France can’t decide whether it wants to exemplify the reason and logic of René Descartes or the “bed-wetting” (President Charles DeGaulle’s term) of the May 1968 student rioters. The latter now seems the preference of the French government as exemplified by its unprincipled tax attack on four hugely successful US internet companies. The attack should be called the Great GAFA Tax Heist. If the US resists, a global trade war could result.
by Richard Schulman with Trade Correspondent L.C.
A growing coalition of tax-greedy countries is organizing a stick-up of the four least popular but most successful corporations in history. These are the four US-originated “GAFA” companies: Google, Amazon, Facebook, and Apple. The coalition is led unsurprisingly by France, mother-country of oppressive state taxation, jacqueries, and short-lived revolutions.
There is so much irony in this conflict that BHP and Rio Tinto should file mining claims:
- Item: The US under the Trump administration has been seeking to knee-cap the rules-based World Trade Organization. The WTO would be the main bulwark of a US defense against the tax wolves led by France and the Brussels-headquartered European Union it dominates.
- Item: The tax-hungry coalition has for three years been protesting the Trump administration’s tariffs on aluminum, steel, and other goods. But the taxes the EU coalition seeks to levy are nothing but tariffs in disguise, levied against successful US-originated software, digital services, patents, and intangible assets.
- Item: Google, co-founded by Sergey Mikhaylovich Brin, emigrated from the Soviet Union to the US at age six and built a company hostile to the US armed forces. Yet its freedoms, protected by those armed forces, enabled him to become the seventh richest person in the world. Furthermore, his company is now being aggressively defended from foreign predators by the very administration his company is doing its best to discredit.
Not a good time (is any?) for a trade war
The US-EU trade confrontation over a digital services tax (DST) and global minimum tax comes at a time when the aircraft subsidies dispute between the US and EU already threatens a trade war amidst a fragile world economy still recovering from the pandemic that China loosed on the world in January.
Now, more countries in the developing world are enacting or exploring DSTs, including Kenya, Nigeria, Mexico, and Thailand. The pandemic is devastating their tax base. At the same time, however, the income of the giant digital-platform companies has been booming as people, including in poorer countries, have become more dependent on digital services as economies shut down. Although DSTs aren’t expected to generate an enormous amount of tax revenue, countries need whatever help they can get and are also eager to show their citizens that rich companies aren’t exempt from the tax burden. As US Trade Representative Robert Lighthizer puts it, “a variety of countries have decided that the easiest way to raise revenue is to tax somebody else’s companies and they happen to be ours.”
Discrimination by country and sector
The dispute became acute when Paris imposed new taxes on the US internet giants, carefully crafted so as to strike only US companies. Washington strongly objected, as did the targeted GAFA companies.
All sides reportedly agree that there could be some type of tax as long as it is consistently applied in a non-discriminatory way under international guidelines. The OECD became the host for negotiations to arrive at such guidelines. But France, followed by a number of other countries, decided to move ahead unilaterally, provoking the US threat of retaliatory tariffs.
Gary Clyde Hufbauer and Zhiyao (Lucy) Lu of the Peterson Institute for International Economics (PIIE) have noted that
[T]he DST has the characteristics of a prohibited tariff under the rules of the World Trade Organization (WTO). More specifically, the high revenue thresholds that subject a firm to the DST, and the exclusion of certain revenues widely earned by European firms, create de facto discrimination against US digital firms, in violation of the European Union’s national treatment commitment under the General Agreement on Trade in Services….
As Senator Russell Long famously remarked, the politics of taxation comes down to an aphorism: ‘Don’t tax you, don’t tax me, tax the fellow behind the tree.’ As far as European politicians are concerned, US multinationals are the ‘fellow behind the tree.’…
Moreover, as the European Commission recognizes, its proposed tax will run headlong into permanent establishment rules enshrined in multiple tax treaties between member states and foreign countries, including the United States.” [emphasis added]
https://www.piie.com/publications/policy-briefs/european-unions-proposed-digital-services-tax-de-facto-tariff (downloadable pdf available at this link)
Initial US response to OECD talks on DST: boycott
On June 17th, during his annual testimony to the House Ways & Means and Senate Finance committees, US Trade Representative (USTR) Lighthizer reported that the US had pulled out of the OECD talks aimed at developing a framework for countries to implement a digital services tax.
