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Global Digital-Tax Detente Ends, as U.S. and France Exchange Blows

Global Digital-Tax Detente Ends, as U.S. and France Exchange Blows

French Finance Minister Bruno Le Maire in June, after talks on how to reallocate tax revenue from digital companies reached an impasse. Photo

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French Finance Minister Bruno Le Maire in June, after talks on how to reallocate tax revenue from digital companies reached an impasse.

Photo: Ludovic Marin/Associated Press

Detente is ending in the global fight over tech taxes.

Earlier this year, France agreed to suspend collection of a tax on digital revenue from large technology companies such as Facebook Inc., Amazon.com Inc. and Alphabet Inc.’s Google. Meanwhile, the U.S. delayed the application of tariffs it was putting on French goods in retaliation for the tax.

But now France has resumed collecting what is known as its digital-services tax, a French official said. Other countries, including Italy and the U.K., whose similar taxes went into effect this year, are also set to begin collection in coming months.

The U.S., meanwhile, is set on Jan. 6 to impose tariffs on $1.3 billion of French imports, including cosmetics and handbags. Washington also has pending investigations that could lead to similar tariffs on 10 other countries, including the U.K., Italy, India and Spain.

At issue in the dispute is how to tax an increasingly digital economy. For decades, tax treaties have generally allocated corporate profit based on where value is created. But modern multinationals—particularly ones with digital offerings—can sell their products across borders in ways that leave little taxable profit in a country where those products are consumed.

France is again collecting a digital-revenue tax from big tech firms like Google.

Photo: charles platiau/Reuters

France and some other big European countries say tech companies should pay more taxes in the countries where their users and clients are located, something that could boost their tax revenues. But in long-running multilateral talks on how to update the tax system, the U.S. has opposed any solution that is too targeted at tech companies—slowing progress.

“These taxes are a reaction to dissatisfaction with how long it has taken to get a global multilateral solution,” said Manal Corwin, who served as deputy assistant secretary for international affairs at the U.S. Treasury Department in the Obama administration, and now works at accounting firm KPMG. “You may need some trade battles back and forth before there’s a strong incentive to say, ‘OK, enough.’ ”

The potential for a trade spat over digital taxes will provide an early challenge for U.S. President-elect Joe Biden, who takes office two weeks after the U.S. tariffs on France go into effect.

President-elect Joe Biden campaigned on raising taxes on the wealthy and corporations. But the fate of Mr. Biden’s plan rests largely on whether or not Democrats take control of the Senate. WSJ’s Richard Rubin explains. Photo: Olivier Douliery/AFP/Bloomberg

Democrats have so far largely supported the Trump administration’s approach to these talks, but the incoming administration has declined to offer any positions on the topic or comment for this article.

A slide into tax-linked trade disputes could reduce global economic output by 1%, the Organization for Economic Cooperation and Development, a club of 37 advanced economies, warned in October.

Big U.S. tech companies have opposed the patchwork of one-time national taxes on digital services, which they contend are unfairly targeted against U.S.-headquartered businesses. Spokesmen for Amazon and Facebook said the companies instead support the multilateral talks—organized by the OECD—on a coordinated global reallocation of tax revenue. A spokesman for Google didn’t respond to a request for comment, but the company has previously expressed the same position.

Amazon charges merchants fees to compensate for digital-services taxes in France, the U.K. and Italy. A company facility in France last year.

Photo: thomas samson/Agence France-Presse/Getty Images

Some companies subject to digital-services taxes have started passing along those costs. Amazon charges merchants fees to cover the taxes in France, the U.K. and Italy, a spokesman said.

The OECD talks on how to reallocate tax revenue from digital companies have run into trouble. Over the summer, U.S. Treasury Secretary Steven Mnuchin declared the talks to be at an impasse. In October, the OECD said that while it had made progress on technical details, it wouldn’t meet the year-end goal of reaching an overall agreement—pushing back its expectations to mid-2021.

The OECD says its proposal for how to reallocate taxable income among countries should shift roughly $100 billion of tax revenue a year. But the potential net cost to U.S. tax revenue is likely much smaller, perhaps as little as $5 billion, according to a person involved in the negotiations.

“International cooperation on tax policy will be crucial to confront and defeat the virus, and also to build back better,” OECD Secretary-General Angel Gurría said during a mid-December speech that referred to the coronavirus pandemic.

As talks have dragged on, some countries including India and Austria have begun imposing their own targeted taxes on digital revenue from big companies. Spain says its digital-services tax will go into effect on Jan. 16, with payments due quarterly.

Austria says it expects its version of the tax to bring in 40 million euros, equivalent to $49 million, for 2020. France, for its part, says its tax—a 3% levy on some types of digital revenue from big companies—brought in €400 million in 2019. The French tax is expected to reap more than that in 2020, the French official said.

The U.S. on Jan. 6 intends to impose tariffs on $1.3 billion of French imports, such as handbags. An Hermès workshop in France in 2016.

Photo: sebastien bozon/Agence France-Presse/Getty Images

“We must make sure they are paying their fair share of taxes,” French President Emmanuel Macron said of tech companies during an autumn event at the OECD.

An international deal is still possible in 2021.  Discussions at the OECD are continuing, with public comments on its proposals submitted this month.

A less-controversial proposal to create a global minimum tax level for corporations faces fewer obstacles. But it isn’t likely alone to satisfy France and other countries, which have said they would withdraw their unilateral taxes only if a satisfactory agreement can be reached on digital taxation.

As more taxes go on the books, an international deal becomes more complicated, KPMG’s Ms. Corwin said: “It’s just much harder to pull it back together when you’ve got countries having gone off and done their own things.”

Write to Sam Schechner at [email protected] and Paul Hannon at [email protected]

Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

This post first appeared on wsj.com

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