(Wall Street Institute) -- The U.S., Europe and other countries are split on how to tax digital businesses, threatening a rush to impose unilateral charges at a time of rising tensions between the major economies.
Finance ministers from the Group of 20 largest economies will discuss ways to increase taxes from the digital economy during a meeting in Buenos Aires next week. But a report prepared ahead of that gathering by the Organization for Economic Cooperation and Development, which helms a global effort to improve tax rules, said there were “a number of areas where there are clear differences of view” that won’t be resolved before 2020.
Some governments are running out of patience with an effort to close loopholes and raise corporate tax revenues that began in 2013. Growing public disquiet with the low taxes paid by high-profile digital companies was a key factor driving the launch of the Base Erosion and Profit Shifting initiative, which has made steady progress toward reducing the opportunities for tax avoidance presented by differences in national tax rules.
The European Commission will next week publish its proposal for a short-term charge on the revenues, rather than the profits, generated by some digital companies, most of which are American. But it isn’t clear the proposal can muster the unanimous support from European Union countries that it needs to become law.
With tensions between the U.S. and Europe on the rise over steel and aluminum tariffs proposed by U.S. President Donald Trump, officials charged with finding a path to an agreement on levying the digital economy are worried that taxation could follow trade as an arena of conflict.
“We are in an environment which is flammable,” said Pascal Saint-Amans, director of the OECD’s Center for Tax Policy.
The report sets out the differences between the U.S., Europe and other countries over where the profits of digital companies are actually made, by whom, and where they should therefore be taxed. Large European countries are focused on fixing the tax system to deal with a limited number of “highly digitalized” businesses, while the U.S. sees digitization and globalization as broader challenges.
“The U.S. firmly opposes proposals by any country to single out digital companies,” Treasury Secretary Steven Mnuchin said in a statement Friday. “Imposing new and redundant tax burdens would inhibit growth and ultimately harm workers and consumers. I fully support international cooperation to address broader tax challenges arising from the modern economy and to put the international tax system on a more sustainable footing.”
Given the distance that separates countries on some issues, the OECD sees it as a hopeful sign that the report was completed on schedule and agreed by the 101 countries involved in the tax discussions. It also said those differences can be resolved through further negotiation, setting 2020 as a target date.
“It’s complex, it’s really complex,” said Mr. Saint-Amans. “But we need to sit down and work together, and if we work, we will get it.”
Most of the 101 countries oppose the use of “interim measures” of the sort under consideration by the European Commission, but the OECD acknowledges that some may nevertheless proceed. The report notes that temporary taxes have a tendency to become permanent and identifies a number of negative outcomes associated with a levy on revenues, including the risk of taxing businesses that are making a loss. It warned that could penalize startups and may work in favor of larger incumbents.
It also set out a number of guidelines that those countries imposing “interim measures” should adhere to in order to minimize their impact on other jurisdictions.
“A proliferation of different interim measures would be undesirable and…it is preferable to set out guidance on the design considerations,” the report said.