Withdrawal from the talks made it appear inevitable that the US would impose Section 301 tariffs on countries that imposed or were likely to impose a DST.
Yet Lighthizer left open the possibility of a US return to negotiations. He told the Senate Finance Committee that “There’s clearly room for a negotiated settlement…. [W]e need an international regime that not only focuses on certain size and certain industries, but where we generally agree how we’re going to tax people internationally…. I don’t think what happened at the OECD was the end of… trying to work out a solution. We still have to do that.” The solution, he said, “involves a tax scheme that treats everyone fairly internationally.”
US retaliatory tariffs in readiness
France is most directly in the line of fire because the USTR office has already completed the “first segment” of a Section 301 probe of its DST, concluding that it “discriminates against US companies, is inconsistent with prevailing principles of international tax policy, and is unusually burdensome for affected US companies.”
More recently, USTR initiated Section 301 investigations of DSTs adopted or under consideration by Austria, Brazil, the Czech Republic, the EU, India, Indonesia, Italy, Spain, Turkey, and the UK.
On October 12th, the OECD announced that it had extended from end-2020 to mid-2021 its deadline for concluding a global deal for a framework for digital services taxes. The Group of 20 finance ministers endorsed the new deadline.
But French Finance Minister Bruno Le Maire, blaming the US for the stalled talks, immediately said France would impose its suspended 3% digital services tax in mid-December. That will almost certainly cause the US to activate its suspended retaliation in the form of 25% tariffs against an array of French exports worth about $1.3 billion. These would take effect on January 6, 2021. Moreover, if other countries that have suspended or not yet enacted DSTs also move to implementation, the US is preparing to retaliate against them as well.
French influence in OECD
The OECD was founded in 1948 to administer US-provided Marshall Plan funds to assist Europe in recovering from the Second World War. It was originally called the Organization for European Economic Cooperation (OEEC) and was led by Robert Marjolin of France. In 1961, it was re-organized as the Organisation for Economic Co-operation and Development (OECD) and membership was extended to non-European states. It is headquartered at the aptly named Chateau de la Muette (“Deaf-Mute Castle”) in Paris. It is still dominated – like the EU’s Brussels-based European Commission – by French diplomats.
The OECD’s efforts to grab revenue streams from successful companies for the benefit of its less successful but revenue-hungry member countries began during the Obama administration under the rubric of the Base Erosion & Profit Shifting (BEPS) talks. These aimed at modifying tax treaties and barring companies from relocating to low-tax countries to evade taxation. About 80 countries signed the original BEPS, the US conspicuously not among them.
The OECD’s pillars one and two
The BEPS talks subsequently metamorphosed into the current unpronounceable “OECD/G20 Inclusive Framework on BEPS Reports on Pillar One and Pillar Two Blueprints.” One pillar would establish the right of countries to tax imputed revenue gained within their borders, and the other — to avoid “horrible” tax competition between nations — would establish a global minimum tax on international income.
If the import of these two “pillars” seems difficult to wrap one’s head around, pause for a moment to think how such principles would play out if enacted in the US. At present, there is active tax competition between the states. This places a salutary discipline on high-tax states. If their greedy politicians raise taxes too high, especially discriminatory taxes on wealth and profits, their citizens and corporations will depart for lower tax states, as indeed they have been doing in droves in recent years. If the proposed OECD/G20 “pillars” became tax policy in the US, the high-tax states could also tax alleged digital services, intangible assets, and patent revenues of out-of-state companies not presently reachable by state sales taxes.
BEPS background
The PIIE’s Hufbauer and Lu usefully provide the background to the proposed new BEPS rules:
During the last year of the Obama administration, [a new] realization cooled the initial enthusiasm of the US Treasury for the BEPS project since higher foreign taxation of US MNCs would not only reduce US tax revenues but also drain the pockets of US shareholders. Nevertheless, several European countries, as well as the European Commission, drew on the BEPS recommendations to augment European tax revenues by targeting the offshore profits of MNCs, particularly US firms.
Among other recognized tax rules, the BEPS project attacked the concept of “permanent establishment,” the classic threshold, long enshrined in bilateral tax treaties, giving a country the right to tax the profits of a business enterprise. A “permanent establishment” is defined (for example, in the US-Germany tax treaty) as “a fixed place of business through which the business of an enterprise is wholly or partly carried on.
loc. cit.
