Blog: U.S. formally asks the EU to “ditch”​ the Digital Tax


Written by Alan Rhode (Taxmen)

It was only a matter of time before   the United States    fired an unequivocal   shot   across the bow   of   the pending   European  Union Digital Service Tax  over objections that the levy is   discriminatory  and a   violation   of current international tax rules.

That U.S. assault landed last week in  a letter    sent  to European Commission President Jean-Claude Juncker  and  European Council President Donald Tusk. But it was  not   a   Donald Trump   tweet that conveyed the message. It was the  U.S. Senate Finance Committee, which writes tax law in the U.S. Congress and  was the chief author  of the recently approved U.S. Corporate tax reform.

In a rare show of bipartisanship for the U.S. law-making body,  the missive – signed by  Republican chairman Orrin Hatch  and   his Democratic  counterpart Ron Wyden – insisted the  EU must “abandon” the DST  because U.S. tech companies that will have  to pay   the  3 percent tax. Just as important the letter stated the DST “violates    the long-held principle that taxes on multinationals should be profit-based, not-revenue-based.”

Perhaps even more important the letter states that the  DST  is a  trade provocation  that could will upend  the current  US-EU trade detente  and put the Trump Administration  on the offensive again against EU products, including German cars.

The   EU DST proposal    has been designed to   discriminate    against   U.S. companies    and undermine the international tax treaty system creating a significant new transatlantic trade barrier    that runs counter to the newly launched US and EU dialogue to reduce such barriers,” the letter says. “Therefore we urge the   EU    to   abandon  this proposal, urge the member states to delay unilateral action and instead refocus efforts on reaching   consensus   with other leading economies   within the OECD    on    any   new digital taxation models”.

The  U.S. Finance Committee    also stated that the “EU   already has a   revenue-tax based   on the location of the customer – the   VAT. Consequently, the   DST will undoubtedly lead to   double taxation“.

Of course, the warning about double taxation issues are not only ones raised by the Americans. In September  Ireland,  Sweden, Finland and the Czech Republic  wrote a letter to EU presidency holder Austria  insisting that the  DST  will  violate international bilateral tax treaties    must be addressed.

At first  Austria    gave short shrift to the demands. Or, as one EU diplomat put it, Austria is trying to sweep the issue under the carpet.” Subsequently Austria relented, and  the double taxation issue    will be  discussed    this week (Oct. 26) in a  DST meeting    of EU tax experts.

 As for what triggered the  U.S. Finance Committee    warning the panel made it clear that the current all-out political and technical  offensive    led by   Austria – and bolstered by  French  Finance  Minister Bruno Le Maire – in order to get an  EU DST agreement    by December was “troubling news”.

Interestingly the U.S.  arguments    against the  EU DST  seem to be on solid legal ground. At least that is the way    OECD tax chief Pascal Saint Amans  sees it. During a  lecture    on international tax delivered earlier in October  in  Brussels,  Amans, a Frenchman, said the EU has a “two hemisphere brain” when it comes to  digital taxation. He said while the  EU wants to tax  U.S. tech companies  with the DST the  EU does not want  China  and  India  to use the same kind of revenue-based  indirect levy    on its own companies.

Amans  went further by insisting that with the  new U.S. corporate tax reform  adopted in  December  the EU and other foreign countries can no longer claim that  U.S. tech companies  no longer do not pay tax. That, he said, is due to the minimum tax provisions in the provision of the U.S. Corporate tax reform known – rightly or wrongly? – as the  GILTI  (the Global Intangible Low-Taxed Income). Based on the  GILTI  provision all  U.S. multinationals tech companies    will have to pay a minimum of  13 percent  on  repatriated income.

Whether or not  Amans’  warning and the  U.S. Senate Finance Committee  message will  slow down  the  Austrian presidency    DST  cavalry  charge will likely be determined – as has been the case for much of 2018 – on  how Germany reacts.

To date German Finance Minister  Olaf Scholz    has been doing a delicate dance  vis a vis  the pressing demands of  Le Maire. The  French finance minister  will up the ante this week when he takes his campaign to the European Parliament and insists that  approval  of the  DST    is vital in order to fend off anti-EU forces in the  2019 European elections.

Scholz’s dodge-and-weave tactic to date to keep  Le Maire  at bay has been to flatter  him with words espousing the need for “fair taxation” and other diplomatic niceties that signal theoretical support for taxing large internet companies but do not give outright DST backing. Of course, the main reason for  German DST reluctance  has to do with fears that it could  imperil German exports, including cars to the  U.S. as well as those sold in  China  and  India.

In what some tax experts see as a German led-effort to find political cover for backing away from the DST,  Scholz  has recently been pushing for a  global minimum corporate tax rate. He seems to have gotten  Le Maire on board  for the initiative and it will be pushed by the two countries  in the  OECD.

But will it – along with the  U.S. letter – be en ought    to  cut off  the  Austrian-French DST cavalry charge  at the pass ahead of the upcoming EU  Council of Finance Minister meetings  in  November and  December?  Watch this space.

This is a guest article   written   by   Ecommerce   Europe VAT & Taxation Expert Alan Rhode, who is the founder of Taxmen.   Taxmen   is a   company specialized  in tax and legal services for the e-commerce sector. Taxmen   cooperates with Ecommerce Europe for all VAT and taxation-related matters.