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US pauses international talks on digital tax

Out-Law News | 19 Jun 2020 | 12:19 pm | 4 min. read

The US has paused its involvement in talks to reform the international tax system to deal with the digitalisation of the economy, the Financial Times (FT) has reported.

Tax expert Catherine Robins of Pinsent Masons, the law firm behind Out-Law, said: "The US's involvement is critical if international agreement is to be reached on where digital companies should pay tax. With coronavirus putting huge strains on the public finances, the delay in reaching global agreement caused by the US's withdrawal is likely to lead to a proliferation of unilateral measures aimed at tech companies. If the US retaliates a Europe-US trade war could result."

In May 2019 the Organisation for Economic Cooperation and Development (OECD) agreed with the G20 a programme of work to come up with proposals to reform the international tax system to address the challenges of the digitalisation of the economy. The aim was for the OECD to reach international agreement on its proposals by the end of 2020.

According to the FT, in a letter to four European finance ministers on Wednesday, US Treasury secretary Steven Mnuchin warned that discussions had reached an "impasse" and said the US was unable to agree even on an interim basis on changes to the international tax system.

The letter was sent to the UK's chancellor Rishi Sunak, French economy and finance minister Bruno Le Maire and the finance ministers of Italy and Spain. It called for talks to be suspended, according to the FT.

"The United States has suggested a pause in the OECD talks on international taxation while governments around the world focus on responding to the Covid-19 pandemic and safely reopening their economies," the US Treasury said in a statement.

According to the FT, on French radio Bruno Le Maire  described the withdrawal of the US from the negotiations on digital tax represents an "act of provocation".

"We were very close to an agreement on the taxation of the digital giants, which are perhaps the only ones in the world to have profited immensely from the coronavirus," Le Maire said.

Although the OECD aims to come up with an internationally agreed reform of the tax system to cater for the challenges posed by the digitalisation of the economy, in the meantime a number of countries have taken interim unilateral action. Countries including the UK, France, Spain and Italy have introduced or proposed their own digital services taxes (DSTs) to address the fact that the current system means that tax is not always paid by digital companies in the countries where digital activity takes place.

The UK introduced a DST in April, to be charged at 2% on the UK-derived revenue of social media platforms, search engines and online marketplaces. It is payable by businesses whose global revenue from in-scope business activities is greater than £500 million and where more than £25m of that revenue is derived from UK users. The first payments will not be made until 2021.

France's 3% DST applies to revenue from digital interfaces which enable users of platforms to interact with each other. It also catches revenue from targeted advertising on digital interfaces including revenue from the sale of personal data for advertising purposes.

Earlier this month, US trade representative Robert Lighthizer announced that the US was investigating digital services taxes adopted or under consideration by the UK, Spain, Italy and the EU as well as a number of other countries, with a view to deciding whether the US should take retaliatory action.

Last year the US investigated France's introduction of a digital services tax and threatened to impose 100% tariffs on champagne and a number of French luxury goods. France agreed to suspend collection of its digital tax, in return for the US not increasing tariffs and continuing to engage with the OECD.

According to the FT, Paolo Gentiloni, the EU economy commissioner, has said the EU is prepared to advance its own EU-wide proposals if international agreement is not reached this year on the OECD proposals.

"Meanwhile, the Commission stands as one with all member states that have moved forward with their own digital services taxes. And if needed, we will react as one," he said.

Catherine Robins of Pinsent Mason said: "Unilateral DSTs significantly increase complexity and costs for businesses as each country comes up with something slightly different. Not only are they likely to lead to double taxation for companies affected, but if the US follows through on its threats about retaliatory action there could be  serious knock on effects for other businesses."

In January, Steven Mnuchin threatened new US tariffs on UK car manufacturers if the UK went ahead with its DST.

Last month the OECD said that despite the coronavirus pandemic, work was continuing on the digital tax project, and that it still hoped to reach agreement by the end of 2020. It said it planned to present its latest proposals to governments in October, rather than July as originally planned.

The OECD's programme of work is divided into two 'pillars'. Pillar one addresses the allocation of taxing rights between jurisdictions and considers proposals for new profit allocation and nexus rules. Pillar two is the 'global anti-base erosion' (GloBE) proposal which seeks to develop rules that would provide jurisdictions with a right to tax where other jurisdictions have not exercised their primary taxing rights or the payment is otherwise subject to low levels of effective taxation.

The OECD's pillar one proposal adds new taxing rights on top of the existing system, targeting all multinational enterprises with consumer facing businesses and not just technology companies. However, the US has expressed concerns that it "unfairly" targets US owned technology companies.

In a surprise move last December, Steven Mnuchin wrote to the OECD secretary-general suggesting a ‘safe-harbour regime’ in place of the OECD’s pillar one proposal, because of concerns about the impact of the proposal on US owned technology businesses.