Amer­ica turns its sights on al­lies in dig­i­tal tax show­down

At­tempts to boost rev­enues from Sil­i­con Val­ley giants are seen as fair and just in Britain and Eu­rope but Washington begs to dif­fer

The Daily Telegraph - Business - - Business Comment - Garry White Garry White is chief in­vest­ment com­men­ta­tor at wealth man­age­ment com­pany Charles Stan­ley. Ben Mar­low is away

Amer­ica’s quest for tech­no­log­i­cal supremacy has been mainly fo­cused on puni­tive ac­tions against China. But Euro­pean at­tempts to boost tax rev­enues from the most suc­cess­ful Sil­i­con Val­ley com­pa­nies means this bat­tle is now spread­ing to its al­lies. Many Western coun­tries be­lieve they can over­come Washington’s re­sis­tance to tax­ing tech giants such as Google, Ap­ple and Mi­crosoft be­cause it seems fair and just. But this un­der­es­ti­mates the im­por­tance of Sil­i­con Val­ley to Washington’s geopo­lit­i­cal am­bi­tions. The US will not back down and tar­iffs on Euro­pean goods are look­ing more likely by the day.

Sil­i­con Val­ley be­he­moths are the front line in Amer­ica’s bat­tle for tech­no­log­i­cal supremacy in the 21st cen­tury. China has al­ready de­vel­oped equip­ment for 5G sys­tems that is su­pe­rior to that pro­duced in the US – and it ap­pears to be get­ting ahead of Western na­tions on smart cities and other ways to ex­ploit the “In­ter­net of Things”. Amer­ica has a fight on its hands.

The US Se­nate fi­nance com­mit­tee warned Britain this week that its dig­i­tal ser­vice tax on Amer­i­can tech­nol­ogy com­pa­nies could put a post-Brexit trade deal at risk. How­ever, the tough­est ac­tion is likely to be taken against the Euro­pean Union.

Big US tech com­pa­nies stand ac­cused of tax dump­ing; lo­cat­ing their Euro­pean head­quar­ters in coun­tries such Ire­land or Lux­em­bourg where profit shuf­fled from other ju­ris­dic­tions is taxed at a lower rate. But Washington does not see it this way. Ac­tion by Euro­pean coun­tries is re­garded as tar­get­ing US busi­nesses in an at­tempt to give their home-grown com­pa­nies an ad­van­tage. In the case of the EU, this ac­cu­sa­tion is cor­rect.

Ear­lier this year, Brus­sels out­lined pro­pos­als to keep it from be­ing overly re­liant on for­eign com­pa­nies. The con­ti­nent has few ma­jor tech play­ers and Brus­sels wants “tech­no­log­i­cal sovereignt­y”, through tougher reg­u­la­tion, new rules for ar­ti­fi­cial in­tel­li­gence and more pub­lic in­vest­ment. “We want to find Euro­pean so­lu­tions in the dig­i­tal age,” Ur­sula von der Leyen, Euro­pean Com­mis­sion pres­i­dent, said.

Boost­ing Eu­rope’s tech­no­log­i­cal ca­pa­bil­i­ties is also a cen­tral pol­icy in Eu­rope’s plan to re­cover from the Covid-19 re­ces­sion, along­side green en­ergy. Tak­ing a leaf out of China’s book, the EU is mov­ing towards a more ac­tive in­dus­trial pol­icy. This has fur­ther fu­elled US con­cerns – and was partly re­spon­si­ble for Steven Mnuchin, the US Trea­sury Sec­re­tary’s de­ci­sion to with­draw from DST ne­go­ti­a­tions with EU of­fi­cials in June.

First in the fir­ing line is France, even though Paris agreed to de­fer col­lec­tion of its 3pc tax. Bruno Le Maire, the coun­try’s fi­nance min­is­ter, de­nounced Mr Mnuchin’s de­ci­sion to with­draw from the global DST talks as “a provo­ca­tion” and, two weeks ago, the Trump ad­min­is­tra­tion pro­posed new tar­iffs on French goods. It an­nounced ad­di­tional du­ties of 25pc on French cos­met­ics, hand­bags and other im­ports to the US that have a to­tal value of about $1.3bn (£1bn). How­ever, the new trade bar­ri­ers would not be raised for up to 180 days. This fol­lowed a “Sec­tion 301” in­ves­ti­ga­tion that con­cluded that the French tax dis­crim­i­nated against US tech­nol­ogy com­pa­nies. The clock is now tick­ing.

Washington has ini­ti­ated sim­i­lar Sec­tion 301 in­ves­ti­ga­tions of DSTs adopted or be­ing con­sid­ered by 10 other coun­tries, in­clud­ing Britain, In­dia and Turkey.

De­spite the on­go­ing pan­demic, the Trump trade war has not gone away. There is also an EU an­titrust in­quiry into how com­pa­nies use data from de­vices such as smart phones. Last month, fur­ther­more, the Euro­pean Court of Jus­tice ef­fec­tively ruled that the US can­not be trusted to process and store cit­i­zens’ pri­vate data be­cause of con­cerns about sur­veil­lance by Amer­i­can au­thor­i­ties. This will only in­crease Washington’s re­solve to halt the global push for a DST.

It will be very dif­fi­cult for Eu­rope to play catch-up with the US and China, even with a good in­dus­trial pol­icy. Eu­rope has strug­gled for years to pro­duce a lead­ing tech­nol­ogy gi­ant, with the re­cent col­lapse of Ger­man group Wire­card high­light­ing its con­tin­ual fail­ure to do so. Nev­er­the­less, the US is un­likely to com­pro­mise.

China man­aged to leapfrog the US in 5G by us­ing its state ap­pa­ra­tus to di­rect in­vest­ment at its tech­nol­ogy com­pa­nies towards Bei­jing’s key pri­or­i­ties. Cap­i­tal­ism, which al­lows the free mar­ket to de­velop ideas and so­lu­tions, proved lack­ing in this race. Washington has recog­nised this – with Wil­liam Barr, the US at­tor­ney gen­eral, even sug­gest­ing that Amer­ica should con­sider tak­ing a con­trol­ling stake in Euro­pean telecoms equip­ment mak­ers Nokia and Eric­s­son.

US au­thor­i­ties are recog­nis­ing that more state ac­tion is needed to main­tain its po­si­tion as the global hege­mon through tech­no­log­i­cal lead­er­ship. This means the next trade war es­ca­la­tion will prob­a­bly be tar­geted at Eu­rope.

‘Ac­tion by Euro­pean coun­tries is re­garded as tar­get­ing the US to win an ad­van­tage’

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