Trans-Atlantic Trade War Looms As The US Backs Out of Negotiation With The EU on Digital Tax

The quest to tax online tech companies in Europe suffered setback as the US President Donald Trump withdrew from the international negotiations on the best way to effect the taxation.

There has been years of long talks on how to tax multinational corporations such as Amazon, Google and Facebook in countries outside North America. Members of the European Union have been leading the talks, hoping it would materialize to a consensus until the Trump administration abruptly left the negotiation table.

The push to get the tech giants to pay taxes for their online services in countries outside the US was intensified by the outbreak of coronavirus pandemic. As many businesses were forced to close in a bid to contain the spread of the virus, many countries, especially in Europe turned attention to big tech companies whose businesses are online.

But the US government made a sudden turnaround from the negotiations. Treasury Secretary Steve Mnuchin wrote a letter to the finance ministers of France, the UK, Italy, and Spain, saying that negotiations were at “impasse,” threatening to retaliate “with appropriate commensurate measures” against any country that attempts to unilaterally Impose digital services taxes on US-based tech companies.

“The United States remains opposed to digital services taxes and similar unilateral measures.” Mnuchin wrote in his letter. “As we have repeatedly said, if countries choose to collect or adopt such taxes, the United States will respond with appropriate commensurate measures.”

EU leaders have expressed their disappointment at the sudden turn of events, and many fear it could lead to trans-Atlantic trade war. French finance minister Bruno Le Maire said the US backed down when they were close to sealing a deal on digital taxation on only companies that offer hope in the midst global health crisis.

“We were inches away from an agreement on digital taxation at a time when the digital giants are the only ones in the world to have benefited immensely from the coronavirus crisis,” he said.

European capitals, Paris, Madrid, London and Rome led the campaign to tax the tech companies. They said that US-based tech companies are making enormous gain from the European markets while making little contribution to the public coffers.

But Mnuchin, in his letter said that move is premature, and “a distraction” considering the health crisis that every country around the world is battling right now.

“Attempting to rush such difficult negotiations is a distraction from far more important matters. This is a time when governments around the world should focus their attention on dealing with economic issues resulting from COVID-19,” he said.

The US said they would resume the talk later in the year, but European countries seem eager to move on with the taxation plan. The UK Treasury said on Wednesday that British law empowers them to do so. The tax proposal will take effect in 2021.

The Financial Times reported on Thursday that the Organization for Economic Co-operation and Development (OECD) had proposed a compromise with two pillars. The first suggested countries would be allowed for the first time to have some rights to tax profits made on the basis of sales in their jurisdiction. This means that the US will have equal right of taxation on European tech companies operating in the US soil.

The second pillar was that there would be a global minimum corporate tax rate to prevent countries from lowering corporate tax rates in an attempt to shift company headquarters to their jurisdictions.

Mnuchin said negotiations based on the second pillar are still on the table, but the US would want more time as the focus is on COVID-19 for now. But it appears that the US is buying time to conduct an investigation on digital tax plans of European countries to ascertain the measure its retaliatory response will be if they go ahead to impose it on US-based tech companies.

Le Maire said on Thursday that the US decision to back out of negotiation is a “provocation” for European countries negotiating in good faith. He added that France will go ahead to reimpose its suspended 3% tax on digital services if OECD nations fail to reach a deal at the end of the year.

“So it is a provocation… to all the citizens of the world who say that it is still legitimate for all the digital giants to pay their taxes. It is also a provocation to the US allies. What is this way of treating US allies- the British, Spanish, Italians, French by threatening us with sanctions?” he said.

The New York Times reported on Wednesday that many European countries are already rolling out plans to impose an unfriendly tax regime on the US tech companies.

The report said: “Several European countries, led by France, have been rolling out digital taxes, which would fall heavily on American internet companies. Italy, Spain, Austria, and Britain have all announced plans to levy digital taxes, which impose duties on the online activity that takes place in those countries, regardless of whether the company has a physical presence.”

But Spanish government spokesperson, Maria Jesus Montero said the intent of the tax plan is not to damage the interest of other countries.

“We are not legislating to damage the interest of other countries. We are legislating so that our tax system is orderly, fair, and adapted to current circumstances,” he said.

The idea has been to make tech giants pay taxes everywhere their products are consumed. That would amount to billions of dollars in revenue. If the EU succeeds in implementing the digital tax, many other countries will follow suit.

Nigerian Finance Minister, Zainab Ahmed said earlier in the month that the federal government has plans to introduce digital tax targeting social media and ecommerce companies offering products and services in Nigeria.

If the EU countries defy the US’ threat and impose the tax, it will trigger a new global digital tax regime that will slash the earnings of tech giants who have had it free for years.