Insight
The US proposals on digital services taxes and minimum tax rates: How the EU should respond by Zach Meyers, 15 April 2021
OECD members are negotiating a global digital services tax and a global minimum corporate tax. EU member-states should support recent US proposals to conclude the talks. Globalisation and digitalisation allow customers to use foreign digital services or purchase directly from foreign producers more easily, but current international tax rules mean that these producers can often escape paying corporate tax in countries where they make sales. As a result of their frustration about this situation, many countries, including large EU member-states such as France and Italy, have introduced digital services taxes (DSTs), setting them at odds with the US. Under international tax treaties, a customer’s or user’s home country (referred to as the ‘market jurisdiction’) can generally only tax a foreign producer’s profits if the producer has a permanent establishment in that country, such as a fixed place of business. DSTs depart from this norm. But DSTs suffer from design flaws. They are typically a tax based on revenues, rather than profits, which can harm firms which are not yet profitable. DSTs generally apply only to digital services (DSTs define this differently), disadvantaging the digital economy over the offline economy. Finally, DSTs often include certain revenue thresholds that effectively single out large tech giants based in the US, rather than taxing domestic businesses. This causes friction with the US – the Office of the US Trade Representative has concluded that various countries’ DSTs discriminate against US firms, which may be a precursor to imposing retaliatory tariffs. The 37 member-states of the Organisation for Economic Co-operation and Development (OECD) are currently negotiating a global replacement for national DSTs, aiming for a mid-2021 agreement. The OECD countries that already have DSTs have generally promised to revoke them in the event of an OECD agreement. DSTs have been disparaged by many economists and raise relatively little income: for example, the French government estimated its DST would raise €400 million in 2020, which (based on 2019 corporate tax revenues) would amount to less than 1 per cent of corporate profit taxes. Nevertheless, DSTs have become totemic. Many governments believe – probably correctly – that the increase in the number of countries imposing DSTs makes the US more likely to change international tax rules to agree to a global CER INSIGHT: The US proposals on digital services taxes and minimum tax rates: how the EU should respond 15 April 2021
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