US digital tax probe raises threat of yet more tariffs

Hello from Washington, where we now face both a curfew and a lockdown. A quick pre-curfew cycle to get some fresh air on Tuesday evening revealed large crowds peacefully gathering outside a fenced-off Lafayette Square, opposite the White House. Parked military vehicles pointedly blocked streets, and much of Washington’s K Street — famed for being home to business lobby groups, as well as the usual office of the Financial Times’ Washington bureau — was boarded up. Heavily armed police stood blocking many of the pavements and cycle lanes leading to the usually open green spaces around the presidential mansion, pushing members of the public even further back than usual.

None of this sense of deep unhappiness at home has stopped the Trump administration’s unstoppable thirst for rattling overseas trading partners with tariff threats. The subject of our main piece today is the US’s newest Section 301 investigation into digital services taxes. Our person in the news is Ron Wyden, the US senator, while Charted Waters looks at how Australian iron ore exports to China are rising despite trade tensions.

Sabre-rattling unlikely to be received well in Europe

Digital services taxes

The US may be in the throes of some of the worst unrest since the 1960s after the killing of George Floyd in Minneapolis last week, but Washington’s penchant for threatening to impose tariffs on trading partners knows no bounds.

The US Trade Representative’s office, headed up by Bob Lighthizer, on Tuesday announced a Section 301 investigation into a plethora of countries that had either implemented, or outlined plans to implement, a digital services tax. At the heart of discussions is the question of how to tax cross-border ecommerce. Many of the digital taxes impose the levy on a company’s revenues where they are generated, even if the company doesn’t have a physical presence there.

The 301 rules were used to impose punitive tariffs on China, and have also already been tried and tested on digital services in the case of France. A US investigation last year into France’s threatened digital services tax concluded that it unfairly discriminated against US tech giants such as Google, Amazon and Facebook, and resulted in officials saying they would levy tariffs of up to 100 per cent on $2.4bn worth of French goods.

In January, Washington and Paris came to a truce. French officials agreed to hold off on the digital tax, US officials said they would hold fire on the tariffs, and both sides said they would wait to see what kind of multilateral agreement the nearly 140 countries taking part in talks on global digital taxation at the Paris-based OECD could come up with over the next year.

Tuesday’s announcement, which lists the EU, the UK, Austria, Brazil, the Czech Republic, India, Indonesia, Italy, Spain and Turkey as all under investigation, suggests impatience with the progress of those talks. An OECD meeting to discuss corporate tax reform scheduled for July was postponed until October, because of the coronavirus pandemic. It seems that the US trade representative’s office cannot be that easily distracted from its simmering disgruntlement with what it sees as an attack on its Silicon Valley darlings.

It’s difficult to see this sabre-rattling being well-received in European capitals, particularly in Brussels and London, where diplomats are locked in ongoing trade negotiations with Washington. For the largely stalled and limited US-EU talks, it’s another spanner in a works already full of spanners. An argument about state subsidies for airlines remains unresolved, the fight over the future of the WTO is escalating, and the future of a trade “mini deal” remains clouded with uncertainty. The UK has a slightly more urgent timeline and interest in getting to a trade deal fast, but has made clear that while it’s invested in a multilateral, OECD-led solution, it stands ready with its own unilateral digital tax (which it has already implemented on revenues generated since April 1, and stands to collect from businesses next April) if that doesn’t work out.

The US is also engaged in trade talks with India, which earlier this year expanded an existing digital tax, while Spain is preparing a tax that could go into effect next year. US business lobbyists with interest in the US’s various trade talks admit that the probe “certainly doesn’t help” trade relations. Myron Brilliant, head of the US Chamber of Commerce, a US business lobby group, has thrown his weight behind the multilateral negotiations being held by OECD member countries.

Why is the US doing this now? Some in Washington have noted that a digital tax is a neat revenue-raising measure, one more attractive than ever to governments dishing out cash for coronavirus-related stimuli packages. The UK’s 2 per cent levy on revenues generated by UK users of tech companies stands to bring it an estimated £500m, according to the government’s own forecasts.

Washington has already ratcheted up sanctions on the EU over the Airbus/Boeing dispute this year, albeit in a very limited way © Chona Kasinger/Bloomberg

Clete Willems, a former Trump administration trade official and partner at Akin Gump, said there was a sense that digital taxes had proliferated even as OECD talks appeared stalled. “This makes it critical that the administration push back on this somehow and let countries know they can’t get away with these types of protectionist policies,” he told Trade Secrets. He added that the issue should be raised in bilateral trade talks with the listed countries.

Is the US likely to issue tariffs on European trading partners over this? It seems a bad time to be reigniting animosity with Europe, but it might do it anyway. It has already ratcheted up sanctions on the EU over the Airbus/Boeing dispute this year, albeit in a very limited way. It seems more likely that Washington simply wants to flex its muscles and insist that the OECD talks must go ahead as planned — or more tariffs are very much in the works.

Charted waters

Australia’s listed iron ore producers are reaping multibillion-dollar rewards as disruption due to coronavirus prevents rivals such as Brazil from capitalising on China’s insatiable appetite for the key ingredient of steel, writes Jamie Smyth in Sydney. With Brazil cutting production, Australian groups are brushing aside rising Sino-Australian trade tensions to fill the iron ore supply gap in China, where demand is expected to grow as the economy recovers.

Person in the news

Ron Wyden is the top Democrat on the influential Senate finance committee © Samuel Corum/Getty

Who is it?

Ron Wyden, US Democratic senator

Why is he in the news?

The Trump administration’s move to investigate digital services taxes overseas has attracted bipartisan support. Wyden, the top Democrat on the influential Senate finance committee, issued a joint statement with the Republican chairman of the committee, Chuck Grassley, saying digital services taxes “unfairly target and discriminate against US companies”.

But on other digital matters he is less supportive of Trump. Wyden was the co-author of Section 230 of the 1996 Communications Decency Act — the law that Trump is now attacking in his fight with Twitter, calling for it to be re-examined after the social media platform attached a warning to one of his tweets, saying it was glorifying violence. Wyden told Digital Trends that Section 230 was never about neutrality, arguing that what Trump really wants to do is “force businesses to play host to his lying”.

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