The Trump administration is deep in talks with 129 other countries on implementing a new standard for taxing digital companies, including Alphabet Inc.’s Google, Facebook Inc. and Amazon.com Inc. —- but its heart lies elsewhere in the discussions.
Rather than usher in with allies a new era of tech taxation, the U.S. goal is to fend off foreign taxes aimed at American companies. The strategy: String out the negotiations for as long as possible to delay the pain and hold out for an agreement with softer edges, say people involved with and briefed on the talks at the Organization for Economic Cooperation and Development.
By slow-walking the discussions, American officials hope they can reach a global agreement that amounts to a small-scale tax increase on global companies, but averts a massive tax increase by foreign countries who see U.S. companies as sources of revenue.
“It’s in the interest of the U.S. to prevent a proliferation of unilateral digital services taxes,” said Jeff VanderWolk, an international tax lawyer at Squire Patton Boggs LLP and an OECD official until last year. “The way to get them to back off is to get them into a multilateral agreement.”
Any future pact would likely create a whole new set of rules governing which countries have the right to tax the companies, which corporate profits were taxable, and how to resolve the inevitable disputes that would arise.
Deciding where profits should be taxed is no easy feat in a digital economy. Corporations can have their headquarters in the U.S., intellectual property stored in Ireland, engineers developing some of the algorithms in India and users all over the world.
The U.S. is hoping to harness this complexity and use the power of roadblock, according to lawyers and tax experts who have discussed the project with Treasury Department officials.
Striking a deal could mean that American companies pay more in taxes, but the U.S. could lose out on tax revenue.
Yet the absence of the deal could be even worse. If talks break down, every country is likely to pass its own laws. That could mean American companies are taxed multiple times on the same profits from a number of countries.
So for the U.S., it’s a delicate balance of progress and procrastination. American officials need to be involved in the talks to prevent countries including the U.K., France and New Zealand from getting impatient and creating their own tax regimes that are more punitive to U.S. companies. But they want to hold out for the deal that is most favorable to American companies and the U.S.
“The United States is actively engaging at the OECD to settle on a long-term, multilateral solution. We have a proposal on the table, and we’re open to discussion and suggestions for how to implement it,” Deputy Treasury Secretary Justin Muzinich said in a speech this week. “We believe that with continued close cooperation, we can move other countries in the right direction.”
The OECD, the international coalition that is leading the effort, is moving quickly. It hopes to have a non-binding agreement by member countries on an approach by early 2020 and technical details signed by the end of that year.
Now, it’s looking to resolve two big problems. The first is dividing up the right to tax a company where its goods or services are sold no matter its physical location. The second is to decide on a global minimum tax rate for profits that companies are able to book in low-or-no tax havens.
Companies now typically pay tax where they book income. Because digital companies rely heavily on patents, algorithms and other intellectual property that can be easily stored and accessed anywhere in the world, some have devised clever transactions that mean they pay tax in a mix of places — where they are headquartered and in the low-tax countries where they hold their IP.
Location, Location
The new tax rules would mean that taxes are paid based on where users are. That would allocate tax revenue away from countries containing lots of headquarters — such as the U.S., Sweden, Ireland and other European countries — and to populous nations.
“It’s a zero-sum game where one country gains tax revenue and the other country loses," said William Morris, deputy global tax policy leader at accounting firm PwC.
The U.S. could come out neutral, or even a little ahead in this equation, depending on how a deal is crafted, Morris said. The U.S. has a lot of headquarters, but it also has a lot of people.
Coming to agreement requires impeccable balance and a deal acceptable to the U.S. could take a lot of time. The U.S. has to protect its own taxing authority and American companies that other countries view as revenue grabs.
The international politics of the digital tax are complex. But the desire to protect the U.S. tax base and American companies has made the politics simple at home. The top Democrat and Republican on the House Ways and Means Committee and the Senate Finance Committee issued a joint statement last month expressing support for American involvement in the digital tax talks and called on other countries to engage with the U.S.
Timing Is Money
If the new tax structure means that companies pay a little more in taxes globally, but no longer have to deal with all the disputes they currently face with foreign governments, the trade-off is “well worth it,” said Barbara Angus, who helped write the 2017 U.S. tax overhaul.
But Angus, now a global tax leader at accounting firm Ernst & Young, LLP, said the speed at which the process is moving could ultimately hurt U.S. companies. “If action is taken too quickly, and there isn’t fully informed deep consensus of the rules, businesses lose because they wind up with double or triple taxation,” she said.
So far, countries have been able to agree on the broad outlines. But the negotiations are now about the details and would create winners and losers, making it hard to get consensus. That could lead to delays that could ultimately help the U.S. get the most beneficial deal.
But if talks completely fall apart, “the alternative is chaos,” Morris said.
