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19 June 2020 / news

United States slows down global solution on digital economy taxation and warns against unilateral initiatives

Some newspapers have reported that, in a letter of 12 June 2020 to some European counterparts, U.S. Treasury secretary Steven Mnuchin announced that the United States suspend their participation in negotiations on a long-term solution to increase the tax revenue levied from large digital economy businesses. He also reiterated the U.S. threat of retaliatory measures, such as import duties, should countries implement unilateral digital taxes.

The U.S. previously issued such warnings and already nudged France to postpone the levying of its proposed digital services tax to the end of 2020, giving time to reach a global consensus. Several other European countries, including the United Kingdom, Italy, Spain and Austria, have adopted or announced their intention to introduce similar digital services taxes.

The OECD is pursuing a two-pillar approach to reform global taxation rules beyond the base erosion and profit shifting (‘BEPS’) Action Plan. Pillar One focuses on the taxation of digitalized business models. It seeks to shift some taxing rights on certain digital business models to consumer / user jurisdictions. Pillar Two aims at achieving a global minimum level of taxation of multinationals. Talks are continuing and Mr Mnuchin hopes to reach an agreement by the end of 2020 on Pillar Two. Pillar One is largely expected to predominantly affect large U.S. technology companies; Pillar Two would have a much more far-reaching impact across all sectors of the economy. For further details, please refer to our earlier publication dated 11 November 2019.

On 18 June 2020, the OECD has urged all participants in the Inclusive Framework to remain committed and engaged in the negotiations, flagging the increased risk of tax disputes and trade tensions in case of uncoordinated unilateral initiatives. France has already reacted to the U.S. letter by announcing it would press ahead with its domestic digital services tax.

The OECD planned to reach a consensus by the end of 2020, but the Covid-19 crisis and the U.S. attitude on Pillar One appear to mean that this deadline will likely not be met. In the absence of consensus, the EU itself may unilaterally want to go ahead with an EU digital services tax or EU minimum tax. The EU digital services tax is mentioned in the recovery plan, Next Generation EU, which was issued before the U.S. letter of 12 June 2020. It remains to be seen how realistic such EU plans would be.

We will keep you posted of further developments.

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