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US companies fear trade fallout from DSTs

US threatens trade war over digital tax

The US has made it clear that it will “defend” its high-tech sector from the special tax measures being imposed on digital companies, but multinationals may have to rethink their supply chains if trade tensions escalate.

Sitting on stage at the IFA Congress in London, Lafayette ‘Chip’ Harter, deputy assistant secretary of international tax affairs at the US Treasury Department, made it clear that the Trump administration is not going to sit on its hands when it comes to the digital services taxes (DSTs) popping up around the world.

“Tech companies remain the most successful, innovative and admired companies in the United States,” said Harter. “These companies are the closest we have to national champions.”

“Our administration has made it very clear that the US intends to respond to attempts by other countries to impose taxes specifically targeted at predominantly US-based enterprises,” he continued. “Our trade powers give us the space to respond appropriately to such measures.”

Silicon Valley has found itself in a strange alliance with the Trump administration over DSTs, but if the US takes a hard-line the results could increase the costs and challenges for traditional US businesses with supply chains in Europe. However, it is impossible to plan on the basis of threats.

“We’re more concerned about adjusting our supply chains to deal with trade wars,” said the head of tax at a Fortune 500 company.

“The trade situation is very fluid right now,” the head of tax told ITR. “Nobody with any sense is going to move the production of anything based on threats that are just part of Trump’s bargaining strategy.”

It was inevitable that China would come up in a discussion about US trade policy. The Fortune 500 company manufactures goods in China for the market there, just as it produces goods in the US for the US market.

“My own view is that Donald Trump and Xi Jinping are both smart businessmen and that ultimately they will reach a mutually beneficial understanding,” the head of tax said.

The same could be said about French President Emmanuel Macron. Arguably, the French DST might be an easier issue to squash than the long list of commercial grievances with China.

There have been trade tensions between the EU and the US and, so far, the strains have been managed. However, the US is investigating whether the French government has discriminated against its businesses. This is where the danger lies.

Taking unilateral action

The world has seen the rise of DSTs in recent years, particularly but not exclusively in Europe. The uncertainty around such efforts to tax the digital economy could create a ripple effect across the global economy, especially if there is no international solution reached soon.

“We’re up to 24 countries in various stages of implementing different versions of a digital services tax,” Chip Harter said. “Such gross revenue taxes are not only bad tax policy, they are a threat to the international tax system.”

The old alliance behind the international tax consensus has broken down. The US may have more in common with China – a country with its own vibrant technology industry – than its traditional allies in Europe.

The UK has drawn up a proposal to tax the high-tech sector at 2% of gross revenue based on user participation, whereas the French DST would impose 3% on a different basis. Meanwhile, Austria and the Czech Republic have plans to tax online platforms at 5% and 7%.

“We believe these measures set a very dangerous precedent,” Harter said. “Countries could set whatever measures they want without restraint from the OECD or international trade principles.”

“There’s no reason they would be limited to tech companies and social media platforms,” he stressed. “It’s difficult to see if there is a natural limit to gross taxation.”

There are also countries looking to work closer with the US on tech innovation. The Polish government has just withdrawn its plans for a digital services tax, going back on its commitment with France to seek interim measures on the digital economy.

US Vice President Mike Pence said his country was “deeply grateful” at a joint press conference with Polish President Andrzej Duda. Pence remarked that the DST “would have hampered trade between our two nations”.

However, there is still plenty of room for conflict as long as these measures fall almost exclusively on businesses based outside these jurisdictions. The French DST is designed to target around 30 large-scale technology companies, including Google, Amazon, Facebook and Apple.

“The United States finds these measures particularly objectionable because it seems like they are designed to target US companies,” Harter said. “Some countries want to tax digital companies, but political pressure goes both ways.”

“The goal of the US is to use those powers to discourage the proliferation of unilateral measures, while the OECD is working hard to achieve a multilateral income-based approach,” he added.

The US is hedging its bets and pushing the OECD to find a global answer. The risk is that if the OECD fails to find a solution the international tax system will be increasingly fractured by opposing tax claims.

“It’s vital that the OECD succeeds given that the alternative could be a very broad disruption that goes beyond mere tax issues and into larger trade issues,” Harter said.

The head of the OECD’s tax policy centre was quick to respond at the IFA Congress. “I cannot be more eloquent than Chip in describing the situation if we don’t get an agreement,” said Pascal Saint-Amans.

“We are working on a unifying approach,” he stressed. “In precisely one month’s time, the paper will be out and you will be able to see what a unifying approach might look like.”

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