Biden bares his teeth - US levels tariff threat at UK over Digital Services Tax

Anyone who thought that Donald Trump’s demise as US President would bring a resolution to ongoing Digital Services Tax (DST) tensions was sadly mistaken as the Biden administration threatens the UK with punitive tariffs and the European Union gives off some decidedly mixed messages on its plans.

The US attitude to countries introducing their own DSTs is long-standing and consistent - they are a tax on US companies and unfair to American providers. On the other hand, non-US countries complain that such providers make enormous amounts of money from them, but don’t pay their dues in tax back into local economies.

Under Trump, this was a clash that fed neatly into his ‘Make America Great Again’ meme and provided another cause to stir up the home base. But as diginomica noted last month:

No-one should assume that just because the US President is no longer spouting “America First” and “MAGA, MAGA, MAGA” as first responses to any issue that somehow the Biden administration is not going to represent the best interests of US business first and foremost.

That’s turned out to be the case. While the new Washington regime has overturned Trump’s truculent refusal to participate in international efforts to reach a global consensus on DSTs, it’s not putting up with dissent from other countries, not even those with whom it has a supposedly ‘Special Relationship’.

So it is that the UK has found itself on the receiving end of a formal threat from the Office of the US Trade Representative that the country faces 25% tariffs on British exports to the US on a range of goods and services, including clothes, jewellery, industrial robots and, for some reason, merry-go-rounds.

The total cost of such tariffs to the UK would be equivalent to $325 million a year, roughly the amount that the UK Government reckons it might rake in from taxing the likes of Amazon, Facebook and eBay on two percent of their respective local turnovers.

The threat is an extension of investigations that had been triggered by Trump’s administration. These covered ten jurisdictions - Austria, Brazil, the Czech Republic, the EU, India, Indonesia, Italy, Spain, Turkey, and the UK. The spectre of punitive tariffs is now being levelled at six of these -  Austria, India, Italy, Spain, Turkey and the UK.

It’s an awkward turn of events for Brexit Britain, which is still in hot pursuit of an over-arching free trade deal with the US and had been encouraged by Biden’s recent decision to take tariffs off of Scotch Whiskey. But picking on US digital giants is a different matter, it seems.

There had been speculation that the UK DST would be quietly shelved in the interests of securing that wider trade deal, but that hasn’t come to pass...so far. Meanwhile the UK finance minister, Chancellor of the Exchequer Rishi Sunak, is publicly trying to make the case for international agreement:

Digitalization has brought enormous benefits to consumers and businesses, but it’s also highlighted that the current international tax framework just isn’t fit for purpose. It’s in everyone’s interest from a corporate perspective to have a multilateral solution. What it will do is provide consistency and certainty, rather than what the current situation is, where you’ve got lots of bespoke regimes that individual countries are having to implement because we can’t find a multi-lateral solution.

Maybe so, is the US response, but those ‘bespoke regimes’ need to go. According to US Trade Representative Katherine Tai:

 The United States remains committed to reaching an international consensus through the OECD process on international tax issues.  However, until such a consensus is reached, we will maintain our options under the Section 301 process, including, if necessary, the imposition of tariffs.

Mais non!

It’s notable that France has escaped the renewed tariff threat after the government there previously went head-to-head with Trump, resulting in the prospect of a wine and cheese war between the two countries. Because the EU has not been able to corral its 27 member states behind its own aspirations for a unified DST plan, the French appear to have been granted a reprieve, despite the Macron government being the most ferocious advocate of tackling US companies about their fiduciary obligations with its own 3% of turnover tax rate.

But is this just a battle deferred? The EU is officially committed to working with the Organization for Economic Cooperation and Development (OECD) on a global solution to the question of DSTs, but is very much keeping its options open. It plans to plough ahead with its own Digital Levy plans, with a proposal due to be on the table by June and a stated aim of having this implemented and operational by 2023 if need be.

Margrethe Vestager, Executive Vice President of the European Commission for A Europe Fit for the Digital Age and the scourge of US ‘Big Tech’, insists that it’s perfectly reasonable for Europe to continue down this path:

We will work to develop a design that does not interfere with the OECD process. There are ways to do this so we will still meet the European objective and actively support the OECD.

But she’s clearly conscious that it doesn’t take a particularly cynical mind to suspect that Europe is working on a contingency plan on the assumption that the global efforts will fail. So she’s quick to lay down assurances that no harm is meant to the international effort that Biden’s administration is now full-square behind:

We are working hard to ensure that the design of such a digital levy cannot be seen as discriminatory and does not fuel trade tensions in any way.

But even if the OECD does come up trumps - pardon the pun - it’ll take a long time for any standard approach to be ratified and implemented and Europe needs the cash, she added:

This is why it is important to push on with the Commission proposal for a digital levy.

My take

There may be trouble ahead, as the song goes.

There are clear signs that the OECD itself is wary of what Brussels is up to. The OECD’s Director of the Center for Tax Policy and Administration Pascal Saint-Amans warned that Europe’s ‘have cake and eat it’ approach to the issue could trigger a trade war with the US:

We're all fully aware of the consequences of that…We will have to try and square the circle, as it were.

Meanwhile other European officials are less circumspect than Vestager when it comes to concealing barely-hidden agendas. João Leão, the Portuguese Finance Minister, has bluntly stated:

We are continuing preparations for imposing an EU digital levy to serve as an EU revenue source by 2023.

Consider that champagne war merely postponed - and add to it increased export prices on bratwurst, wiener schnitzel and Guinness.

As for the British, expect a DST climbdown at any minute from a UK Government, which is already juggling the fiscal requirement to rebuild the public purse, after the enormous cost of bailing out the nation during the pandemic, with the urgent political need to strike some kind of post-Brexit trade deal with the Yanks.