A race to the top: Digital tax and trade wars
France became the first country in the EU to adopt a 3% tax in July of 2019 on digital services. Italy followed suit with a similar tax, effective 2020. According to Tax Foundation, Austria, Belgium, the Czech Republic, Poland (suspended for the moment), Slovenia, Spain, Turkey, and the United Kingdom have all either announced or published a proposal to introduce a digital services tax.
Tech companies opt for low-tax jurisdictions but since most systems adopt domicile-based taxation, this results in diverting taxable revenues generated from sales in other countries away to these companies.
Digital taxation is under review by the Organization for Economic Co-operation and Development (OECD) where the organization is expected to submit an agreement to the G20 by the end of 2020 on the matter. Under the OECD/G20 Inclusive Framework, over 130 countries and jurisdictions are collaborating on the implementation of 15 measures to tackle tax avoidance, improve the coherence of international tax rules and ensure a more transparent tax environment.
This tax though should apply to any entity that meets the threshold (companies with at least 750 million euros ($845 million) in global revenue and digital sales of 25 million euros in France). According to Bloomberg, of about 30 businesses affected, most are American, but the list also includes Chinese, German, British and even French firms.
The U.S. Trade Representative (USTR) launched an investigation under section 301 of the Trade Act of 1974 and found that France’s Digital Services Tax (DST) discriminates against U.S. companies such as Google, Apple, Facebook, and Amazon, is inconsistent with prevailing principles of international tax policy, and is unusually burdensome for affected U.S. companies. The report proposed additional duties of up to 100 percent on certain French products, includes 63 tariff subheadings with an approximate trade value of $2.4 billion. The notice solicits comments from the public on USTR’s proposed action, which includes additional duties of up to 100 percent on certain French products. The report is open for public comments on the option of imposing said fees Jan 6, 2020.