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Digital Services Tax Could Be Next US Trade War: The Week Ahead

The U.S. might be on the path toward another trade war, this one with Europe over digital services taxes that could be imposed on American technology firms.

The use of retaliatory tariffs as the weapon to exert financial pressure over technology matters is nothing new. Although dubbed a trade war when implemented, the actual issue has been centered on control over how technology is used. The world saw that in the U.S.-China trade war that began in July 2018 as the two countries competed in the race for technological innovation to claim global supremacy. Central to the U.S. position was its demand that China do more to protect the intellectual property assets of American corporations.

Europe last year began implementing digital services taxes, setting the stage for the continent to become the next battleground for a trade war over taxes on digital services. That’s a distinct possibility now that the U.S. on Wednesday walked away from talks to negotiate some global solution to the matter.

U.S. Trade Representative Robert Lighthizer confirmed to the House Ways and Means Committee hearing on Wednesday that America withdrew from multilateral talks conducted through the Organization for Economic Cooperation and Development. Treasury Secretary Steven Mnuchin is said to have determined that talks should be put on hold as countries focus first on economic issues connected with the impact from the public health crisis as a result of the coronavirus, or COVID-19, pandemic.

Of course, pulling back on talks is sometimes a negotiating tactic that’s used to indicate one’s willingness to walk away if needed. And sometimes that pause gives everyone a chance to rethink their respective positions. Mnuchin and Lighthizer hit an impasse several times last year when negotiating with China over its trade war dispute, promising to escalate tariffs if it doesn’t get certain concessions.

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“I hope this will be a temporary setback rather than a definitive stop,” Paolo Gentiloni, European Economic Commissioner, said on Wednesday. Noting regret that the U.S. had pulled out of negotiations, Gentiloni said that while the European Commission prefers a global solution to “bring corporate taxation into the 21st century,” the European Union is prepared to proceed on its own with a new proposal at the EU level.

Italy, notwithstanding the COVID-19 emergency, is prepared to work with France, Spain and the U.K. on a single solution in 2020, as determined by the G20, Roberto Gualtieri, Italian finance minister, tweeted on Thursday.

While the U.S. is trying to negotiate ways in which American companies can reduce their tax liability, foreign governments are looking at their balance sheets and financial goals, not to mention how to raise revenues. The focus on local economies is part of what has been a localization trend focused on nationalism and away from free cross-border transactions.

As for digital services taxes, France was the first in 2019 to institute a digital tax on internet services by foreign entities, such as Amazon, Apple, Facebook and Google. Italian lawmakers followed shortly thereafter.  But then the U.S. and France reached truce to hold off implementation of the tax for the rest of 2020 to allow time to negotiate a resolution to the matter. Italy’s tax went into effect on Jan. 1, 2020.

The battle over taxation promises to be long and drawn out given what’s at stake. The French and Italian tax rate is 3 percent on digital revenue, provided the technology firm being taxed generates over 750 million euros ($830.9 million) in global revenue. The second criteria requires 25 million euros ($27.7 million) generated in France for the French tax and at least 5.5 million euros ($6.0 million) in Italy for the Italian tax. That would translate to about 500 million euros ($563.0 million) in collected revenue for France and an estimated 600 million euros ($719.0 million) for Italy. The U.K. has a 2 percent tax on its books that’s expected to generate nearly 500 million pounds ($655.0 million).

Last year, U.S. President Donald Trump has indicated that he’s willing to play hard ball by slapping reciprocal tariffs on items such as French wine, handbags and fresh cheese if France wasn’t willing to make some concessions. Presumably, he’s willing to do the same with EU goods and those from the U.K. as well, now that it has legally left the trading bloc on Jan. 31. If that comes to pass, the loser will be consumers who will have to shell out more dollars due to higher prices for goods.