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US will fight digital services tax

European insistence on a digital service tax is being resisted by US authorities. Tariff against its allies are a real possibility.

US will fight digital services tax
Garry white employee

by
Garry White

in Features

31.07.2020

America’s quest for technological supremacy has been mainly focused on punitive actions against China. But European attempts to boost tax revenues from the most successful Silicon Valley companies means this battle is now spreading to its allies.

Many western countries believe they can overcome Washington’s resistance to taxing tech giants such as Google, Apple and Microsoft because it seems fair and just. But this underestimates the importance of Silicon Valley to Washington’s geopolitical ambitions. The US will not back down and tariffs on European goods are looking more likely by the day.

Silicon Valley behemoths are the front line in America’s battle for technological supremacy in the 21st century. China has already developed equipment for 5G systems that is superior to that produced in the US – and it appears to be getting ahead of western nations on smart cities and other ways to exploit the so-called ‘Internet of Things’. This means that US tech majors have become a geopolitical tool that Washington will rush to defend from the slightest attack – even by its allies. 

The US Senate Finance Committee warned Britain this week that its digital service tax (DST) on big American technology companies could put a post-Brexit trade deal at risk. It is one of the thorny issues that mean an agreement is now unlikely this year. However, the toughest action is likely to be taken against the European Union (EU).

Tax dumping

Big US tech companies stand accused of tax dumping; locating their European headquarters in countries such Ireland or Luxembourg where profits shuffled from other jurisdictions is taxed at a lower rate. It seems obvious that these companies are not paying their dues on the substantial profits they earn in individual countries.

But Washington does not see it this way. Action by European countries is regarded as an attempt to target US businesses in an attempt to give their home-grown companies an advantage. In the case of the EU, this accusation is actually correct.

Earlier this year, Brussels outlined proposals to keep it from being overly reliant on foreign companies. The continent has few major tech players and Brussels wants to restore “technological sovereignty,” through tougher regulation of the technology majors, new rules for artificial intelligence and more public investment. “We want to find European solutions in the digital age,” Ursula von der Leyen, European Commission president, said.

Boosting Europe’s technological capabilities is also a central policy in Europe’s plan to recover from the Covid-19 recession, alongside green energy. Taking a leaf out of China’s book, the EU is moving towards a more active industrial policy than in the past. It wants to ensure that some of its fledgling tech companies can compete with foreign players and boost its digital sovereignty. This has further fuelled US concerns – and was partly responsible for US Treasury Secretary Steven Mnuchin’s decision to withdraw from DST negotiations with EU officials in June.

France at the vanguard

First in the firing line is France, even though Paris agreed to defer collection of its 3% tax. Bruno Le Maire, the country’s finance minister, denounced Mr Mnuchin’s decision to withdraw from the global DST talks as “a provocation” and, two weeks ago, the Trump administration proposed new tariffs on French goods. It announced additional duties of 25% on French cosmetics, handbags and other imports to the US that have a total value of about $1.3bn (£1bn). However, the new trade barriers would not be raised for up to 180 days. This followed a “Section 301” investigation that concluded that the French tax discriminated against US technology companies. This means the clock is now ticking.

Washington has initiated similar Section 301 investigations of DSTs adopted or being considered by 10 other countries, including Britain, India and Turkey, which could also result in tariffs against their goods.

The window to resolve this issue is therefore shrinking and, despite the ongoing pandemic, the Trump trade war has not gone away. There is also a new EU antitrust inquiry into how companies use the data from devices such as smart phones and a European court ruling has also added to the tensions. Last month, the European Court of Justice effectively ruled that the US can’t be trusted to process and store citizens’ private data because of concerns about surveillance by American authorities. This will only increase Washington’s resolve to halt the global push for a DST. 

It will be very difficult for Europe to play catch-up with the competition in the US and China, even with a good industrial policy. Europe has been struggling for years to produce a leading technology giant with the recent collapse of German group Wirecard highlight its continual failure to do so. Nevertheless, the US is unlike to compromise.

China managed to leapfrog the US in 5G by using its state apparatus to direct investment at its technology companies towards Beijing’s key priorities. Traditional capitalism, which allows the free market to develop ideas and solutions with minimal state interference, proved lacking in this race. Washington has recognised this advantage – with US Attorney General William Barr even suggesting that America should consider taking a controlling stake in European telecoms equipment makers Nokia and Ericsson.

Clearly, American authorities are recognising that more state action is needed to maintain its position as the global hegemon through technological leadership. This means the next escalation of the trade war will probably be targeted against Europe.

A version of this article first appeared in the Daily Telegraph.

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