Transatlantic tension flared Friday as Washington took aim at proposals from Paris and London to start taxing the revenue of digital giants, in a spat set to overshadow a meeting of G7 finance ministers in France next week.
Hours after the White House opened an investigation into France’s plan for a digital services tax, the U.S. Treasury Department upped the ante by declaring it would review the possibility of doubling taxes on French companies and citizens with U.S. income in response to Paris’ proposal.
The U.K. has also incurred Washington’s ire, with U.S. lawmakers warning that a digital services tax would imperil any post-Brexit trade deal between Britain and the United States.
“I met with U.K. officials earlier and said, ‘You expect a trade agreement with the U.S. and the U.K. It will not happen with your digital services tax. Period. Full stop,'” Senator Ron Wyden, the top Democrat on the Senate Finance Committee, told journalists.
Both Paris and London have stated they would only impose a digital service tax temporarily, until a broader OECD measure is put in place.
The threats from Washington are testing London and Paris’s resolve to move ahead with a tax that would chiefly target the revenue of large Silicon Valley companies like Google and Facebook, which politicians accuse of paying too little into national coffers despite generating billions of dollars of revenue in Europe.
In an address to the French Senate on Thursday, Finance Minister Bruno Le Maire struck a defiant tone in the face of U.S. pressure. “France is a sovereign state that makes its own fiscal decisions, and will continue to do so,” he told the chamber minutes before Senators voted to approve the digital services tax.
But France and Britain are likely to face further challenges from the U.S. at a gathering of finance ministers from the Group of Seven industrialized nations in Chantilly, France, next week.
London is seeking a free trade deal with the U.S. to shore up its economy in the event of a no-deal Brexit. The prospect for such an agreement has been eagerly touted by prospective U.K. Prime Minister Boris Johnson, but it also grants U.S. President Donald Trump unique leverage over London in regard to the digital tax.
The U.K. government is under pressure to reform its tax system and to extract more revenue from digital companies. Doing so is popular among many Conservative and opposition MPs, who are under pressure from local businesses and who have seen their high streets struggling in recent years.
At an event in York last Thursday, Johnson said a way had to be found of “taxing the internet giants on their income, because at the moment it is simply unfair.”
“I think it’s deeply unfair that high street businesses are paying tax through the nose… whereas the internet giants, the FAANGs — Facebook, Amazon, Netflix and Google — are paying virtually nothing,” Johnson said at a leadership hustings event in York, northern England.
But two figures close to Johnson’s campaign said they did not think he had yet formulated a firm policy approach to taxing digital companies.
French President Emmanuel Macron, who will be hosting G7 ministers at the town near Paris starting Wednesday, runs the risk of isolation if London backs out of its plan for a digital services tax.
A French-led crusade to have a digital services tax adopted at the European level failed last year due to wilting support from other EU countries, namely Germany, which also feared U.S. trade retaliation.
Now Macron faces the prospect of fighting a trade skirmish with U.S. alone, over a tax that experts see bringing in less than €1 billion per year to the French state.
One possible exit ramp for both France and Britain is the Organization for Economic Co-operation and Development, where developed countries are negotiating a global reform of corporate taxation that could remove the need for a tax targeting digital firms specifically.
Both Paris and London have stated they would only impose a digital service tax temporarily, until a broader OECD measure is put in place. Representatives for the Paris-based organization say they aim to complete work on a global corporate tax reform by the end of this year, and the U.S. has endorsed the process as an alternative to nationally-imposed digital taxes.
“Our digital services tax is a targeted, proportionate and temporary tax that will ensure large digital businesses pay tax that reflects the value derived from their U.K. users,” said a HM Treasury spokesperson. “We’ve been clear that our strong preference is for a global/OECD solution, and that’s why we’ll be discussing this at the G7 next week. Once an appropriate global solution is in place, we will no longer need our own digital services tax.”