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Daily Tax Report: International

U.S. Retaliation Still Looms in French Digital Tax Talks (1)

Oct. 17, 2019, 8:46 AMUpdated: Oct. 17, 2019, 4:20 PM

President Donald Trump’s administration still might double U.S. taxes on French taxpayers and companies—even as negotiators work towards a broader international solution.

A short negotiation window over France’s plan to tax digital companies such as Facebook Inc. and Alphabet Inc., combined with tension over Trump’s use of tariffs, has those tracking the issue concerned it could escalate. Trade and tax experts also worry that proliferation of digital taxes around the world could drag on the global economy, becoming the internet equivalent of tariffs.

“Right now I don’t think there’s much optimism about an outcome, certainly within the timeframe given,” said a former administration official briefed recently on the status of negotiations.

Treasury Secretary Steven Mnuchin told reporters in early September that if the U.S. and France don’t reach an agreement within a 90-day period, then the administration would consider its options under its ongoing Section 301 investigation. And although French President Emmanuel Macron has suggested there is an agreement with the U.S., it’s not clear that U.S. officials will allow the country to roll out its digital services tax without retaliation. Section 301 of the Trade Act authorizes the president to take action, including retaliation, against another country’s policy if it violates an international trade agreement or restricts U.S. commerce.

Mnuchin told reporters Oct. 16 that some progress has been made, but there still isn’t an agreement with France, according to the Associated Press.

That same day, Trump said he isn’t happy about other countries taxing U.S. companies.

“If anyone is going to tax those companies it should be the U.S.A.,” he told reporters.

Congressional and private sector staff briefed by the Treasury Department in recent weeks told Bloomberg Tax that opinions on retaliation remain split within the department, but that few are optimistic a deal will be in place in time—the 90-day deadline expires in mid-December, and France is aiming to implement its tax in November.

The administration and business groups hope to relieve tension through negotiations at the Organization for Economic Cooperation and Development. The OECD released a plan to rework international tax rules on Oct. 9, and will publish an update on its global minimum tax efforts in November.

Trade Dispute

Progress in the international tax negotiations is being closely watched as it has become an important bargaining chip in a dispute that is mixing with trade issues.

Tax code Section 891, the provision that would allow Trump to double income taxes on French citizens and companies in the U.S., comes from a law passed in response to another tax dispute over multinational business revenues and trade with France.

But doubling taxes on French individuals and companies could be seen as disproportional punishment and rattle markets already jittery around trade uncertainty, multiple experts said. French companies could also sue the federal government in court to stall or overturn the decision as violating their rights.

Because the law has never been used, lawyers are still uncertain as to how even its exact mechanics could play out. The 1930s-era law reads that the president “shall so proclaim,” his decision, leaving open the possibility that Trump could declare his finding—and the doubling of income taxes on French individuals and companies in the U.S.—via tweet. It’s unclear how a proclamation would interact, or interfere, with a tax treaty between the U.S. and France.

Senate Finance Committee Chairman Chuck Grassley (R-Iowa) and ranking member Ron Wyden (D-Ore.) wrote to Mnuchin in June urging him to consider all available tools, including Section 891, to convince the French government to rethink the tax.

In a July response, Treasury acknowledged that Section 891 was among the options under consideration.

‘Fluid State’

Treasury has kept a tight lid on the current status of talks due to immediate political ramifications between the U.S. and France if they fall through, as well as broader concerns about the economic ripple effects that could ensue.

“They’re in such a fluid state right now, Treasury is focused on what they can do in this space that won’t require legislation,” said a Senate Republican staffer who requested anonymity to speak candidly.

The hope is that ongoing conversations could remove the need to move forward with the 301 investigation, the staffer said.

A Treasury spokesperson declined to comment on the status of talks, or if Treasury might recommend a retaliatory tax as a response.

Ripple Effect

The Trump administration has tried to head off the French tax and its imitators by pushing for broader international talks about how best to tax digital services and threatening punitive action.

The U.K. and Italy will begin digital taxes—on revenues that companies earn from providing digital services—in 2020. Austria’s Federal Council approved its version, a 5% tax on digital advertising revenue, Oct. 10.

Italian President Sergio Mattarella said he didn’t discuss the topic with Trump Oct. 16.

“This is an open issue,” he said, as part of the press conference with Trump.

Larger trade tensions play into the dispute as well. Trump has threatened tariffs on European auto manufacturers, and the World Trade Organization recently ruled that both the U.S. and European Union violated trade agreements with each other through subsidizing Boeing and Airbus, respectively.

As a result the U.S. will be able to levy billions in tariffs on European goods—which may include French wine and cheese in addition to aircraft-related penalties—while European governments may respond with corresponding tariffs early next year.

—With assistance from Isabel Gottlieb.

(Adds Mnuchin comments in fifth paragraph. )

To contact the reporter on this story: Colin Wilhelm in Washington at cwilhelm@bloomberglaw.com

To contact the editors responsible for this story: Patrick Ambrosio at pambrosio@bloombergtax.com; Colleen Murphy at cmurphy@bloombergtax.com

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