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Why Digital Taxes Are the New Trade War Flashpoint
July 2020
Big internet companies have long been the target of complaints that they don’t pay enough in taxes. Fed up, France imposed a 3% levy on the digital
revenue of companies that make their sales primarily in cyberspace, such as Facebook
Inc. and Alphabet Inc.’s Google. Other
countries also are targeting companies, many of which are American, that have multinational earnings that often escape the taxman’s grip. The U.S. isn’t taking this sitting g down.
1. How does digital tax work?
The French law imposes the 3% levy on companies with at least 750 million
euros ($845 million)
in global revenue
and digital sales of 25 million
euros in France. Of about 30 businesses affected,
most are American,
but the list also includes
Chinese, German, British,
and
even French firms. The idea is to focus on taxation where users of online services are located, rather than on where companies
base their European
headquarters or book their earnings. Targeting revenue rather than profit
gets around techniques many companies use to shift their earnings to lower-tax
jurisdictions.
2. Who else is imposing a
digital tax?
Italy is enacting a tax similar to France’s starting on Jan. 1. Turkey’s
government has proposed
a digital tax of 7.5%. In the U.K., which is gearing up for a national
election on Dec. 12,
both leading parties
have pledged to implement
digital taxes. Legislation proposed in the U.K. in July would impose a 2% levy on the revenues
of search engines, social media platforms, and online marketplaces that “derive value from
U.K. users.” Austria, Spain, and Belgium are also considering digital levies. Plans being floated would generally emulate the French model by taxing sales of electronic data, online advertising, and the services of intermediaries such as Uber Technologies Inc. and Airbnb Inc. that connect users to products.
3. How is the U.S. fighting back?
The U.S. government, saying France’s tax discriminates against American companies, proposed tariffs on roughly $2.4 billion in French products and says it’s exploring whether to open investigations into the digital
taxes proposed in Austria,
Italy, and Turkey.
The U.S. is
relying on Section
301 of the U.S. Trade Act of 1974 — the same tool President Donald Trump used to impose tariffs on Chinese
goods due to alleged
theft of intellectual property. France says the European Union will retaliate against any U.S. sanctions.
4. Could this be amicably resolved?
France says it would drop its tax if the U.S. and others agree to a global
effort for a uniform approach under the stewardship of the Paris-based Organization for Economic Cooperation and Development. The OECD aims to conclude
its negotiations in 2020. Long before adopting its digital
tax, France had pushed for a European
Union-wide digital
levy that was scrapped
when four countries — Sweden,
Finland, Denmark,
and Ireland — declined
to sign off on it.
5. What’s the case for a
digital tax?
Because they’re often domiciled in other countries — including
low-tax jurisdictions such as Ireland
or Bermuda — and shift money seamlessly across borders, companies that sell online can easily avoid paying taxes in countries where they nevertheless make significant sales. More fundamentally, France argues that the structure
of the global economy
has shifted to one based on data, rendering 20th-century tax systems archaic. According to 2018 figures
from the European Commission, global tech companies pay a 9.5% average
tax rate compared with 23.2% for traditional firms.
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