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
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’