France blinks first against US tariff threats, but UK insists it's still going ahead with its Digital Services Tax

France has capitulated to pressure from the US to call off its Digital Services Tax - for the moment at least. Now attention turns to the UK where legislators have similar plans while simultaneously trying to strike a post-Brexit trade deal with Washington.

The French government of President Macron last year voted to go it alone on a 3% tax on the revenues of digital services providers, most notably aimed at the likes of Google, Amazon, Facebook and Apple.

This followed a frustrated attempt to push the European Union into agreeing a collective position on the subject, an ambition thwarted by the vested interests at play in nations such as Ireland  - too much inward investment from US tech firms at risk - and Germany, which came under pressure from its automotive lobby which feared US retaliation.

The French decision to go ahead unilaterally provoked anger in Washington where it was seen as an attack on US firms. President Donald Trump threatened $2.4 billion of tariffs on French wine, cheese and other goods in retaliation, declaring:

I'm not going to let people take advantage of American companies. If anyone is going to take advantage of American companies, it's going to be us!

Leaving aside the unintended double meaning in his remarks, the scene was set for the opening up of another trade war. But as Trump touched down at the World Economic Forum gathering in Davos yesterday, there was an outbreak of peace as France agreed to delay its new tax regime until the end of this year to give the Organisation for Economic Cooperation and Development (OECD) more time to put forward an international consensus option.

French Finance Minister Bruno Le Maire - who is scheduled to meet with the US Treasury team in Davos today - confirmed that the Presidents of the two countries had spoken directly on the subject:

Macron and Trump had a very constructive discussion... and they agreed to avoid all escalation between the US and France on this digital tax issue.

Brexit Britain next 

With that delay in place, Washington has now fired a warning shot over the bows of the UK where the government plans to introduce a similar tax - at 2% of local revenues - from April.

In what can only be read as an unwelcome complication as the UK prepares to exit the EU formally next Friday (31/1) and enter a transition period during which it hopes to strike a trade deal with America, the US Treasury Secretary Steven Mnuchin warned that if the new digital tax goes ahead, tariffs against Brexit Britain will follow. Call it off, he urged Prime Minister Boris Johnson or there will be consequences:

If not, they’ll find themselves faced with President Trump’s tariffs. We’ll be having similar conversations with them.

For the moment, the UK government is standing firm with a UK Treasury spokesperson insisting:

We have consulted extensively on our Digital Services Tax and have sought to design it in a proportionate way...We've committed to introduce our Digital Services Tax from April 2020. It will be repealed once a global solution is in place

In his speech to the good and the great at Davos on Tuesday, President Trump made reference to the prospect of a UK/US trade deal when he said:

We look forward to negotiating a tremendous new deal with the United Kingdom, who have a wonderful new Prime Minister, who very much wants to make a deal.

But he added a reminder that he’s a big fan of using tariffs as a blunt instrument to advance US interests:

These achievements would not have been possible without the implementation of tariffs, which we had to use. We’ll be using them on others too.

Prime Minister Johnson plans to try to strike a deal with the US at the same time as negotiating with Brussels over the terms of future trading relations with the EU post-Brexit. The assumed intent is to use the prospect of a trade arrangement with the US as leverage to drive a good deal with the EU, so any sign of tension between London and Washington would be an unwelcome complication for UK negotiators.

As of this morning, there were no signs of any softening of the US position as Secretary Mnuchin said:

International tax issues are very complicated and take a long time to look at. If people want to just arbitrarily put taxes on our digital companies, we’ll consider arbitrarily putting taxes on car companies.

He added: 

We’re going to have some private conversations about that... and I’m sure the President and Boris will be speaking on it as well.

The OECD has tried to calm the situation with Secretary General Angel Gurria telling the BBC that the UK should “hold fire”. In addition to the UK, Italy, Austria and Turkey are also considering imposing new digital tax levies, which led to Gurria warning of “cacophony and a mess” if individual countries go their own way.

But UK Chancellor of the Exchequer Sajid Javid told his Davos session this morning:

We plan to go ahead with our digital services tax in April. It’s important –  as we said at the time when we first introduced it to Parliament and legislated for it – it is a proportionate tax. It is a tax that is deliberately designed as a temporary tax. It will fall away once there is an international solution.

And he held up the prospect that progress towards such a solution is possible in the short term:

This does require an international solution that we agree on – that is why all the big economies are part of this discussion. This could be the year of change, This could be the year of agreement.

Tech firms have opposed the tax plans, with Amazon saying it will pass on any extra cost to customers. But Microsoft President Brad Smith yesterday voiced his firm's support for finding an international solution, while Apple CEO Tim Cook called on all countries to support the OECD efforts:

I would certainly be the last person to say that the current system or the past system was the perfect system. I'm hopeful and optimistic that they will find something.

My take

So France blinked first. How long before a trade deal-hungry Brexit Britain does the same?

The most sensible thing for the UK to do right now would be follow the French lead and postpone its tax plans until the end of the year. Give the OECD time to put forward more concrete proposals. The organisation is late on delivering these, but the complexity of getting something on the table that everyone can live with and save face is horrendous.

Kicking further action away until after the US election in November also makes sense as Trump’s speech in Davos yesterday served as an unnecessary reminder that the ‘America First’ agenda will inevitably be front-and-center in the campaigning. That’s not a backdrop that’s conducive to striking deals that result in US firms paying more tax to other countries.