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 truce allows time for tax officials from nearly 140 countries
including France and the U.S. to hammer out a deal to modernize the international tax system. On Jan. 31, they agreed to push ahead with negotiations
to rewrite global cross-border tax rules by the end of the year.
So, for the moment, your brie and bordeaux
As a tax professor
, I applaud the willingness of France and the U.S. to negotiate. The problems with the international tax system can’t be resolved by these two countries alone.
That’s because the current rules based on century-old tax treaties are ill-suited to the demands of the digital economy and need urgent reform.
A discriminatory tax
In March 2018, the the European Union
proposed a 3% tax on certain gross profits of the world’s largest digital companies, regardless of whether those companies had a physical presence in a country.
Although tech-friendly European countries including Ireland and Sweden blocked the EU tax, France passed its own version
in July 2019. Like its EU model, the French tax applies disproportionately
to US tech giants
by targeting companies with at least US$750 million in revenue that sell online ads, user data or operate a digital marketplace.
France argued that it needs digital taxes to force tax-dodging U.S. companies
to pay their fair share. But US officials complain that digital taxes are protectionist, discriminate against U.S. companies and double-tax them
And such unilateral digital taxes may even violate EU law, as I’ve argued elsewhere
with a colleague.
An obsolete rule
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.
Today’s digital companies earn significant profits in countries where they have no physical presence
. The result is that nations like France and others around the world, which have large markets
for digital services, receive little or no income tax from these tech businesses.
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.
Frustrated with the physical presence requirement, at least 36 countries
including the U.K. and India have enacted or proposed
their own taxes to get around the rule, according to advisory firm KPMG.
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.
The governments have in principle agreed on a framework
to design a new system and set a minimum corporate tax rate. The new rules would affect not only tech giants
like Amazon and Apple but also many other large companies such as luxury goods maker LVMH and automakers Volkswagen and Tesla.
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.
This article is republished from The Conversation
under a Creative Commons license. Read the original article