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European countries and US reach deal on unliteral digital services taxes

Out-Law News | 25 Oct 2021 | 12:24 pm | 3 min. read

European countries which have implemented unilateral digital services taxes (DSTs) have reached a deal with the US on how these taxes will be withdrawn.

The UK, Austria, France, Italy, Spain and the US issued a joint statement confirming the details of the deal. In return for the US dropping retaliatory trade tariffs, the countries concerned will give multinationals a credit against their future tax liabilities if the amount of tax collected under the DSTs for an interim period exceeds the tax due under the new proposals.

The UK, Austria, France, Italy, Spain and the US were among the 136 countries who agreed in principle on 8 October to changes to the international tax system to address the tax challenges arising from the digitalisation of the economy.

The reforms brokered by the Organisation for Economic Cooperation and Development (OECD) are comprised of two ‘pillars’.

Pillar one aims to ensure a perceived fairer distribution of profits and taxing rights among countries with respect to the largest multinationals. Multinational enterprises with global turnover above €20 billion will be subject to tax on a proportion of their profits in the countries where they operate. This is designed to address concerns that the large technology companies are not currently paying much tax in the countries where their customers are located because they are able to generate profits without a fixed base there.

Pillar two introduces a global minimum corporate tax rate set at 15%.

The deal on pillar one includes an agreement not to introduce new DSTs from 8 October 2021 until the earlier of 31 December 2023 or the coming into force of the multilateral convention implementing the deal. Signatories to the convention will agree to remove existing DSTs and not to introduce such measures in the future.

The UK, Austria, France, Italy and Spain had wanted withdrawal of DSTs to be contingent on implementation of pillar one, while the US wanted the DSTs withdrawn from 8 October 2021.

“Pillar one of the deal is favoured by the European countries who feel they are currently missing out on tax revenues from the US multinationals which generate significant revenues from European customers but pay very little tax in those market jurisdictions,” said Catherine Robins a tax expert at Pinsent Masons, the law firm behind Out-Law.

“In contrast the US sees pillar one as moving taxing rights away from the US and favours pillar two. Pillar one will be difficult for the US to get through Congress, so it is not surprising that European countries were unwilling to drop the leverage their unilateral DSTs give them over the US, until pillar one comes into force,” she said.

Under the political compromise reached by the countries, the UK, Austria, France, Italy and Spain are not required to withdraw their DSTs until pillar one takes effect. Instead, multinationals will be entitled to a credit in respect of future corporation tax due to the country that charged the DST, should that amount be more than they would otherwise have paid in corporation tax. The credit will be calculated as the difference between the DST paid by the multinational between 8 October 2021 and the date pillar one takes effect, and the tax payable by that multinational in that jurisdiction in the first full year of pillar one implementation.

“Although this seems a sensible political compromise and should address concerns that DSTs as taxes on revenue rather than profit could be onerous for multinationals operating with lower profit margins, it will add further complexity to the already complex calculations that will need to be carried out under pillar one to work out what tax needs to be paid where,” Robins said.

In return for the agreement to mitigate the effects of the DSTs, the US has agreed to terminate proposed trade actions and has committed not to impose further trade sanctions against the UK, Austria, France, Italy, Spain with respect to their existing DSTs.

In January the US Trade Representative’s Office announced that it had found that the UK’s DST discriminated against US digital companies. It had come to similar conclusions in relation to the DSTs implemented by France, Italy, Spain and Austria and had imposed but suspended additional duties on goods from those countries.

Turkey and India have also implemented unilateral taxes which have been found by the US Trade Representative to discriminate against US companies. However, those countries are not party to the new deal.