Global Talks on Digital Tax: Will there be Global Tax Reform Targeting US Tech Giants?
What has happened to the ‘digital tax’ plan that France was planning to impose? At the end of 2019, France said it would impose a 3% tax on the revenue of big tech companies with more than $82 million in annual sales, which would mainly target U.S. tech giants. The French Digital Services Tax is also referred to as the “GAFA tax”, which stands for Google, Apple, Facebook, and Amazon.
Over the past few years, the European Union has been exploring ways to prevent US multinational corporations (MNCs) from tax avoidance. Several countries, including France, Italy, Spain, Austria, and the United Kingdom have announced their plans for digital services taxes. A digital services tax, or DST, would allow these countries to tax the part of the digital firms’ revenues, which U.S. Treasury Secretary Steven Mnuchin claims to be “discriminatory in nature against digital companies, and specifically a handful of U.S. companies.”
Mnuchin’s claim arises from the fact that the French DST applies to revenue rather than income, which means that even unprofitable companies might have to face heavy tax burdens. The French DST was also criticized for the likelihood of doubling taxation on covered U.S. companies since they would not be eligible for a tax credit for foreign taxes paid in the U.S. In retaliation, Trump said the U.S. would impose tariffs of up to 100 percent on French goods such as wine, cheese, and luxury handbags if France advances its digital tax plan.
For now, the French President Emmanuel Macron and U.S. President Donald Trump have reached a temporary truce, holding off on a potential tariff war until the end of 2020. France has also agreed to replace its digital services tax plan with whatever provision the Organisation for Economic Cooperation and Development (OECD) ultimately proposes. Nevertheless, the tension has not yet been relieved.
Currently, the OECD is also developing rules to tax digital companies according to where business transactions take place instead of where companies register subsidiaries. The finance leaders of the G20, the world’s 20 biggest economies, highly advocated this move and said they should work toward reaching a consensus on the tax issue by the end of 2020.
In opposition to global efforts to implement new tax rules on big tech companies, the United States has proposed a “safe harbor” regime, which lets US MNCs choose whether to follow the new rules or stick to the existing ones. Although Mnuchin disagrees with the term ‘optional tax’ used for the “safe harbor” proposal, tax experts believe that U.S. companies could opt out of the international agreement of tax if this passes.
Mnuchin claims: “What a safe harbor is - and there’s lots of safe harbors that exist - you pay the safe harbor as opposed to paying something else, and you get tax certainty. People may pay a little bit more in a safe harbor knowing they have tax certainty.”
Although Mark Zuckerberg recently said that he is willing to pay more taxes needed in support of global efforts to address tax issues, the U.S. is unlikely to make concessions to imposing global digital tax any time soon.
The OECD’s tax reforms, which include both digital service tax and a global minimum tax, are estimated to boost government tax revenues by around $100 billion annually. The additional amount of collected taxes might be used towards the welfare of society and hence improve the quality of life in many countries. However, it is questionable whether any deal could be reached by the end of 2020.
