• BCMstrategy, Inc.

QOTD -- Digital Services Tax

All week, PolicyScope Platform users and PolicyScope Risk Monitor have been watching the trade policy process rumble back to life after months of relative quiet. Multiple sovereigns have been making tactical 2021 opening gambits. In parallel, the United States Trade Representative (USTR) has been making final moves in the closing days of the Trump Administration.

We therefore were not necessarily surprised to see trade policy as the most active component of this morning's Momentum Measurement chart:

and then saw measurable activity concerning Digital Services Tax issues

we knew interesting policy moves were being made.

USTR closes out the Trump Administration by laying down the gauntlet globally regarding a key issue important to the digital economy: the digital services tax.

Yesterday, USTR released a series of reports and findings regarding various Digital Services Tax initiatives around the world. The moves regarding the European Union and the United Kingdom caught our eye:

The only reason why the European Union escapes a concrete finding at this stage is because the EU technically has not yet imposed a Digital Services Tax. But active initiatives are underway to implement such a tax at the EU level.

Policymakers in Brussels and at various Member State capitals (including Berlin and Paris) have made clear they intend to impose a Digital Services Tax by year-end 2021. Technically, France imposed one in 2020 but suspended implementation pending international discussions at the Organization for Economic Cooperation and Development.

When the Biden Administration takes office next week, they inherit a challenging set of policy dilemmas regarding the digital tax issue.

  • Silicon Valley: Commitments to renew engagement at the multilateral level on the digital services tax issue will require the new government to make concessions not only to Europe but to other nations globally that will authorize them to impose tax burdens on U.S. companies based in Silicon Valley. California-based companies will not welcome the sudden imposition of tax liabilities from other countries.

  • Multilateral Policy: The tax issue is being negotiated at the OECD, which weakens the global trade policy supposed to be filled by the World Trade Organization. Switching forums will create delays and open up additional areas for difficulty by potentially exposing Silicon Valley companies to a wider range of tax liabilities from a wider range of nations globally.

  • UK Policy: The UK finding leaves open what kind of enforcement should be taken. The Trump Administration famously imposed retaliatory tariffs on French goods, but then suspended implementation pending the outcome of international negotiations. The USTR finding regarding the UK's Digital Services Tax will require the Biden Administration either to apply equivalent treatment to the UK as to France or be open to the criticism that they are favoring one nation (the UK) over another (France).

  • EU Policy: The USTR's findings leave no room for doubt that implementation of any of the proposals making the rounds in Brussels will be viewed by Washington as discriminatory and distorting. If the Biden Administration softens the tone or the substantive approach, they could be open to criticism from Silicon Valley that they are favoring foreign and multilateral priorities over domestic constituents. If the Biden Administration holds firm on this Trump-era policy, they could be open to criticism that they have failed to reverse course in general. Additional friction with Europe could further splinter a fraying transatlantic relationship.

The precise policy trajectory remains unclear. But at least those of us paying attention to these micro moves will not be surprised by policy volatility in this issue area when it arises.


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