European leaders doubled down on their plans to introduce digital services taxes after the US suspended talks with European countries on evolving a new global tax framework for technology companies and warned them of retaliatory measures on June 17. The Financial Times reported both these developments.

Steve Mnuchin, the American Treasury Secretary had reportedly sent a June 12 dated letter to four European finance ministers — UK Chancellor of the Exchequer Rishi Sunak, French Economy Minister Bruno Le Maire, Italian Finance Minister Roberto Gualtieri, and the finance minister of Spain — telling them that the US could not agree to OECD-proposed changes to global taxation law that would affect American technology companies even on an interim basis. The US wants to resume talks later this year, as per the letter.

In response, Le Maire reportedly called the suspension of these talks a “provocation” and said that Paris would apply a tax on Big Tech “whatever happens”. In May, he had said that France would impose a 3% digital tax on digital companies that have a revenue of more than €25 million in France, and more than €750 million worldwide irrespective of whether or not an international deal on such a levy progressed. When the French Senate had approved this tax in July 2019, it was meant to be a placeholder until the OECD overhauled cross-border tax rules via an international agreement, and Paris had even offered to suspend its digital tax until the end of 2020. But the fallout from the COVID-19 pandemic upended those plans. EU Economy Commissioner Paolo Gentiloni reportedly said Brussels was prepared to advance its own EU-wide proposals.

The UK Treasury will also reportedly proceed with its digital tax, even though it is engaged in trade negotiations with the US. The UK’s 2% levy on digital business, which is expected to collect £2 billion pounds in revenue, has moved to the committee stage which must be completed before June 25.

OECD had moved the deadline for iron out the agreement from July 2020 to October 2020 because of the pandemic. In their response to Mnuchin, the four European finance ministers wrote that the pandemic had increased the need for such levies, irrespective of whether or not such multinational digital companies had a “physical” presence in the countries, the BBC reported.

US agreed with one of the changes proposed by OECD

OECD had proposed to changes to international taxation: first, that countries be allowed to tax profits made on sales in their jurisdictions; and second, that there be a global minimum corporate tax rate to stop countries from offering lower corporate tax rates so that company headquarters shift there. The latter practice, called base erosion and profit sharing, that the US, too, wants to curtail, and that Mnuchin wants resolved this year.

On June 2, the United States Trade Representative Robert Lighthizer had started an investigation into digital services taxes that have been adopted or are under consideration by a number of US’ trading partners. This investigation is being conducted under Section 301 of the 1974 Trade Act which gives the USTR authority to investigate and respond to another country’s actions that may be unfair or discriminatory and negatively affect American commerce. From Lighthizer’s comments, it is clear that this has been done at the behest of US President Donald Trump.

Such digital services taxes are similar to the 2% equalisation levy that the Indian government brought into effect on April 1, 2020, which is imposed on the sale of goods or services by a non-resident e-commerce operator in India. The Indian government had imposed a 6% equalisation levy on digital advertising services offered by non-resident providers in 2016. India has, for quite some time now, seeking to tax digital companies on the basis of their economic presence. To that end, Finance Minister Nirmala Sitharaman had called for adoption of the “significant economic presence” concept to tax global digital companies at the G20 Finance Ministers and Central Bank Governors’ Meeting in June 2019.