US and France agree deal on digital tax

The US and France have formally declared a truce in their fight over digital taxation after the US dropped its insistence that any international taxation agreement should be optional, making the prospects for a global deal in 2020 significantly brighter.

Talks on the sidelines of the World Economic Forum in Davos on Thursday morning between Bruno Le Maire, the French finance minister, and Steven Mnuchin, US Treasury secretary, resulted in a US pledge that its trade representative would suspend planned tariffs on $2.4bn of French goods. France agreed to stop collecting its digital tax, although corporate liabilities will still be accrued.

The breakthrough on Thursday shows that the two countries have established a basis of trust in their negotiations over a global accord to transform the way multinationals are taxed.
The agreement removes a US requirement that any global digital tax should be optional — a demand that proved a stumbling block in negotiations earlier this week.

The US stipulation — first made in December — threatened to kill any prospect of a deal because, as Mr Le Maire said in Davos this week, “I don’t know of any company that would opt for taxation”.

Officials close to the negotiations said that the US would stick to the language it used in its December statement that any international digital tax must follow “safe harbour” rules, but these would be redefined to avoid stating that the taxes were optional.

Angel Gurría, secretary-general of the OECD, said the negotiating process was back “on track” and he hoped countries would make progress in the next phase of negotiations in Paris next week, when 137 countries will engage in formal discussions at an OECD conference. The aim is to agree an international tax framework by the end of this year.

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Mr Gurría said that “a lot of political will and a great spirit of compromise” was still needed to reach an international agreement. Failure, he added, would lead to a “cacophony” of national actions.
At stake is the way companies are taxed; any agreement could rip up a century of corporate taxation policy that links companies’ revenues to their physical location. A breakdown in the talks could spark a transatlantic trade war, officials have warned.

The discussions have been tense, with the US threatening the UK and other countries over their plans to introduce national digital taxes if the global talks fail.

The UK said it intended to legislate for a digital tax to come into force in April.
Sajid Javid, the UK chancellor, said on Wednesday in Davos that “there has been a growing disconnect between where customers are based for these businesses and where the profits are generated”.
The UK’s resolute attitude, in the face of Mr Mnuchin’s threats to impose “arbitrary” tariffs on its car industry, emboldened the French.

Mr Le Maire insisted on Wednesday night that France had not dropped its tax, which he said would remain in place until there was an international agreement. He had faced criticism at home over suggestions that he had capitulated to the US.

Mr Le Maire said: “I want to be very clear. [There has been] no suspension of the French taxation, no withdrawal of the French taxation. Either there is an international agreement in 2020 and in that case the international agreement will replace the national taxation, or there is no agreement at the OECD, and in that case, since the French taxation remains in place, the companies will have to pay.
“In any case, digital companies in France will have to pay their due taxes in 2020.”

The US complains that digital taxes largely hit US companies and destroy international taxation conventions. France, the UK, Italy and others argue that the nature of business has changed and question why the world’s most profitable companies should pay little to no domestic corporate taxes because profits are shifted abroad.

But Mr Mnuchin faced frustration from some other countries in Davos over the aggressive stance he took. As recently as October, no one thought international corporate taxation would become the subject of a stand-off.

Talks at the OECD initially progressed smoothly towards a grand bargain in which more countries gained corporate taxing power at the expense of multinationals that would have to pay more tax, and low-tax jurisdictions such as Ireland and the Netherlands.

Under OECD proposals, countries would gain the right for the first time to levy a tax on highly profitable multinationals based on the location of their customers. This would hit companies such as Google, but also big French luxury brands and German car companies.

A global minimum corporate tax rate would reduce the scope for companies to shop around for the lowest tax jurisdictions in which to locate their profits. In a December U-turn, Mr Mnuchin called for the first part of the proposal, the tax on multinationals, to be optional. Mr Le Maire said: “An optional solution is not a fair and efficient starting point for an OECD solution.”