President Donald Trump and French President Emmanuel Macron talk during the NATO meeting in London … [+]
Not for the first time, President Trump has me confused about his tax policy.
The signature legislation of his presidency was the 2017 Tax Cuts and Jobs Act (TCJA). Among other things, that law moved the US more in the direction of a territorial tax system, where the US taxes profits made in the US, and away from a system where we tried to tax US-based multinational firms on their worldwide earnings.
But now, the president seems to have turned his back on that achievement. In a Dec. 3 press conference, Trump blasted France for its new 3 percent digital services tax on income tech firms make in France: “I don’t want France taxing American companies,” he said.
Trump summarized his new view on taxing US-based multinationals this way: “They’re our companies, they’re American companies. If anyone is going to take advantage of the American companies, it’s going to be us. It’s not going to be France.”
Does he really mean that only the US should tax US-based multinationals on their income, no matter where they earn it?
Trump’s curious belief
Leaving aside the president’s curious belief that making US corporations pay tax is somehow “taking advantage” of them, Trump is headed down a counter-productive path. And his journey may be even more costly for US firms and consumers because he wants to press his case by imposing $2.4 billion in new tariffs on French imports—a step certain to result in retaliatory French taxes on US exports to France.
Trump is not wrong is raise concerns about ad hoc European digital taxes that seem primarily aimed at US tech firms such as Google, Facebook, and Amazon. France is just the leading edge of this trend. Italy is set to impose its own version on Jan. 1. The Turkish government has proposed a 7.5 percent levy. The UK, Austria, and Spain all have plans on the drawing board.
The French carefully targeted firms with at least 750 million euros in annual global revenue and 25 million euros in annual digital sales in France. Not by accident, most are US-based, though the tax would hit firms from China, Germany, and, yes, even France. The tax is imposed on gross receipts (not profits) generated from the country where users of online services reside, rather than on where a firm is physically located or where it books earnings.
“Inconsistent with tax principles.”
In a report issued on Dec. 2, the US Trade Representative concluded that the French digital tax “is unusual and inconsistent with prevailing tax principles and renders the tax particularly burdensome for covered U.S. companies.” That is mostly true.
The Europeans have come to realize that they all are losing precious tax revenue from a years-long race to the bottom that allowed—and often encouraged—multinationals to avoid taxes on their profits. The US played its part by allowing US-based firms to defer paying US taxes indefinitely on income they retained in a subsidiary located in another country.
Some member nations of The Organization for Economic Cooperation and Development (OECD) tried to address this growing problem—first with an effort to develop multilateral rules to limit the firms’ ability to shift profits to low-tax jurisdictions, then by an attempt to build a consistent set of rules to tax income from digital services. But both efforts foundered and several countries now are taking matters into their own hands.
One-off digital taxes are spawning a new problem. Instead of multinationals avoiding paying taxes on all their worldwide income, the firms now risk being taxed in multiple jurisdictions on the same revenue.
Pillars
The OECD hopes to try again next year with a two-part solution (Pillars 1 and 2, in OECD-speak) to the problem of how to allocate income from digital services to specific locations. It would create a formula for establishing each participating country’s taxing rights as well as a global minimum tax regime for multinational firms.
While there still is no agreement among OCED member states (and we’ve all seen this movie before) there seems to be a growing consensus that the world needs to get past its cacophony of corporate taxes—with different rates and rules—where each country aims to collect revenue from firms located somewhere else.
That brings us back to President Trump. By moving towards a territorial system that was long-ago adopted by most other nations, combined with a set of anti-abuse rules and its own minimum tax, the TCJA took some modest steps toward making the US part of the solution. Indeed, the OECD’s two-pillar plan borrows liberally from the TCJA’s design.
But by seeming to turn his back on that model and, at the same time, perhaps blowing up careful back-room negotiations with renewed threats of a trade war, Trump may be damaging a serious worldwide effort to solve a difficult and growing problem. Treasury Secretary Steven Mnuchin appeared to compound the criticism with his own objections to the OECD initiative.
Maybe Trump thinks he can use tariffs to bludgeon France into unilaterally abandoning its digital tax and discourage other countries from adopting their own. But he’s almost surely wrong.