by Alan Rhode, co-founder, Taxmen.eu
It was only a matter of time before the United States fired an unequivocal shot across the bow of the pending European Union digital services tax over objections that the levy is discriminatory and a violation of current international tax rules.
That US assault landed last week in a letter sent to European Commission President Jean-Claude Juncker and European Council President Donald Tusk. But it was not a Donald Trump tweet that conveyed the message. It was the US Senate Finance Committee, which writes tax law in the US Congress and was chief author of the recently approved US corporate tax reform.
In a rare show of bipartisanship for the US law-making body, the missive – signed by Republican chairman Orrin Hatch and his Democratic counterpart Ron Wyden – insisted the EU must “abandon” the digital services tax because US tech companies will have to pay the 3 percent tax.
Just as important, the letter stated the digital services tax “violates the long-held principle that taxes on multinationals should be profit-based, not-revenue-based.”
Perhaps even more important, the letter states that the digital services tax is a trade provocation that will upend the current US-EU trade detente and put the Trump Administration on the offensive again against EU products, including German cars. The letter states:
“The EU DST proposal has been designed to discriminate against U.S. companies and undermine the international tax treaty system creating a significant new transatlantic trade barrier that runs counter to the newly launched US and EU dialogue to reduce such barriers. Therefore, we urge the EU to abandon this proposal, urge the member states to delay unilateral action and instead refocus efforts on reaching consensus with other leading economies within the OECD on any new digital taxation models.”
The US Finance Committee also stated that the “EU already has a revenue-tax based on the location of the customer – the VAT. Consequently, the DST will undoubtedly lead to double taxation”.
Of course, the warning about double taxation issues are not the only ones raised by the Americans.
In September Ireland, Sweden, Finland, and the Czech Republic wrote a letter to EU presidency holder, Austria, insisting that the fact that the digital services tax will violate international bilateral tax treaties must be addressed.
At first, Austria gave short shrift to the demands. Or, as one EU diplomat put it, Austria was “trying to sweep the issue under the carpet.” Subsequently, Austria relented, and the double taxation issue will be discussed October 26 in a digital services tax meeting of EU tax experts.
As for what triggered the US Finance Committee warning, the panel made it clear that the current all-out political and technical offensive led by Austria – and bolstered by French Finance Minister Bruno Le Maire – to get an EU digital services tax agreement by December was “troubling news”.
Interestingly, the US arguments against the EU digital services tax seem to be on solid legal ground.
At least, that is the way OECD tax chief Pascal Saint Amans sees it. During a lecture on international tax delivered earlier in October in Brussels, Saint Amans, a Frenchman, said the EU has a “two-hemisphere brain” when it comes to digital taxation. While the EU wants to tax US tech companies with the digital services tax, the EU does not want China and India to use the same kind of revenue-based indirect levy on its own companies, Saint Amans said.
During a lecture on international tax delivered earlier in October in Brussels, Saint Amans, a Frenchman, said the EU has a “two-hemisphere brain” when it comes to digital taxation. While the EU wants to tax US tech companies with the digital services tax, the EU does not want China and India to use the same kind of revenue-based indirect levy on its own companies, Saint Amans said.
Amans went further by insisting that with the new US corporate tax reform adopted in December, the EU and other foreign countries can no longer claim that US tech companies do not pay tax. That, he said, is due to the minimum tax provisions in the provision of the US corporate tax reform known – rightly or wrongly? – as GILTI (global intangible low-taxed income). Under the new GILTI provision, all US multinational tech companies will have to pay a minimum of 13 percent on repatriated income.
Whether or not Amans’ warning and the US Senate Finance Committee message will slow down the Austrian presidency digital services tax cavalry charge will likely be determined – as has been the case for much of 2018 – on how Germany reacts.
To date, German Finance Minister Olaf Scholz has been doing a delicate dance vis a vis the pressing demands of Le Maire. The French finance minister will up the ante this week when he takes his campaign to the European Parliament and insists that approval of the digital services tax is vital to fending off anti-EU forces in the 2019 European elections.
Scholz’s dodge-and-weave tactic to keep Le Maire at bay has, to date, been to flatter him with words espousing the need for “fair taxation” and other diplomatic niceties that signal theoretical support for taxing large internet companies but not give outright digital services tax backing.
Of course, the main reason for German digital services tax reluctance has to do with fears that it could imperil German exports, including cars to the US as well as those sold to China and India.
In what some tax experts see as a German led-effort to find political cover for backing away from the digital services tax, Scholz has recently been pushing for a global minimum corporate tax rate.
He seems to have gotten Le Maire on board for the initiative and it will be pushed by the two countries in the OECD.
But will it – along with the US letter – be enough to cut off the Austrian-French digital services tax cavalry charge at the pass ahead of the upcoming EU Council of Finance Minister meetings in November and December? Watch this space.
— Alan Rhode is co-founder at Taxmen.eu.
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