National digital taxes and US sanctions to be withdrawn after OECD tax deal

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A group of European countries agreed with the United States on Thursday (21 October) to withdraw their digital taxes. The move by Austria, France, Italy, Spain, and the United Kingdom follows an international tax deal agreed earlier this month that aims to allocate parts of the profits from highly profitable, big corporations to countries in which revenue is generated.

The national digital taxes should be phased out as soon as the OECD tax deal is put into practice, the US and European states agreed. In return, the US promised to drop the sanctions it had imposed in response.

The agreement, communicated on 21 October, is a further step towards resolving a longstanding grievance between US and European countries over how to tax digital behemoths that make a lot of revenue in European countries but do not book the corresponding profits there.

France and other European countries had unilaterally implemented digital taxes in order to access parts of the profits generated in their economies even if they were not booked there.

The US under former president Donald Trump reacted by threatening retaliatory tariffs of 25% on a number of products from these countries. President Joe Biden’s administration held on to this threat to keep leverage over European countries in the negotiations over the OECD tax deal.

On 8 October, 136 countries agreed on a deal, brokered by the Organisation for Economic Cooperation and Development, that allocates 25% of profits above a threshold of 10% of revenue from companies with a turnover of above $20 billion to countries, in which the revenue was generated.

This means that a small portion of profits from highly profitable firms like Google or Apple will be allocated to France, Germany and other states instead of being exclusively taxed in the countries of their headquarters.

136 countries agree on international tax reform

More than 100 countries agreed on Friday (8 October) a reform of the international tax regime intended to make it fit for the digital age and respond to longstanding concerns about corporate tax evasion.

Part of the deal was that unilateral taxes would be replaced by the new profit allocation.

According to the agreement, the countries can keep their national digital taxes in place, until the OECD deal is implemented. If the tax revenue from the national digital taxes exceeds the amount the states would receive if the OECD deal was already implemented, the excess amount will have to be paid back in the future. In return, the US terminates the tariffs it had threatened to impose on European products.

What about the EU digital levy?

The EU Commission had planned to propose a European digital levy, that would contribute to the EU’s own resources but the OECD agreement leaves the fate of an EU-wide digital levy unclear.

The Commission always stressed, however, that the EU digital levy could co-exist with the OECD deal. An analysis by the law firm Freshfields Bruckhaus Deringer pointed out that a digital levy could be lawfully implemented if it functions as a sales tax on all products and services sold online.

OECD tax chief Pascal Saint-Amans gave similar signs in August, telling an law journal: “If you want to introduce an excise tax on some form of transaction, as long as you have an extremely broad coverage and low rate, I don’t see any contradiction with our deal.”

Moreover, the UK treasury this week announced its intention to implement a 2% sales tax on online sales, indicating that it did not see itself restricted by the OECD deal.

In August, EU Budget Commissioner Johannes Hahn told EU lawmakers that the EU digital levy would be proposed “no matter if there is an agreement or not” at OECD level. According to him, the proposal would follow the G20 meeting at the end of October.

[Edited by Benjamin Fox]

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