Maire agreed to continue discussing how to proceed with the international tax plan after the US insisted it had to be optional for companies to pay — which would, in practice, have made the scheme redundant.
They agreed US tech companies would begin running up liabilities under a unilateral scheme that France is preparing, but the tax would in the meantime not be collected; in exchange the US would not proceed with tariffs on French wine and cheese.
Fixing international tax without the US will be difficult, given the scale of its economy and the fact that it is home to most of the big tech companies. Yet it will be especially tricky to negotiate with an erratic US president casting around for external enemies to help him through his re-election campaign. A renewed push to resolve what is a long-term, structural issue may need to wait until next year when the US political situation will become clearer.
The mooted digital services taxes have become even more important because of the pandemic. Lockdowns have helped multinational big tech companies grow even bigger while squeezing more traditional businesses — just as governments are scrambling for new tax revenues to pay for support they have provided to the economy. It has become only more urgent to provide a level playing field for bricks-and-mortar retailers that compete with digital rivals but are taxed very differently.
But the need for an agreed international solution remains a priority. A patchwork of unilateral schemes will be less effective and harder to enforce. It could also provoke a Europe-US trade war at a time when the global economy is in turmoil.
The current tax treatment of Big Tech is unsustainable. In the absence of an international compromise, EU countries should continue to introduce tax schemes but are better to hold off on collection. Claims that this amounts to an unfair trade practice are unfounded and retaliatory US tariffs would be unmerited; the schemes would grant the US the right to tax European luxury companies on their US sales. Mr Le Maire has called the US suspension of negotiations a “provocation”. Europe should not rise to it, for now.
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