(New York Times) -- A global attempt to prevent large, multinational companies from shifting their profits to lower-tax jurisdictions is setting off a fight between the United States and Europe, as policymakers on both sides of the Atlantic spar over efforts to impose new taxes on foreign firms.
On Wednesday, the European Commission is expected to take aim at Silicon Valley’s tech giants with a proposal to seriously revamp how technology companies are taxed in the 28-nation European Union. The plan, outlined in a draft obtained by The New York Times, would tax digital media companies based on where they generate revenue, rather than where they have their regional headquarters, which are often in countries like Ireland and Luxembourg that have lower tax rates.
The proposal comes in the wake of the new $1.5 trillion tax law that President Trump signed last year, which tried to crack down on profit-shifting by imposing a new minimum tax on the overseas earnings of any companies with United States operations. The international provisions in the United States tax law have angered some European leaders, who say they go too far and may violate World Trade Organization rules.
The global tensions — and the dueling tax efforts — stem from a shared concern among foreign governments that large, multinational corporations are not paying their fair share of taxes to the countries where they do business. American tech giants like Amazon, Apple and Google have kept their tax bills low for years by keeping profits overseas in lower-tax jurisdictions.
But there is no agreement about how to remedy such tax avoidance. The efforts are exacerbating the already heightened strain between the United States and Europe over a White House plan to impose stiff tariffs on most steel and aluminum imports.
“Tax and trade have basically merged” as issues between the United States and Europe, said Jay Khosla, the staff director for the Senate Finance Committee.
The Organisation for Economic Co-operation and Development has been trying to coordinate global efforts to combat tax evasion. In a report on digital taxation issued on Friday, which was separate from the European Union proposal, the organization said that more than 110 countries agreed to review the international tax system, parts of which had been rendered obsolete by the digital economy.
Officials from the organization said that debate over the proposed European digital tax had been intense at the gathering of the Group of 20 finance ministers in Buenos Aires on Monday. Steven Mnuchin, the United States Treasury secretary, assailed the concept as unfair to American companies.
“We think that having gross taxes on internet companies is not fair,” Mr. Mnuchin said in an interview on the sidelines of the G-20 meeting. “It is not the basis of how we think that they should be taxed, and we have been very clear in those discussions.”
He added: “To the extent that there are issues with change in taxation systems regarding physical presence, that needs to be addressed. It should not be a two-tiered system where internet companies are taxed under a different standard.”
Pascal Saint-Amans, the director of the O.E.C.D.’s Center for Tax Policy and Administration, said that the level of animosity could undermine what had been a coordinated, global effort to crack down on tax avoidance.
“There are very positive aspects which should be conducive to conversation, but the background is tension, with risks,” Mr. Saint-Amans said, adding that his organization was trying to ensure that “these countries don’t go to war, at a time when there are some worries on that front.”
The European Union’s new tax proposal is expected to hit Silicon Valley tech companies the hardest by forcing them to pay taxes to governments where they do business.
For example, Amazon operates across the European Union, but lists its regional headquarters as Luxembourg, a tiny country but one with legal loopholes, sweetheart tax deals and low effective corporate taxes. The European Commission estimates that digital businesses pay an average effective tax rate of just 9.5 percent, compared with the 23.3 percent that traditional businesses pay.
Amazon has been the focus of European officials in the past. Last year, Luxembourg was ordered by the European Union’s commissioner for competition, Margrethe Vestager, to collect around 250 million euros, or about $293 million, in unpaid taxes from Amazon.
Amazon is not alone. European regulators have pressed technology companies on a range of issues, mounting an aggressive campaign against tax avoidance, the mishandling of private data and anti-competitive behavior. But that push has prompted complaints from American tech giants, which argue that they are being unfairly singled out by Brussels. European officials strongly deny those claims, arguing that Europe welcomes American technology, but not tax evasion.
Within the past few years, the European Commission has ordered Apple to pay €13 billion in back taxes and levied fines against other tech giants for abusing their dominant market positions. In January, European antitrust officials fined Qualcomm, the chip maker, €997 million for illegally shutting rivals out of the market for certain smartphone and tablet chipsets for more than five years. Qualcomm said it would appeal the ruling.
Last year, the European Commission fined Google €2.42 billion for using its search engine to favor its own comparison shopping service — called Google Shopping — in search results while demoting results of rival services. Google has appealed the ruling.
Now, as the European Union prepares to institute comprehensive new data protection rules in May, European regulators have opened a novel line of attack. They are investigating the tech giants’ vast information-gathering operations as potential anti-competitive abuses.
In December, Germany’s federal cartel office said Facebook had abused its dominant position by requiring its users to let the social network “limitlessly amass” data by tracking them through other online services — including the Facebook-owned platforms Instagram and WhatsApp. Antitrust regulators said they were “not convinced that users have given their effective consent” to Facebook’s data practices and that the extent of the data collection violated mandatory European data protection principles.
In a blog post, Facebook said that it was cooperating with the German agency, but challenged the claim that it had a dominant position, saying that the social network was merely “popular in Germany.” The company also said it would “be working directly with relevant data protection officials” to ensure compliance with the upcoming European data regulation.
The European Commission’s new proposed tax is likely to apply to companies with annual global revenue of more than 750 million euros, or about $925 million, and cover sales generated within the bloc that top €50 million a year. It would affect revenue coming from specific digital services, such as digital advertising, paid subscriptions and the selling of personal data. The relatively high threshold is intended to ensure that the tax affects only large companies with a significant presence in the European Union.
The exact thresholds and rates have not yet been established, and the plan is not guaranteed to be put into effect, either. The proposals must still be approved by the parliament and the bloc’s member states, and although countries such as France and Germany have raised concerns over companies they say have not paid their fair share of taxes, other member states like Ireland have opposed changes to a system in which they can use tax policy to attract businesses.
“The taxation will go to the biggest markets with the most sales, and that effectively means that activities which could be taxed in Estonia will be transferred to Germany,” said Peter Chase, a senior fellow at the German Marshall Fund in Brussels who focuses on the trans-Atlantic economy, trade and digital policy. “Some member states may question whether that redistribution is a good thing.”
As the schism widens between the continents on how to ensure fairness on issues like market competition and data privacy rights in the digital era, it is not clear what steps Washington might take in response to a new European digital tax, but there could be calls for the Trump administration to retaliate.
In 2015, when the European Union tried to go after American technology companies for tax avoidance, some lawmakers urged the Treasury Department to use the president’s authority to retaliate on the grounds that Europe was imposing discriminatory taxes on American businesses.
But European leaders are not just rankled by American tech companies, they are rankled by United States tax policy as well. They have criticized provisions of the new law that tax multinational corporations with operations in the United States, particularly a provision that taxes the American subsidiaries of foreign banks for loans they receive from their parent companies, saying that goes too far and violates World Trade Organization rules.
There is some concern among Republican lawmakers that Washington’s push to impose tariffs could allow Europeans to argue to the trade body that the United States is engaged in a pattern of protectionist actions, not just on trade, but on taxes. The dispute could heat up on the sidelines of the G-20 conference in Argentina this week, where Mr. Mnuchin is meeting with other finance ministers.