How tech taxes became hottest economic debate

A growing movement by foreign governments to tax American tech giants that supply internet search, online shopping and social media to their citizens has quickly emerged as the largest global economic battle of 2020.

The fight pits traditional allies against each other, with European countries such as France, Italy and Great Britain clashing with the U.S. over their plans to impose new taxes on digital services provided by companies such as Amazon and Google.

At the core of the debate are fundamental questions about where economic activity in the digital age is generated, where it should be taxed and who should collect that revenue. The potential for large tax dollars has spurred governments across the world to consider new digital taxes and has even inspired lawmakers in some American states, such as Maryland and New York, to propose their own levies on digital trade.

This week, national leaders meeting in Davos, Switzerland, brokered a truce between the U.S. and France, which had planned to move ahead with a digital services tax. Officials in both countries said they would pause what had been an escalating dispute to give international negotiators a chance to reach a global tax agreement that could halt a proliferation of digital taxes.

But the meetings, which took place at the World Economic Forum, have brought new threats of taxation and tariff retaliation and underscored how fragile negotiations remain.

The stakes are high for governments and multinational corporations — even those outside the tech sector. The digital tax negotiations, being conducted through the

Organization for Economic Cooperation and Development, have become entwined with efforts to reduce attempts by companies to avoid taxes by shifting profits overseas.

Late last year, negotiators at the OECD, including a delegation from the Trump administration, agreed to a first-step framework that would allow countries to tax certain digital-service providers even if they did not have physical presences inside their borders.

But Treasury Secretary Steven Mnuchin quickly surprised OECD officials with a letter requesting a change to the framework, one that effectively would allow some U.S. companies to opt out of those taxes. OECD officials pushed back, and negotiators are set to meet again next week in Paris.

The discussions, expected to last months, could end with an agreement on a global

minimum tax that all multinational companies must pay on their profits, regardless of where the profits are booked. The negotiations could set a worldwide standard for how much tax companies must remit to certain countries based on their digital activity.

Mnuchin expressed frustration Thursday in Davos that a digital sales tax had become such a focus of discussion at the World Economic Forum. Setting a minimum tax for companies around the world, to prevent them from hiding profits in tax havens, will make a much bigger difference, he said.

“From my perspective, that is by far the more important,” he said.

There is a chance the talks could devolve into a “Wild West” array of separate tax regimes on digital activity around the world.

“It’s a big old mess,” said Jennifer McCloskey, vice president for policy at the Information Technology Industry Council, a trade group that represents companies including Apple, Oracle and several other American tech leaders. “But,” she added, “that’s to be expected.”

Companies that operate across borders have long paid taxes where their profits are booked. Calculating that sounds simple enough, but it has grown increasingly complicated in recent decades. To reduce their tax bills, corporations have shifted profits — and in some cases their headquarters — on paper to low-tax countries such as Bermuda and Ireland. OECD countries such as the U.S. have agreed to measures meant to discourage such shifting.

Such efforts did not resolve some countries’ complaints about Facebook, eBay and other companies that offer online services to their residents but have little or no physical presence within their borders.

Those governments, along with leaders of the European Union, say large tech companies are avoiding paying their fair share of taxes.

“They’re looking for new ways to raise revenue,” said Nicole Kaeding, an economist and vice president of policy promotion at the National Taxpayers Union Foundation, which opposes the digital tax push by countries and states. “These are all wrapped up in the questions of how do we adjust a tax system that is 100 years old in order to tax the digital economy?”

The feud between French and U.S. officials has sped up the OECD process to rewrite those rules, which has a deadline for completion at the end of this year.

France announced plans last year to impose a 3% tax starting Jan. 1 on the revenues that companies earn from providing digital services to French users.