The BEPS project characterized the permanent establishment threshold as an outmoded, 20th century concept, no longer relevant in the globalized and digitized 21st century. Seizing on this criticism, the European Commission proposed the two digital taxes. The core rationale is that local users of digital platforms provide value to digital firms, either by responding to website advertisements, by disclosing personal information (gender, age, tastes, etc.), or by interfacing with other users. Accordingly, the country where users live should have the power to tax digital firms on their profits or revenue streams, regardless of whether the firms are local or foreign and whether the profits or revenue streams originate in the taxing jurisdiction or abroad.
Taxing non-resident services has long been forbidden
A similar rationale, when unilaterally applied (as with the Commission’s proposals), has long been rejected in other contexts. For example, Hufbauer and Lu write, Dutch shipping companies transporting goods from Rotterdam to Baltimore can’t be taxed by the US for the benefits US consumers derive from these services. Nor foreign airlines for transporting passengers and cargo to the US. Nor postal and telecommunication companies such as the Deutsche Post for carrying personal messages and business packages to the US. “France can tax a US corporation’s profits attributable to a permanent establishment in France, but it cannot tax profits attributable to the firm’s activities in the United States or other countries,” Hufbauer and Lu write.
So the EU tried to cook up a supposedly sharp distinction between “digital users” and “traditional consumers.” Hufbauer and Lu again:
If a country wants to tax the revenue from local sales by a foreign firm that has no local presence, it can apply its sales or value added tax to those revenues. But the Commission wants to do much more: It wants to tax the cross-border flow of electrons, even though local residents pay nothing to the company.
loc. cit.
Like the PIIE, Founders Broadsheet has often criticized the Trump administration’s trade wars against allies, its ill-executed trade war with China, and its withdrawal from the strategic Trans-Pacific Partnership (TPP). But the administration’s opposition to the French, EU, and OECD/G20’s unprincipled, WTO-illegal tax grab is spot on. Unsurprisingly, the White House has bipartisan support for its position.
Whither the Trump administration?
What is not yet clear is if the White House’s objective remains to push the OECD talks into a direction acceptable to Washington or if, instead, it is fine with having a new opportunity to impose tariffs on a wide variety of trading partners or perhaps using that opportunity as leverage in other areas of its trade relationships.
The only change that might be anticipated if the Biden-Harris team wins in November might be a more favorable attitude toward the WTO. This would be a positive move because the WTO is the most important bulwark the US has against the EU/OECD/G20 tax grab.
One GAFA company — Apple — has, however, already won an important case in the EU’s own second-highest court, where it successfully contested the European Commission’s outrageous claim that it owed Ireland $15 bn. in back taxes.
Ireland wanted no part
The failed tax suit was entirely the Commission’s doing. Ireland wanted no part in such an ex post facto tax claim. Ireland is a genuine nation-state, not a Caribbean or Channel Island tax haven. It is quite happy being the well-regarded home of many multi-national corporations that desire to do business in the EU under a reasonable, non-confiscatory corporate tax rate.
So, for the moment, the action has moved to the OECD. The OECD admits that if the effort for a framework fails and tax chaos does set in, the world could lose 1% of global GDP – in a world trying to recover from the pandemic.
The 160 countries involved in the talks have agreed that a deal would include acceptance of the right of countries to tax companies that do business with their consumers but don’t have a physical presence in their territory, and that a deal would set a minimum level for the DST that a country imposes. The difficulty is in the details. That is why the talks had to be extended.
The stickup may succeed
If the US has agreed to such a stick-up it would presumably be because it is so greatly outnumbered. The GAFA companies could rightly fear serious nationalist reprisals if they resist concessions, no matter how principled.
But the US has remained adamantly opposed to the French DST — because it was made retroactive, has extra-territorial reach, applies to revenue rather than income, and flagrantly singles out for taxation US companies while being exquisitely crafted to avoid hitting any French or EU companies.
The US has rejoined the OECD talks. It’s possible a deal could be reached by next summer. The alternative is a trade war in the West that would make the US-China trade war seem small by comparison.
Leave a Reply