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The US's Opposition to Various Digital Tax Proposals


The USs Opposition to Various Digital Tax Proposals Feature (1)

It was announced on 20 January that France will suspend digital tax payments for 2020 to prevent the imposition of tariffs on certain French imports into the United States.

France is among a number of countries to have proposed a national digital services tax (DST), intended as an interim measure, pending the conclusion of multilateral negotiations being led by the OECD towards modernised international tax rules for the digitalised economy.

The French DST is a 3% tax on the revenue of digital companies providing advertising services, selling user data for advertising purposes, or performing intermediation services. Companies with global revenues of €750m ($838m) or more and French sales of at least €25m were to be required to pay the tax. The tax was to apply to turnover realised in France since 1 January 2019.

The US argues that such taxes unfairly discriminate against US-based companies. Specifically, a US Trade Representative investigation into the French DST said the tax runs counter to international tax norms on account of its retroactivity, its application to revenue rather than profits, its extraterritorial application, and its:

"purpose of penalising in particular US technology companies."

According to various media reports on 20 January following discussions between French Finance Minister Bruno Le Maire and US Treasury Secretary Steven Mnuchin, France has agreed not to collect digital tax payments this year. In return the US will suspend its threat to impose the additional tariffs, with the two countries now set to hold talks on a more definitive agreement.

US authorities had been considering the application of additional duties of 100% on certain French imports with a trade value of $2.4bn. France said it expected to collect just €500m ($555m) in revenue from the tax.

The US previously indicated that it would consider similar measures that would punish other countries for going ahead with their own digital taxes. Countries that have announced either proposals or definite plans to introduce digital services taxes include the United Kingdom, Canada, New Zealand, Israel, Spain, Turkey, and the Czech Republic.

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These levies are widely considered problematic in large part because they come amid negotiations being led by the OECD on an international framework that would render them obsolete.

The OECD has released proposals in two areas. First, it has proposed a minimum tax on corporate profits that would otherwise be subject to low or no taxation. Second, it has proposed new rules to allocate taxing rights to jurisdictions in respect of income derived from digital supplies that might otherwise escape taxation under the current, outdated rules tied to whether a supplier has a physical presence in the territory.

Perhaps to garner leverage in its bilateral negotiations with states that are proposing national digital services tax, the United States has threatened to throw a spanner in the works in talks towards this OECD-led reform.

In a letter to the OECD dated 3 December 2019, Mnuchin urged countries to suspend work towards the introduction of digital services taxes, arguing that they have:

"a discriminatory impact on US-based businesses and are inconsistent with the architecture of current international tax rules which seek to tax net income rather than gross revenues."

Mnuchin also appeared to suggest that the US does not support the direction that international talks are taking towards a solution to the tax challenges of the digital economy, calling in his letter for a "safe harbour" regime as a partial answer to these problems.

OECD guidelines on safe harbours define a safe harbour as:

"a provision that applies to a defined category of taxpayers or transactions and that relieves eligible taxpayers from certain obligations otherwise imposed by a country's general transfer pricing rules."

French Finance Minister Bruno Le Maire recently said the US proposal would make the OECD's digital tax plans "optional" for digital businesses and as such were not acceptable, according to the Agence France-Presse news agency.

The outcome of the talks between France and the United States, therefore, will have broad ramifications, both at national level for those states that have proposed DSTs, and on the OECD's work to secure support, including from the US, for its land.

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