When France imposed a new digital services tax on Silicon Valley’s biggest companies, President Trump responded in kind, threatening a tariff on the country’s wines.
That evidently didn’t faze Boris Johnson, the new United Kingdom prime minister. His proposal for a similar charge could be an early test of his relationship with Trump, who had praised his selection for the post, and imperil a trade agreement between the two nations once Britain leaves the European Union.
“The U.K. and the French taxes share a lot of similar features. In principle, it’s the exact same idea that elicits the same concerns,” said Josh Kallmer, executive vice president of policy at the Information Technology Industry Council.
The existence of the United Kingdom’s tax on digital services, Kallmer said, raises two possibilities: The first is that the U.S. and the United Kingdom “wouldn’t be able to move forward on cooperative things like a trade agreement,” and the second is the imposition of tariffs, as the president has threatened against Paris and other world governments he views as acting against American interests.
The proposal from the United Kingdom, unveiled this month, would hit companies with global revenue exceeding $627 million, or £500 million, with a 2% tax on sales from British users. Though draft legislation doesn’t name companies, the law is expected to ensnare companies like Google, Facebook, Apple, and Amazon.
Johnson said before succeeding Theresa May as prime minister that the country has “to find a way of taxing the internet giants on their income.”
“I think it’s deeply unfair that high street businesses are paying tax through the nose,” Johnson said, using the British equivalent for Main Street, while internet giants “are paying virtually nothing.”
The prime minister and the president had their first official communication last week, and Trump expressed optimism about the future of the relationship, telling reporters the two sides have already set to work on a “very substantial trade agreement.”
Sen. Ron Wyden, D-Oregon, the top Democrat on the Senate Finance Committee, warned this month that the tech duty would close the door to such an agreement, however.
“I met with U.K. officials earlier, and said, ‘You expect a trade agreement with the United States and the U.K. It will not happen with your digital services tax. Period. Full stop,’” Wyden told reporters, according to Bloomberg.
Any deal “has to go through Congress, and if they’re saying, ‘We’re not doing this, you tax our companies,’ you’re going to make it difficult,” said Cathy Schultz, vice president for tax policy at the National Foreign Trade Council. “They’re already drawing lines.”
Trump’s own relationship with Britain had soured this year when leaked cables revealed Sir Kim Darroch, the May government’s ambassador to the U.S., referred to the president as “inept” and “incompetent.” Darroch resigned his post this month.
Centuries-old ties between the U.S. and the United Kingdom may not be enough to keep London from adding a levy on American firms. Schultz noted the relationship between Trump and French President Emmanuel Macron — the president held his first state dinner for Macron and his wife — did not stop France.
“The question is, ‘How does the Trump administration’s response to the French affect how the U.K. looks at this and how does a potential U.S.-U.K. free trade agreement affect this?’” Schultz said.
The French measure levies a 3% tax on revenue generated in France by tech companies that provide digital services. The duty applies to companies with global revenue of at least $845 million or €750 million, and sales of $28 million or €25 million in France.
The Trump administration responded with an investigation under Section 301 of the Trade Act of 1974, which was the mechanism used to impose tariffs on China.
Austria, Italy, Spain, and Belgium are weighing similar duties.
Schultz said any unilateral action is “disruptive” and creates a patchwork of tax rules that differ by country. “The more the digital services taxes proliferate, the more difficult it’s going to be” for companies, she said.
Firms in Silicon Valley worry they could face double or triple taxation, as their income would be subject to levies in the U.S. and their revenue taxed in the United Kingdom or France.
They may get relief, however, from the Organization for Economic Cooperation and Development, which hopes to reach a multilateral agreement on taxation in the digital era by the end of 2020. If the pact comes to fruition, France and the United Kingdom said they would drop their respective levies.
Lilian Faulhaber, a professor at Georgetown University Law Center, said the interim measures are in part a strategic way to get countries to the negotiating table. But there could be negative consequences if the levies lead to back-and-forth trade measures.
“These recent moves have focused a lot more international attention on the negotiations and put a lot more pressure to reach an agreement,” she said. “It’s possible those moves actually will push those countries toward an agreement, but there is also the danger this has gotten so much attention it will make it harder for countries to come to the table.”
