For more than a year, Europe has pressured the U.S. into a global pact to increase taxes on big tech firms. The U.S. just pulled out of those negotiations. This was the right decision, but made for the wrong reasons.
A new proposal, led by European members of the Organization for Economic Cooperation and Development, an intergovernmental economic forum, aims to remove restrictions that currently keep governments from taxing foreign-owned businesses that have only a limited presence in their country.
If the organization doesn’t get its way, France, Spain, the U.K., Italy, and others have threatened to impose new unilateral domestic digital services taxes, designed to act as tariffs, on largely U.S.-based service providers like Google and Facebook.
On June 12, Treasury Secretary Steven Mnuchin announced that the U.S. would no longer participate in the ongoing discussions to remake the international tax system in a letter to finance ministers of European Union nations. The Euro-block countries quickly threatened to move forward with their unilateral digital tax plans, and the U.S. threatened retaliatory tariffs.
Explaining part of the Trump administration’s rational, U.S. Trade Representative Robert Lighthizer expressed sympathy for the idea that a new unified global tax regime is needed, but also expressed skepticism that the current process was on the right track. “What we need is a standard tax that takes away the tax planning that a lot of these people go into and is uniform across countries and treats every business fairly,” Lighthizer said, according to Inside Trade.
There is already a set of international tax rules in place which, when followed, protect businesses from being taxed by countries in which they don’t physically operate. This is a good standard. If a business doesn’t have people or things—factories, warehouses, etc.—in the country, it shouldn’t be subject to taxes there.
Each country is also able to set its own tax rates, creating international pressure to keep taxes from getting too high. If tax burdens do get too high, businesses can move, creating tax competition that protects consumers and workers from high taxes that slow economies and lower wage growth.
The current system is certainly not perfect, but physical presence protections and tax competition are crucial constraints on government’s power to tax indiscriminately.
The Organization for Economic Cooperation and Development’s two-pronged proposal would overturn both critical protections in the current system by taxing some international profits based on their consumers’ location rather than the businesses’, and by adding a new global minimum tax to further slow the taxpayer-friendly pressures of tax competition.
Any international agreement to “take away the tax planning,” as advocated by Lighthizer, will similarly take away the sovereignty of the U.S. to decide our own tax system (a similar goal of the ongoing talks at the Organization for Economic Cooperation and Development).
Such a tax system would mean allowing international bureaucrats in Paris to set U.S. tax policy, effectively creating a global tax cartel. It would also eliminate the ability of places like the U.S. or Ireland to attract business with lower tax rates.
The unilateral European digital services taxes to punish U.S. withdrawal from the Organization for Economic Cooperation and Development negotiations include revenue thresholds that seem to be set to hit primarily American businesses, illustrating that these digital taxes are protectionist.
Yet, the irony is that the threatened digital services taxes act more like tariffs, and the cost primarily hits European businesses and consumers, not Americans.
Amazon already passed the cost of a French digital services tax onto third-party French sellers. A similar Australian tax on digital downloads from overseas resulted in higher prices, and in some cases, the price increase was more than the value of the tax.
In March 2019, a study by Deloitte and Taj Societe D’Avocats found that 95% of the digital services taxes will be paid by local consumers and domestic businesses that use the taxed digital platforms.
E-commerce has become the lifeline of many businesses and maintained some sense of normalcy during the coronavirus pandemic. People can, for the most part, buy what they need online.
Church services, happy hours, dates, meetings, are all able to be conducted online because of digital services trade. The countries threatening to impose digital services taxes should think twice about the value of digital trade and consider that the incidence will fall mostly on their citizens.
The U.S. is right to leave the Organization for Economic Cooperation and Development negotiations to remake the international tax system, but wrong to impose new tariffs. If the U.S. makes good on threats to levy new tariffs on Europe, President Donald Trump will be needlessly raising costs for Americans.
American businesses cannot afford to pay any more tariffs. The successive rounds of tariffs imposed over the last two years have dwindled businesses’ cash balances. Temporary coronavirus shutdowns and lost sales are making it even more difficult to pay increased tariff costs. This will inevitably results in higher prices for their customers and a slower economic recovery.
Imposing more tariffs during COVID-19 will not solve the debate around the international tax system and will make Americans’ lives more difficult at a time when they need the freedom to trade the most.
America can use our position to explain why new digital taxes will hurt the people of Europe, but the U.S. shouldn’t punish American consumers for the policy mistakes of Europe.