The Trump administration on Wednesday abruptly withdrew from international negotiations over how best to tax the profits of multinational corporations such as U.S.-based tech giants Amazon and Google, leading European allies to accuse the White House of torpedoing years-long talks that were close to a resolution.
In a letter to the finance ministers of France, the U.K., Italy, and Spain obtained by the Financial Times, U.S. Treasury Secretary Steve Mnuchin said negotiations were at an "impasse" and threatened to retaliate "with appropriate commensurate measures" against any country that attempts to unilaterally move ahead digital services taxes on U.S.-based companies—a warning that sparked fears of a potentially devastating trans-Atlantic trade war.
"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."
—Bruno Le Maire, French finance minister"The U.S. is a rogue state," writer Nando Vila tweeted in response to news of Mnuchin's letter.
The New York Times reported Wednesday that "several European countries, led by France, have been rolling out digital services taxes, which would fall heavily on American internet companies. Italy, Spain, Austria, and Britain have all announced plans to levy digital services taxes, which impose duties on the online activity that takes place in those countries, regardless of whether the company has a physical presence."
French Finance Minister Bruno Le Maire on Thursday denounced Mnuchin's letter as a "provocation for everyone who was negotiating in good faith" and said France will reimpose its currently suspended 3% tax on digital services if OECD nations can't reach a deal on a fair tax system by the end of the year.
"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," Le Maire said in a radio interview. "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 U.S. allies. What is this way of treating U.S. allies—the British, Spanish, Italians, French—by threatening us with sanctions?"
Maria Jesus Montero, a spokesperson for the Spanish government, said Thursday that "neither Spain, nor France, nor Italy, nor Britain, no country will accept any type of threat from another country."
"We are not legislating to damage the interest of other countries," said Montero. "We are legislating so that our tax system is orderly, fair, and adapted to current circumstances."
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As the Wall Street Journal explained:
Current rules generally allocate corporate profit for tax purposes based on where value is created. But modern multinationals—particularly ones with digital offerings—can sell their products across borders in ways that leave little taxable profit in a country where those products are consumed.
Many big European countries say that tech companies should pay more taxes in the countries where their products are consumed, something that could boost their tax revenues by billions of dollars. But the U.S. has opposed any solution that is too targeted at tech companies, where it has more to lose...
Tech companies, for their part, have opposed national digital-services taxes like France's, but have supported the OECD process, arguing that they would like to avoid a patchwork of overlapping national initiatives.
Joseph Stiglitz, a Nobel prize-winning economist and professor at Columbia University, said in an interview with the Independent Commission for the Reform of International Corporate Taxation Wednesday that the coronavirus pandemic "has helped the very companies that have been the tax avoiders," bolstering the case for measures like digital services taxes until a global tax framework is established.
"The internet companies are the big beneficiaries, because they are the people who can continue to operate... So they're the big beneficiaries of the pandemic," said Stiglitz. "Part of their advantage is they're not paying taxes. They're not paying their fair share in taxes."
"That's why the proposals—as an interim measure until we work out a whole global system—of just having a digital tax is one that had a lot of resonance before the pandemic, but now becomes an imperative," Stiglitz added.