European digital tax plans add to US-EU trade woes

18 April 2019 12:46

The European Commission recently dropped an EU-wide proposal to tax digital services seen as discriminatory to large American tech firms, but the US remains on edge.

European countries are moving forward with their own similar separate revenue measures that would levy various digital activities — particularly those of tech giants such as Google and Facebook — prompting the US tech industry and policymakers to blast such proposals as possible trade roadblocks amid US and EU attempts to officially begin already-fraught bilateral talks.

“Even on an interim basis, unilateral actions, such as digital services taxes proposed by some countries, can adversely affect U.S. businesses and have negative economic and diplomatic effects,” bipartisan leaders of the House Ways and Means Committee and Senate Finance Committee said in a rare joint statement on April 10.

The final US-EU pact requires the approval first of the two influential trade committees and then of the full Congress. Several lawmakers, however, are already skeptical of the discussions because the EU has continued to exclude agriculture in the negotiations.

EU finance ministers agreed last month to no longer push the 3 percent tax plan and opted for a more multilateral approach to developing a digital services tax regime at the Organisation for Economic Co-operation and Development, which has already been working on such a framework.

The decision didn’t stop France, the UK, Spain, Italy and Austria from moving ahead with their own tax measures similar in design as the EU-wide plan.

Meanwhile, American businesses have been warning the US International Trade Commission and the Office of the US Trade Representative that such regimes are trade impediments.

The USTR also sees them as hurdles, flagging UK, Spain, Italy and France’s measures as ones similar in scope as the EU-wide plan in a 2019 foreign trade barrier report, released late March.

The digital taxes “should be part of those [US-EU trade] discussions when you’re looking at countries going after another country’s specific industry,” a tech industry trade expert told MLex.

Digital services tax

Some EU nations allege large companies selling digital services in the bloc pay little or no taxes on their profits in the country where the value of their services originated. So, in March 2018, the European Commission introduced a directive that would impose a 3 percent interim tax on digital activities of multinational companies while it worked on a broader digital tax framework.

The tax would hit companies with annual worldwide revenues of $868 million and EU revenues of $58 million, according to the Tax Foundation, drawing strong opposition from companies such as Amazon, Google and Facebook operating in Europe who view the tax as discriminatory toward US tech firms.

Several countries including Ireland, Norway, Denmark and Finland also opposed the directive, which led foreign ministers to suspend efforts last month to move it forward.

But France, Italy, Spain and Austria based their own proposals after the EU-wide plan, each proposing a 3 percent levy on digital services. The Czech Republic is reportedly weighing a digital tax plan for multinational companies.

In preparation for Brexit, the UK had offered its own measure in October — a 2 percent tax on revenues of search engines, social media platforms and online marketplaces and applied it to companies with global revenues of at least $638 million.

The US and the global tech industry fear the French tax plan the most because it’s the furthest one along the legislative approval process after the National Assembly earlier this month cleared the measure. If adopted, the policy — dubbed as “Gafa” for Google, Amazon, Facebook and Apple — would be retroactive to Jan. 1, 2019.

“Taxation of digital services by France threatens to undermine agreed-upon international frameworks at a time when we are working to open [trans-Atlantic] trade and investment,” Jordan Haas, Internet Association director of trade policy, said in a statement issued after Paris introduced the measure early March. The association represents large and popular online companies, including the US corporations that would get hit with the tax.

US retaliation?

The high revenue thresholds for US companies in the proposed digital services tax could violate the General Agreement on Trade in Services under the World Trade Organization rules, Gary Clyde Hufbauer, a nonresident senior fellow at the Peterson Institute for International Economics, told MLex.

If the French plan does become law, the US can challenge it at the WTO — although the process could take a long time given the stalemate over staffing the dispute settlement body.

But the US “big gun” is Section 301 of the Trade Act of 1974, which Washington could invoke to restrict exports from France and other countries, Hufbauer said. Section 301 is the same law the Trump administration used to impose tariffs on China last year for alleged unfair tech trade practices.

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