Digital tax fight emerges as global economic threat

The world’s top economic leaders warned on Saturday that an international tax fight between the United States and Europe poses a new threat to the global economy if a resolution is not reached this year.

>> Alan Rappeport and Jim TankersleyThe New York Times
Published : 23 Feb 2020, 06:39 PM
Updated : 23 Feb 2020, 06:39 PM

After two years of economic fallout from a trade war between the United States and China, finance ministers and other senior officials at the Group of 20 meeting in Riyadh expressed alarm about an impasse over plans by foreign governments to impose new taxes on US technology companies. If a deal proves elusive in the coming months, European countries will begin collecting levies, which would probably set off retaliatory tariffs from the United States.

“The trade tensions of today would look like they are not so serious compared to the consequences of something like this,” Angel Gurría, secretary-general of the Organization for Economic Cooperation and Development, said in an interview on the sidelines of the G-20 on Saturday. “There’s the cacophony, the trade tensions that would invariably follow, and then there’s the impact on growth.”

Several European countries, led by France, have been rolling out digital services taxes, which would hit American companies like Amazon, Google and Facebook. Italy, Spain, Austria and the United Kingdom have all announced plans for digital services taxes, which assess a levy based on the online activity that takes place in those countries, regardless of whether the company has a physical presence.

The OECD has been trying to head off a proliferation of disparate tax regimes around the world and has been leading negotiations over the last year for an international overhaul that would allow countries to tax certain digital service providers even if they lack physical operations inside their borders.

Negotiators have set an end-of-year deadline to broker a deal that would set international standards for how, and where, online activity may be taxed. Also under discussion is whether to impose a global minimum tax of sorts on multinational corporations to discourage companies from shifting profits to low-tax countries like Ireland and Bermuda to minimise their tax bills.

The United States, along with the tech industry, has been eager to prevent a proliferation of new digital taxes across the world and has pushed for a global tax regime that would govern all OECD countries.

But the talks hit a snag late last year when Treasury Secretary Steven Mnuchin told the OECD that the United States wanted American companies to essentially have the option to avoid some of the taxes.

Some administration officials privately express concerns that the global minimum tax under discussion could discourage countries from further reducing their corporate tax rates, as the United States did in 2017. Lower rates, these officials argue, make their economies more attractive to global investment and help companies. Other economists say the competition to lower rates have encouraged firms to shift profits, at least on paper, to tax havens.

The economic effect of the digital services taxes on the United States is relatively small, but US companies fear the levies could evolve to hit a broader swath of sectors beyond tech. A recent analysis by the OECD found that the international tax changes under consideration would increase global corporate taxes by about $100 billion.

FILE -- Employees work at a Facebook office set up to monitor misuse of the platform, in Dublin, May 2, 2019. The world’s top economic leaders warned at the G20 in Riyadh that an international tax fight between the United States and Europe poses a new threat to the global economy if a resolution is not reached this year. (Paulo Nunes dos Santos/The New York Times)

The taxes have drawn the ire of President Donald Trump, who has criticised Europe’s attempt to collect more taxes from American companies. Last year, Trump said the United States would retaliate against France’s digital tax by imposing tariffs of up to 100% on French products such as wine, cheese and handbags. The United States agreed last month to delay those tariffs and France agreed to delay collection of the taxes in the hope that a more global agreement could be reached.

European finance ministers expressed urgency on Saturday to reach an agreement, hoping to find common ground with the United States and avoid a broader economic conflict.

“Next year is coming very soon,” said Olaf Scholz, Germany’s finance minister. “There is not time to wait for elections.”

But major obstacles remain and the strong opposition to any plan that would allow American companies to opt out of taxes was palpable.

“Clearly, there is a need to avoid any kind of optional solution,” said Bruno LeMaire, the French finance minister. “I do not know of any private company that would choose to be taxed instead of not being taxed.”

Mnuchin tempered expectations that such a complicated deal could be reached so quickly.

“We are dealing with some of the most complicated international tax issues,” Mnuchin said during a panel discussion at the Ritz-Carlton Hotel. “In the US, depending upon what the solutions are, these may require congressional approval.”

Mnuchin reaffirmed his view that he believed the European digital services taxes were “discriminatory” but said he was committed to the multilateral process underway so that companies could have clarity over taxes in an increasingly digital economy.

The Treasury secretary also resisted the suggestion that the United States is proposing to make the tax optional, describing the proposal as a so-called “safe harbor” regime in which companies would agree to pay more in exchange for having more certainty over their tax bills.

Failure to reach agreement on either the digital tax or the global minimum tax could scuttle the entire package. Finance ministers from other nations have made clear to Trump administration officials that a large swath of countries will not agree to any deal that allows some large American companies to effectively pick their preferred tax system to minimise their global liability.

But the administration faces competing pressure at home, from businesses and lawmakers. Some multinational companies, including many tech giants, are eager for an agreement that would head off the complications of complying with different digital service taxes in a wide range of countries. Other companies fear the agreement would raise their taxes unexpectedly.

Any deal might need to be ratified by the Senate, where approval would be difficult in any event, but more so if a large group of powerful corporations oppose it.

Still, other countries have pressed the Trump administration to drop its so-called “safe harbor” demands and take a more active role in pushing negotiations toward consensus, starting with the finance ministers meeting this weekend.

The tussle over international taxes comes as the global economy is emerging from a year of sluggish growth made worse by uncertainty from Trump’s trade war with China and the disruption of global supply chains caused by American tariffs. While economists have projected a rebound this year, amid easing trade tension, the coronavirus outbreak in China represents a new variable that threatens to slow output.

Kristalina Georgieva, the managing director of the International Monetary Fund, said she currently thinks the virus could have a V-shaped effect on China’s economy, causing a sharp drop in growth followed by a rapid recovery with modest spillover to the rest of the world. But she acknowledged that the trajectory of the virus was not clear.

“We recognise that other scenarios could be significantly more impactful,” Georgieva said at a dinner in Riyadh sponsored by the Institute of International Finance.

The IMF on Saturday downgraded its forecast for China’s economic growth this year by 0.4 percentage points to 5.6% and reduced its global growth outlook by 0.1 percentage points to 3.2%.

Tax experts who have been tracking the talks fear the chances of reaching a sweeping agreement by the end of the year are slim given the complex internal politics involved in brokering a deal with so many countries.

“The OECD process is hanging by a thread and the consequences of failure are underappreciated by European sovereigns,” said Itai Grinberg, an international tax policy professor at Georgetown University Law Center.

If the talks do fail and European countries move ahead with their digital taxes, Grinberg said, the response from the United States would be forceful, particularly if Trump is reelected in November.

“There is a high risk that the OECD process is going to crater and that is what is driving the building bipartisan willingness to consider what the retaliatory measures by the United States would be,” he said.

Mnuchin did offer one option to avert such a fate on Saturday.

“If everybody adopts the US proposal, I have 100% confidence we’ll get it done,” Mnuchin said, eliciting some laughter from his counterparts.

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