In the stalemate between the US and four European nations over taxing technology companies according to the size of their presence in each country, Europe blinked first. France, UK, Spain and Italy have offered to limit the scope of their proposed digital taxes after the US threatened to hit the countries with tariffs if they went ahead with their taxes, Bloomberg News reported. The four countries allegedly wrote a letter to US Treasury Secretary Steve Mnuchin, offering to implement a phased approach that would initially only include automated digital service companies. The European leaders still aim to overhaul the global digital tax regime within this year.

This is a major concession and proves that Uncle Sam’s economic threats work, at least on European nations. Last week, when the US had suspended talks with European countries on digital taxation and threatened them with economic retribution, the European leaders had initially doubled down on their plans.

Not France’s first tryst with the US

French Economy Minister Bruno Le Maire had in fact 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.

But this is not the first time that France has had to back track on its digital tax. In December 2019, the US had threatened to impose $2.4 billion in tariffs over French goods, including champagne and cheese, as a retaliatory measure. As result, France had delayed its digital tax in January 2020 and the US had backed off. 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.

The UK Treasury had also said that it would 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.

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. Countries under investigation include European nations as well as India which brought its 2% equalization levy into effect on April 1, 2020. From Lighthizer’s comments, it is clear that this has been done at the behest of US President Donald Trump.

Also read: France will implement its 3% digital tax in absence of global tax treaty | French Senate approves 3% digital tax on Big Tech; MediaNama’s take | Foreign e-commerce companies to pay 2% equalisation levy from April 1