WASHINGTON — For most of the 21st century, wealthy nations have engaged in a race to the bottom on corporate taxes, cutting rates in an effort to poach business activity across borders. Very quickly, that script has flipped.
Developed countries are now moving to impose new taxes on technology companies, like Facebook and Google, that have large presences in their citizens’ daily lives but pay those countries little tax on the profits they earn there.
France moved on Thursday to become the first country to impose a so-called digital tax of 3 percent on the revenue companies earn from providing digital services to French users. It would apply to large companies, numbering more than two dozen, with robust annual sales in France, including United States-based Facebook, Google and Amazon. British leaders also detailed plans on Thursday to impose a similar tax, of 2 percent, on tech giants. And the European Union has also been mulling a digital tax.
The digital revenue grab is pitting traditional allies against one another, threatening to set off a cascade of tax increases and tariffs unless political and economic leaders work out a multinational agreement to avert them. Late Wednesday, the Trump administration said it would pursue an investigation into whether France’s tech tax amounted to an unfair trade practice that could be punishable with retaliatory tariffs. Administration officials, including Treasury Secretary Steven Mnuchin, have also raised concerns about Britain’s move.
The French tax, which would exact a bigger toll on foreign companies than French ones, has been denounced by the American tech industry, along with Democratic and Republican leaders, who are looking for ways to avoid such one-off decisions by more closely coordinating international digital tax arrangements.
Administration officials have tried to shape an effort being led by the Organization for Economic Cooperation and Development to broker an international system for taxing digital profits. A lobbying flurry has broken out in Washington to influence the negotiations.
And in its attempts to show international leadership — and not go it alone, as Mr. Trump has in his trade wars with China and other partners — the administration is pushing the Senate to vote next week on a package of long-foundering updates to international tax treaties, which could demonstrate to allies that it is serious about leading the effort to broker a digital armistice.
Countries have competed to reduce corporate tax rates, and attract business activity both physically and on paper, for two decades. The average rate tracked by the Organization for Economic Cooperation and Development has fallen seven percentage points since 2000, to just over 21 percent today. France and the United States both cut rates substantially for 2018, with Mr. Trump’s signature tax cuts bringing the American rate of 21 percent right to the international average.
Technology companies’ revenue has surged worldwide, but not their tax payments, prompting many wealthy governments to complain that digital businesses are not paying their fair share. The European Union calculates that digital company revenue is growing more than four times as fast as revenue for other multinational companies, partly from ad sales to European consumers.
Because the firms have relatively light physical presences in Europe, they benefit from the current system, which taxes companies based on where their operations and assets are — and not where their sales are generated. The European Union has said this has allowed tech companies to pay less than half the effective tax rate of other multinationals, and European leaders want to tax them in a way that takes into account where their users are.
Mr. Mnuchin has spent much of his time discussing the issue at international forums with finance ministers from around the world.
During meetings of the International Monetary Fund and the World Bank in April, Mr. Mnuchin said it was a “priority” to find an international solution, and he pressed France and Britain to abandon their own tax plans once a compromise is reached.
At the Group of 20 finance ministers meeting in Japan in June, Mr. Mnuchin underscored his concerns, and the finance ministers agreed in their communiqué to work toward finding a common set of rules to close loopholes that global technology companies have been using to reduce their tax bills.
“I’m not in favor of the current digital tax that has been proposed by France and the U.K.,” Mr. Mnuchin said, warning a system of unilateral digital taxes would not work. “We have significant concerns with both of those.”
The United States has called for a tax that is based on companies’ income, not sales, and said specific industries should not be singled out with a different standard. The Treasury secretary has dispatched his deputy, Justin Muzinich, to help broker an agreement. The Organization for Economic Cooperation and Development released a “road map” in May, agreed to by nearly 130 countries, toward finding agreement on a global digital tax plan.
France has said that it will repeal its tax once a group agreement is reached. The subject will come up again when finance minsters gather in Chantilly, France, for the summit of the Group of 7 industrialized nations next week. Bruno Le Maire, the French finance minister, has suggested that France’s tax will help accelerate an international pact.
“We are willing, especially with Steven Mnuchin, to give new impetus during the G7 in Chantilly on the very specific topic of minimum taxation,” Mr. Le Maire said in an interview last month.
The Treasury Department said in a letter to the Senate Finance Committee on Thursday that it is considering a range of responses to the French tax.
“We have and will continue to urge France to forbear from such unilateral actions and join with us in an intensive effort to reach a comprehensive, multilateral solution,” wrote Kimberly J. Pinter, deputy assistant secretary in Treasury’s office of legislative affairs.
As negotiations persist, administration officials and Republican Senate leaders have worked together to break a decade-long logjam on updating international tax treaties, some of which were negotiated in the early years of the Obama administration.
Senator Mitch McConnell of Kentucky, the majority leader, moved on Thursday to set up a vote on the quartet of treaties next week, in what would be a bipartisan victory for multinational companies. The package is expected to succeed in garnering the support of two-thirds of senators voting on the issue.
The so-called tax protocols would update existing tax treaties with Spain, Japan, Luxembourg and Switzerland. They would allow companies with operations in those countries to avoid some previous tax penalties for transferring money to their operations abroad, in a provision proponents say would encourage multinationals to invest more in the United States. They would also update the existing treaties to allow for more detailed sharing of information among countries on individual and corporate taxpayers.
The treaties were held up for years by Senator Rand Paul, Republican of Kentucky, who objected to that information sharing. But the Senate Foreign Relations Committee overrode his complaints and voted to advance the treaties last month.
A host of large and powerful trade groups, including the Semiconductor Industry Association and the Business Roundtable, has been urging Senate leaders to approve the measures. “Tax treaties help the U.S. economy by allowing U.S. companies to more efficiently conduct their businesses abroad and by making the U.S. more hospitable to foreign investment,” the groups wrote this spring in a letter to Senator Jim Risch, the Idaho Republican who leads the Foreign Relations Committee.
One of the companies that stands to benefit is a Spanish-owned steel maker with a large plant in Kentucky, North American Stainless, which has been pushing Mr. McConnell and other senators to schedule a vote.
North American Stainless is the subsidiary of Acerinox, and employs more than 1,300 workers in Kentucky. A company executive told a Senate panel in 2014 that ratifying the tax protocol with Spain could boost Acerinox’s investments in Kentucky, by ending a 10 percent tax on dividend payments from the American subsidiary to the parent company.
In pushing for the tax treaties, Treasury officials have argued that they would promote fair and efficient taxation by the United States and treaty partners, reduce the risk of double taxation and help combat tax evasion by improving the flow of information among tax authorities.
A Treasury spokeswoman said the tax treaties were a priority for Mr. Mnuchin and Mr. McConnell and that the Senate’s bipartisan work on the issue would fuel economic growth.
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