A growing movement by foreign governments to tax American tech giants that supply internet search, online shopping and social media to their citizens has quickly emerged as the largest global economic battle of 2020. The fight pits traditional allies against each other, with European countries like France, Italy and Britain clashing with the US over their plans to impose new taxes on digital services provided by companies like Amazon and Google.
At the core of the debate are fundamental questions about where economic activity in the digital age is generated, where it should be taxed and who should collect that revenue. The potential for large tax dollars has spurred governments across the world to consider new digital taxes and has even inspired lawmakers in some American states, like Maryland and New York, to propose their own levies on digital trade.
This week, national leaders meeting in Davos, Switzerland, brokered a truce between the US and France, which had planned to move ahead with a digital services tax. Officials in both countries said they would pause what had been an escalating dispute in order to give international negotiators a chance to reach a global tax agreement that could halt the proliferation of digital taxes.
But the meetings, which took place at the World Economic Forum, have also brought new threats of taxation and tariff retaliation and underscored how fragile negotiations remain. The stakes are high for governments and multinational corporations — even those outside the tech sector. The digital tax negotiations, which are being conducted through the Organization for Economic Cooperation and Development, have become entwined with efforts to reduce attempts by companies to avoid taxes by shifting profits overseas.
Late last year, negotiators at the OECD, including a delegation from the Trump administration, agreed to a first-step framework that would allow countries to tax certain digital-service providers even if they did not have physical presences inside their borders. But Treasury Secretary Steven Mnuchin quickly surprised OECD officials with a letter requesting a change to the framework, one that would effectively allow some US companies to opt-out of those taxes. OECD officials pushed back, and negotiators are set to meet again next week in Paris.
The discussions, which are expected to last months, could end with an agreement on a global minimum tax that all multinational companies must pay on their profits, regardless of where the profits are booked. The negotiations could also set a worldwide standard for how much tax companies must remit to certain countries based on their digital activity.
Mnuchin expressed frustration Thursday in Davos that a digital sales tax had become such a focus of discussion at the World Economic Forum. Setting a minimum tax for companies around the world, to prevent them from hiding profits in tax havens, will make a much bigger difference, he said.
“From my perspective, that is by far the more important,” he said. There is a chance the talks could devolve into a “Wild West” array of separate tax regimes on digital activity around the world. “It’s a big old mess,” said Jennifer McCloskey, vice president for policy at the Information Technology Industry Council, a trade group that represents companies including Apple, Oracle and several other American tech leaders. “But,” she added, “that’s to be expected.”
Companies that operate across borders have long paid taxes where their profits are booked. Calculating that sounds simple enough, but it has grown increasingly complicated in recent decades. To reduce their tax bills, corporations have shifted profits — and in some cases their headquarters — on paper to low-tax countries like Bermuda and Ireland. OECD countries like the US have agreed to measures meant to discourage such shifting.
Such efforts did not resolve some countries’ complaints about Facebook, eBay and other companies that offer online services to their residents but have little or no physical presence within their borders. Those governments, along with leaders of the European Union, say large tech companies are avoiding paying their fair share of taxes.
“They’re looking for new ways to raise revenue,” said Nicole Kaeding, an economist and vice president of policy promotion at the National Taxpayers Union Foundation, which opposes the digital tax push by countries and states. “These are all wrapped up in the questions of how do we adjust a tax system that is a hundred years old in order to tax the digital economy?”
Kimberly Clausing, an economist at Reed College in Portland, Oregon, who specializes in international taxation and has pushed for additional measures to tax corporate profits around the world, said the digital tax effort exposed political and economic tensions in wealthy nations.
“It really lays bare this fiction that economic value is something we can assign to a location,” Clausing said. “As more and more of the value is intangible, it really creates this opportunity for profit-shifting.” The proliferation of profitable digital services makes it “really the time” for the international community to revisit the rules of corporate taxation across borders, she said.
The feud between French and US officials has sped up the OECD process to rewrite those rules, which has a deadline for completion at the end of this year. France announced plans last year to impose a 3 per cent tax starting Jan. 1 on the revenues that companies earn from providing digital services to French users. The government estimated a windfall of 500 million euros (about $563 million). Similar taxes are under consideration in Britain, Italy, Canada and a host of other wealthy nations.
Those moves have drawn criticism, and tariff threats, from the Trump administration. President Donald Trump has insisted that only the US may tax American-based companies, even though American multinationals already pay taxes in other countries where they have factories or other physical operations. The president threatened to retaliate against France with US tariffs of up to 100 per cent on French wine, cheese, handbags and other goods.
This week, Mnuchin also threatened tariffs against Italy and Britain if they impose similar taxes. British Chancellor Sajid Javid, who is also in Davos, said Britain would push ahead with the tax regardless. Despite the acrimony, there are signs of progress. France’s finance minister, Bruno Le Maire, said Wednesday that the US and France had found a path forward in the OECD negotiations to set digital taxes.
The French agreed to suspend collections of their new digital tax, and the US agreed to hold off on tariffs, giving negotiators at the OECD time to strike their deal. Le Maire made clear that the digital tax issue was far from resolved, and talks were expected to continue Thursday.
“We need to address fiscal evasion,” he said. “We have to address the fact that the biggest companies in the world are making huge profits in Europe and everywhere in the world without paying the due level of taxation because they do not have any physical presence — we have to address that question".
Some observers are sceptical that the process can produce consensus, from some 130 countries, by year’s end. “Some countries are going to have to give up taxing rights in order to allow other countries to have them. And the question is: Who?” said J. Clark Armitage, a former IRS official and the president of the tax firm Caplin & Drysdale in Washington. “It’s going to be hard to pass something that tracks what they propose.”
Negotiators face intense and competing pressures from large multinational companies. American tech firms are eager for a deal that would prevent multiple countries from imposing a wide variety of taxes on their activities. “The worst case would be triple, quadruple taxation, because of how the individual taxes are not aligned,” said Jordan Haas, trade director for the Internet Association, another tech trade group in Washington.
Other companies, like consumer products giant Johnson & Johnson, have urged negotiators to go slow in considering the global minimum tax proposal that the OECD is discussing — and that French officials say must be included in any final agreement.
EU officials are already looking at reviving their own proposal to significantly revamp how the companies are taxed in the 28-nation bloc in the event that the OECD discussions fail. On Wednesday, an EU official said leaders were waiting to see whether Trump administration negotiators engaged more aggressively in the discussions and showed a willingness to work with Congress to carry out any consensus solution that emerged from the talks.
“We’re pleased” with the progress announced in Davos, the official said. “At the same time, we’re sceptical.”