Congress must deal with punitive targeting of US digital businesses by Europe



Washington is currently back and forth on a wide range of issues, including infrastructure investments, US purchasing policy, and even electric vehicles.

But amid the usual partisan deadlock, it seems Democratic and Republican lawmakers are agreeing on one problem: the issue of foreign digital service taxes (DST).

DST is a hallmark of the Internet age, a tax on sales made on digital platforms. This includes any product or service transferable over the Internet. The issue gets complicated quickly, however, as tangible consumer goods are often intertwined with digital services. As a result, disagreements can arise as to when to start selling a product and when to end a support service.

As obscure as it all sounds, digital taxation could soon have a disproportionate impact on the US economy. Indeed, the world’s largest digital companies are primarily headquartered in the United States. So, with European countries threatening to impose taxes on digital services on a large scale, the real consequence is a potential threat to the competitiveness of American businesses.

Europe has a smart logic to impose DST. He notes that American digital companies are shifting their profits massively to tax havens in order to avoid paying EU taxes. Such profit shifting is a well-used tactic, however, and many global companies, including pharmaceutical producers, use similar tactics to avoid paying taxes in the United States. But since the taxation of global multinationals has become such a thorny issue, the Organization for Economic Co-operation and Development (OECD) has even looked into the issue. In fact, the OECD recently agreed that countries should be able to collect taxes from the biggest profit shifters. As a solution, the OECD has proposed moving to a global system that taxes profits based on place of sale and end user.

It’s good that the OECD has worked to mediate such a controversial dispute between some of the world’s largest industrial nations. But that did not solve the problem of daylight saving time. It was agreed that in return for participating in the new OECD fiscal framework, countries would abandon their unilateral DST. However, many of these countries are hinting that they could persist with DSTs — they claim they are waiting to make sure the OECD deal works. Realistically, however, this means that Europe wants to continue taxing American digital businesses in the short term. And this is something that American lawmakers rightly find unacceptable.

If Europe and the rest of the world persist with its DSTs, the United States Trade Representative (USTR) could respond with tariffs. But imposing such tariffs would be complicated. And realistically, the United States just needs better tools to fight taxation in the digital arena.

A useful aspect of the OECD tax deal is that countries are now accepting the merits of “selling factor sharing”. Overall, this is useful, as it could motivate the United States and other countries to finally tackle large-scale profit shifting. But if Washington seeks to eliminate the DST problem, a lot of work remains to be done.

It would be a good thing if Washington chooses to use the unilateral distribution of the sales factor to combat the unilateral taxation of DST from other countries. This is because Europe sees America’s digital businesses as an easy target, and yet it still wants to protect its own tax evaders. Basically, Europe is saying “We want to target your tax cheats, but our tax cheats can continue to do what they are doing. Congress is right to be frustrated by such selfish behavior. And so, a response from the United States that uses Selling Factor Allocation would be particularly appropriate – an upgrade of the playing field that says, “If you tax our businesses for profit shifting, we’ll tax your businesses for profit shifting. same thing. “

All of this is strong medicine, of course. And Washington would likely only take action in response to the continued unilateral efforts of other countries. But if the OECD cannot resolve the current bickering, Washington must take action in response to countries that choose to conduct punitive DST on U.S. companies.

This column does not necessarily reflect the opinion of the Bureau of National Affairs, Inc. or its owners.

Author Info

David Morse is Director of Tax Policy at the Coalition for a Prosperous America Education Fund. Follow him on Twitter @CentristinIdaho.

Bloomberg Tax Insights articles are written by seasoned practitioners, academics, and policy experts who discuss current tax developments and issues. To contribute, please contact us at [email protected].

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