Biden wants to keep global freeze on digital services taxes

The Biden administration is proposing to allies that they extend a coordinated freeze on new digital services taxes beyond its planned expiration at the end of this year, in a bid to avert a trade war among friends and keep alive a foundering global tax deal.

The freeze was included in the October 2021 global tax agreement, brokered by the Organization for Economic Cooperation and Development and supported by more than 130 countries. But that deal has not yet been implemented, in part because the U.S. Congress has refused to endorse it.

The administration is seeking the extension because it sees ratification and implementation of the global deal going beyond the year-end deadline, according to a U.S. Treasury Department official, who asked not to be identified because the efforts aren’t public. The U.S. remains committed to that global agreement and aims to finalize the technical details this summer, the official said. 

The effort to extend the freeze is aimed at preventing a blowup in trade relations over digital services taxes that Washington views as discriminatory against U.S. technology giants like Amazon.com and Google owner Alphabet Inc. 

Known as DSTs, governments have imposed them as a way to capture some tax revenue on commerce that’s done digitally in their markets by firms based elsewhere. 

Under the so-called standstill agreement, countries considering new digital taxes would only move forward if the broader agreement is not in force by Jan. 1, 2024. Canada, for example, aims to impose a DST early next year and would impose the tax retroactively to the beginning of 2022. 

The United States Council for International Business, a trade group for U.S.-based multinationals, this week also urged the OECD to extend the moratorium on DSTs in a letter to the group’s top tax officials.

Tit-for-tat taxes

A number of countries with existing DSTs, including the U.K. and France, said they would phase out DSTs when the global tax agreement came into force. They also agreed to effectively refund any money collected under those taxes in excess of what corporations would pay under the new regime. 

In exchange, the U.S. dropped a series of retaliatory tariffs, which are set to return if the DSTs aren’t gone by the end of this year. Without an extension, the entire truce risks unraveling.

A spokesperson for French Ministry of Finance declined to comment.

Rebecca Kysar, a former Treasury official who played a role negotiating the 2021 agreement, said it was “entirely reasonable” for the U.S. to ask for an extension.

She added that other countries “should oblige” given that the final text of an important portion of the agreement, originally contemplated for signing last year, won’t be ready until July. “Since it was delayed for a year, the standstill agreement should also be delayed,” said Kysar, now a professor at Fordham University School of Law.

The Canadian DST has some in the U.S. tech sector particularly on edge. One executive, who asked not to be named in order to discuss the topic, said it would encourage other countries contemplating new DSTs if one of the Washington’s closest allies imposed such a levy. 

Multilateral preference 

“Canada’s priority and preference has always been and remains a multilateral agreement,” said Adrienne Vaupshas, press secretary to Canadian Finance Minister Chrystia Freeland. “However, to ensure Canadians’ interests are protected, we have committed to a digital services tax if a multilateral agreement is not in place by 2024.”

Vaupshas didn’t comment on the U.S. proposal to extend the moratorium.

Even with an extension, however, prospects for the global deal look dim. Many Republican lawmakers have rejected the agreement, and in May introduced legislation that would punish foreign individuals and companies based in countries that enforce minimum tax rules that are part of the agreement.

The minimum rate under the deal is 15%. With Congress still not bringing U.S. tax rules into line, some U.S.-based multinational companies could be subject to penalty taxes from foreign countries if their effective profit tax rate in the U.S. is below the deal level.