Transatlantic tensions mount over Digital Services Tax

European Commission Executive Vice President, Margrethe Vestager, recently stated that the EU will continue to press ahead with its own Digital Services Tax legislation as it is unlikely that an anticipated global agreement will be reached in the next few months. This is in response to a letter dated 12 June 2020, whereby the U.S. suspended its talks with a number of European countries whilst threatening retaliatory measures if those countries went ahead with their "unilateral" digital service taxes.

To recall, the talks were aimed at developing a coordinated multilateral agreement on how to tax digital companies globally. These talks had reached an "impasse" according to the US Treasury secretary, Steven Mnuchin. He stated that the U.S. was unable to agree even on an interim basis and would resume talks later on in the year to enable countries to focus on "far more important matters", namely coronavirus.  In the meantime, he described these discussions as a "distraction".

On 25 June, France, Spain, Italy and the UK responded to the U.S. In contrast to Ms Vestager, they offered to limit the scope of the proposed tax, conceding in a reply to Mr Mnuchin that they "would considerably ease the task of achieving a consensus-based solution and make a political agreement within reach this year". This includes a "phased approach", but it is not yet clear what this will look like.

The suspension of the talks follows an announcement on 2 June 2020 by the United States Trade Representative that investigations would be launched into digital taxes adopted, or being considered by 10 countries, citing discrimination against U.S. companies and unreasonable tax policies.

The Organisation for Economic Co-ordination and Development (OECD) had been mandated by the G20 international forum for governments and central bank governors to deliver a consensus-based solution on a global digital services tax by the end of 2020. On 18 June 2020, the OECD addressed Mr Mnuchin's letter and urged all parties to remain "engaged in the negotiation towards the goal of reaching a global solution by year end", citing the risks associated with an uncoordinated group of unilateral initiatives, including "trade tensions" and potentially a "trade war".

Two pillars that the OECD has proposed in order to reform global taxation rules are currently under discussion. The first pillar grants countries the right to tax profits made on the basis of sales within their own jurisdiction. Therefore, it would not only catch U.S. tech companies but also, for example, luxury goods companies based in the EU.

The second pillar would introduce a global minimum corporate tax rate in order to stop countries lowering corporate tax rates in an attempt to attract corporate headquarters into their jurisdictions. According to the U.S., this second pillar remains on track to be concluded by the end of the year. However, without agreement on both pillars, it's unlikely that there will be support from the European countries.

For further information contact Lucy Turner and Simon Gough.

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