While everybody seems to be aware of the viral threat these days, not all media are focused there exclusively. Bloomberg says a possible fight over the right to tax some of the world’s most profitable companies could become a multifront trade war – no matter who the next president is.
In fact, either party might be tempted to continue to pursue “a policy of retaliation” against foreigners who impose new taxes on U.S. tech companies, the report says.
A tit-for-tat trade fight already is building with France, which passed a 3% tax on large tech companies that went into effect at the start of 2019. The U.S. responded with the threat of tariffs on $2.4 billion worth of French cheese, sparkling wine and makeup, prompting the EU to consider tariffs on U.S. goods.
All sides have now agreed to a tax cease-fire until the end of the year to see if a broader global agreement can be worked out.
“Democrats have been as opposed to the digital services taxes as Republicans,” Brian Jenn, a former Treasury official said. “While very few Democrats are tariff fans, it looks like the tariff approach at least bought a temporary victory in the case of France.”
The U.S., along with more than 130 countries, is currently negotiating at the OECD about a new international tax system that would redefine which countries can tax which corporate profits. A revamped global tax code could apply not just to tech companies but also to other multinational firms that have customers in countries where they don’t currently record profits.
Bloomberg says that negotiators need to reach an agreement this year before several countries--including France, Canada and Italy--plan to move forward with their own taxes on tech giants.
A retaliatory tariff fight with the UK could begin even sooner since its version of the tax is set to go into effect in April and U.S. officials are considering responding with tariffs on car exports. That could be a “worst case” scenario for companies such as Amazon.com Inc. that could end up paying taxes to several countries on the same income. And they have reason to worry--it’s far from certain that there will be a deal ahead of this year’s deadline, Bloomberg says.
“I’m very skeptical that the U.S. will agree to this proposal by the end of this year – or ever,” said Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics. Without a deal “interesting enough” to keep the parties at the negotiating table, U.S. companies could face taxes from perhaps a dozen countries that have proposed the idea, causing either a Republican or a Democratic administration to fend off levies on revenues that the U.S. views as within its right to tax, Bloomberg said.
“There aren’t a lot of other tools in the toolbox to address unilateral taxes in a meaningful way,” Jenn said. He served as a U.S. delegate to the OECD and is now a partner at law firm McDermott Will & Emery.
The negotiations are centered around two main points: establishing a global minimum tax so companies can’t avoid taxes entirely, as well as reallocating taxing rights, meaning some countries with many customers or users of a digital service could push for taxes on some of the profits even if the company doesn’t have business operations there.
U.S. Treasury Secretary Steven Mnuchin said after a G-20 Finance Ministers meeting in Saudi Arabia that there’s “pretty much consensus” about the minimum tax. The point of contention is reallocating taxing rights, which the U.S. wants to be optional for companies.
The OECD plan “is structured so that those companies would pay more tax abroad, regardless of U.S. tax policy,” Daniel Bunn, vice president of global projects at the Tax Foundation, said. And, it’s still not clear how the U.S. would fare under the global approach—since it could “lose the right to tax some profits from highly profitable technology and pharmaceutical companies, but gain some of that back from foreign companies that have lots of U.S. customers, including French luxury brand conglomerates or German carmaker Mercedes-Benz AG.
Facebook Chief Executive Officer Mark Zuckerberg said this month he approves of the OECD efforts, even though it would increase his company’s overall tax bill, because it would create a “stable and reliable system going forward.”
So, we will see. It now seems clear that world commerce will be changed after the coronavirus threat ends, but there is not yet any indication of what those shifts may be. The threat of additional taxes seems real, but so does the threat of damaging instability. These are trends that should be watched closely as they continue to emerge in today’s hyper-political world, Washington Insider believes.
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