Trump and Macron agreed to a detente in their trade spat. AP Photo/Evan Vucci
The dispute involves France’s decision last summer to unilaterally reach outside the United States-French tax treaty framework to tax U.S. tech companies like Google, Amazon, Facebook and Twitter. Calling the French tax an illegal trade practice, the U.S. vowed to retaliate with 100% tariffs on a broad range of French products.
After talks in January, French President Emmanuel Macron and President Donald Trump appeared to reach a truce. France agreed to delay the digital tax until the end of the year, and the U.S. won’t impose more tariffs.
The US-French digital tax dispute is part of a larger conflict that embroils every country.
Modelled on a framework developed in the 1920s, a large network of bilateral tax treaties forms the backbone of the international tax system. Under these treaties, a country cannot tax a foreign company unless it has an office, store or other physical presence in the country.
And the problem isn’t limited to web services. Online retailers like Amazon take orders from Paris residents over the internet but avoid having a physical presence by hiring third parties to deliver Parisians their jeans and shower curtains.
But such unilateralism increases complexity, subjects companies to double taxation, slows growth and hampers trade.
A global problem
Fortunately, there’s an effort underway to fix the problem.
The Organisation for Economic Co-operation and Development is leading talks involving 137 countries to modernise the international tax system to allow countries to collect taxes even when companies lack a physical presence within their borders.
Agreement has been hard to find, however, in part because avoiding double taxation means that an increase in tax by some countries necessarily will result in a loss of tax by others. Fearing disproportionate impacts on US companies and government revenue, the U.S. has been a particularly reluctant participant.
But things will only get worse for the US if it refuses to budge.
We do not yet know the outcome of the bargaining in Paris, but one thing is clear: The 100-year-old tax system is unlikely to survive intact. If countries cannot agree on a broader reform, they will continue to take matters into their own hands.
The Conversation Africa The Conversation Africa is an independent source of news and views from the academic and research community. Its aim is to promote better understanding of current affairs and complex issues, and allow for a better quality of public discourse and conversation. Go to: https://theconversation.com/africa
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