EU promises new digital taxes after US pulls out of talks

By on 22/06/2020
Treasury Secretary Steven Mnuchin said that talks over a digital tax had reached an impasse. (Photo by Andrea Hanks, courtesy the White House via flickr).

An abrupt US decision to abandon international negotiations aimed at taxing tech giants has sparked fears of a trade war, with the European Commission and member states vowing to act alone on tax reform if necessary.

Responding to the US withdrawal, Organisation for Economic Co-operation and Development (OECD) secretary general Angel Gurría said that action to address the tax challenges caused by the digitalisation of the economy is “long overdue”, and warned that a failure to solve the issue multilaterally could increase trade tensions at a time when the global economy is already suffering.

America’s decision to retreat from the OECD-led negotiations was revealed last week in a letter from Treasury Secretary Steven Mnuchin to his European counterparts.

According to a report in the Financial Times, which has seen the letter, Mnuchin wrote that discussions had reached an “impasse”. The US was unable to agree, even on an interim basis, changes to global taxation laws that would affect leading US digital companies, the letter stated. 

He added that the talks were a distraction from dealing with the economic fallout from COVID-19.

Unilateral tax threats

The EU and the governments of France, Spain, the UK and Italy have all championed new taxes on global tech giants such as Apple, Facebook and Google, arguing that the current international tax arrangements are skewed in their favour. As organisations including the Institute for Government and Global Government Forum have reported, the companies’ small local footprints and complex tax structures mean that they contribute relatively small amounts in property and corporate taxes, hollowing out national tax bases and giving them an advantage over domestic competitors.

Responding to the US move, French minister for economy and finance Bruno le Maire called Mnuchin’s letter “a provocation”, adding: “I confirm that there will indeed be a taxation of digital giants in France in 2020 as in 2019.” Several countries have already introduced ‘digital services taxes’, including the UK: since 1 April, social media businesses making over £500m globally and £25m in the UK have been liable for a 2% tax on UK revenues.

European Commission commissioner for the economy Paolo Gentiloni tweeted that a digital tax is necessary, saying that if the US makes an international agreement impossible, the European Commission will make its own proposal.

Trump’s retaliation

In return, the US has threatened retaliatory tariffs on imports from countries that introduced digital taxes. Earlier this month, the Trump administration announced an investigation into whether digital tax measures in the UK, Spain, Italy and others amount to unfair trade practice – a finding which would allow Washington to introduce retaliatory tariffs.

But Gurría pleaded with governments to remain engaged in the negotiations, which began in 2018 and were due to reach a solution by the end of the year.

A failure to find a multilateral solution would lead to more countries taking unilateral measures, he warned. Some of these have already been planned, he said, but they could trigger tax disputes and heightened trade tensions. “A trade war ­– especially at this point in time, where the world economy is going through a historical downturn – would hurt the economy, jobs and confidence even further,” he said.

Outdated regulations

Government officials worldwide have been grappling with the issue of digital taxes, as they pose a huge threat to public sector revenues. Explaining the EU’s approach at the 2018 Global Government Finance Summit, Dmitri Jegorov, Estonian deputy secretary general for tax and customs policy, said: “International tax regulations are based on physical locations and on tangible assets, and none of that’s important for the digital economy: our regulations are out-dated and need to be modernised.”

Digital industries often generate much of their value in locations where they have no physical presence or taxable activity, he pointed out.

About Catherine Early

Catherine is a freelance journalist and editor specialising in government policy and regulation. She writes predominantly about environmental issues and has held permanent roles at the Environmentalist (now known as Transform), the ENDS Report, Planning magazine and Windpower Monthly, and has also written for the Guardian, the Ecologist and China Dialogue. She was a finalist in the Guardian’s International Development Journalism competition 2009, and was part of the team that won PPA Business Magazine of the Year 2011 for Windpower Monthly. She also won an outstanding content award at Haymarket Media Group’s employee awards for data-led stories in Planning magazine. She holds a 2:1 honours degree in English language and literature from Birmingham University.

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