Deal or no deal? Don't crack open a bottle of red just yet over the Digital Services Tax compromise between France and the USA

Profile picture for user slauchlan By Stuart Lauchlan August 27, 2019
Summary:
A done deal or another Euro-fudge? Washington's silence on France's Digital Services Tax compromise doesn't bode well...

Donald Trump Macron

In the end, it was something of a damp squib at the G7 Summit where ructions and Twitter tantrums had been anticipated over France’s unilateral decision to introduce a 3% Digital Services Tax.

This followed the failure last year to reach a European Union consensus on such a tax across the region. The decision to go it alone by the French enraged Washington where it was perceived as a tax deliberately targeting US technology firms.

Reprisals were threatened by President Donald Trump, pre-empting an inquiry by the Office of the US Trade Representative.

En route to Biarritz, there were some saber-rattling threats from the US leader to tax French wine imports to the US punitively:

Those [tech firms] are great American companies and frankly I don’t want France going out and taxing our companies.And if they do that ... we’ll be taxing their wine like they’ve never seen before.'

But  a compromise deal appears to have been struck over the three day G7 Summit in Biarritz this weekend, leading to French President Emmanuel Macron stating:

We have a deal to overcome the difficulties between us.

The plan

The French tax applies to companies with digital sales of €25 million in France or €705 million worldwide. The compromise that’s been brokered appears to allow any firm that is liable to claim a rebate once an international agreement has been reached. France will pay the difference if a global tax regime comes in at a lower rate than 3%; if it isn’t lower, then presumably nothing changes.

That might be regarded as kicking the problem down the road as such an international consensus has not emerged to date. But it’s a solution that appears to be face-saving enough for both French Finance Minister Bruno Le Maire and his US counterpart Steven Mnuchin who reached agreement on Sunday evening in time for Trump and Macron to take the credit.

At a closing press conference, Macron said:

There’s been a lot of anxiety because of misunderstandings on this French digital tax. We talked about it, and I think we have found a very good deal thanks to the work of ministers. When there’s an international taxation model, we will remove the tax — and everything that has been paid will be deducted from this international tax. We have found an agreement that is good for all parties involved. It can solve a lot of really negative issues and improve the international system.

He made it clear that the ultimate goal is still to reach a global agreement on digital services taxation:

The idea is that we need to find a joint agreement in order to address joint international problems and the situation right now is very negative, and the international tax system definitely needs to be modernized, and I think we will work together in a spirit of cooperation on this.'  

For his part, Trump failed to confirm that a deal had been done and has yet to do so. He's also not taken the wine tariff threat off the table. (Although he did comment that First Lady Melania is a big French wine fan!).

And this morning there were signs in Washington that agreeing to the proposed compromise might not be politically-wise at home. Senator Ron Wyden, Ranking Member on the Senate Finance Committee warned:

The Trump administration should reject any deal that allows France and other countries to move ahead with discriminatory taxes on US technology companies, in exchange for vague promises down the line. If Donald Trump gives France a pass now, then it will be open season for foreign governments to go after major American employers.

The silence from the Trump camp may explain why French President, whose led the drive to push through an EU-wide digital services tax regime, followed up his remarks via Twitter this morning when he stated:

Some digital players pay very little tax. This is an injustice that destroys jobs. @realDonaldTrump and I have just agreed to work together on an agreement at the @OECD level to modernize international tax rules.' 

The Organization for Economic Cooperation and Development (OECD) is currently working on a proposal for global-level tax changes. Secretary-General Angel Gurria said that progress is being made, although in terms that still smack of aspiration rather than achievement:

What we are seeing is a very strong and a very clear signal of wanting to find a multilateral solution.

Whatever happens with the French tax, there remains outstanding the prospect of a UK version, pitched at 2% of revenue, which has been due to come into force in April next year. But with the UK in hot pursuit of a post-Brexit trade deal with the US, that’s a political problem for new Prime Minister Boris Johnson.

Basking in praise from Trump at the G7 Summit, Johnson was careful not commit himself to the idea of the tax, which was the brainchild of former Chancellor of the Exchequer Philip Hammond, one of Johnson’s most outspoken political enemies:

Frankly, we must do something to tax fairly and properly the online businesses that have such colossal sales in our country. We must do something to ensure we tax them properly. I am open to discussion about how we do that and I am willing to listen to our American friends about the modalities but we must do something to tax them fairly.

My take

In other words, from Johnson, something must be done…but I’m not about to ruin this Summit photo opp by telling you what that something should be!

For Macron, the compromise proposal is something of a climbdown and one that’s not in the bag yet. There’s every chance that the Trump administration will ultimately reject it, although it was being reported that the deal has been smiled upon by White House economic advisor Larry Kudrow.

Still, probably best not to crack open a celebratory red just yet…