Premium

Donald Trump torpedoes Europe's digital tax plans 

Donald Trump

That didn’t last long. Just hours after scuttling the Washington career of Sir Kim Darroch, Donald Trump was back on the warpath against another top official of a European ally this week.

This time, it was the turn of France’s finance minister Bruno Le Maire.

By instructing Robert Lighthizer, America’s chief trade official, to examine retaliatory trade tariffs against France, the US President casually tossed a grenade at Le Maire’s best laid plans to tax big technology companies.

France’s proposed digital services tax - which Senators nodded through on Thursday - would slap a 3pc charge on the turnover of digital companies with revenues of over 750m euros globally and 25m euros in France.

Mr Lighthizer said because the plans, which are expected to rake in 650m euros next year, will “unfairly target American companies” like Google, Apple, Amazon and Facebook, Washington could respond by slapping tariffs on imported French cars or bottles of Bordeaux. 

It’s lucky Donald Trump doesn’t drink - and is driven around in a US-made Cadillac. 

Either way, it’s not just Monsieur Le Maire as well as French tax officials, winemakers and carmakers who are likely to be dismayed by the threat, made late on Wednesday evening.

The US announcement was impeccably timed to cause maximum upset for the mandarins across the English Channel at HM Treasury too, who published new draft legislation on Thursday for a new 2pc UK digital services tax of their own.

For years, British and French officials have been diligently working together behind the scenes to build international consensus around a new agreement on how to big tech giants within the 36 nation OECD. 

At the heart of the debate lies a valid question.

An 'unfair' tax?

Why should the world’s most valuable companies - which put together are worth trillions of dollars and which play an increasingly powerful role in global business - be permitted to pay derisory levels of tax in many of the countries in which they operate and where they earn substantial revenues?

By using complex but perfectly legal international structures, such as booking revenues in low-tax jurisdictions like Ireland and Luxembourg, tech companies have successfully slimmed their tax levels to wafer thin levels.

Those arrangements mean they can end up coughing up very little to countries such as France or the UK, despite having big businesses and tens of millions of customers.

For example, Amazon UK's 2017 tax bill totalled just £1.7m, or less than 1pc of its £2bn turnover. 

In the past 20 years, Amazon UK Services has paid £61.7 million corporation tax - less than the amount M&S paid in one year alone.

While Bruno Le Maire and Philip Hammond have sought to make France and Britain leaders in the campaign to tax the digital giants, it has been a tough old slog.

The OECD discussions have been dragging on since 2017, but it has been tricky to reach a deal because many countries have a vested interest in playing for time.

Unsurprisingly, the plans have never gone down well in the US, where the biggest tech companies are based and which benefits most from their growth, jobs, innovation and investment.

They have also been opposed by others including Denmark, Sweden and Ireland, which has used low levels of corporation tax to aggressively court technology companies like Apple.

That’s why when the EU failed to reach a deal to impose a bloc-wide levy, Britain and France decided to go it alone with their own unilateral taxes - with tentative support from Austria, Italy and Spain.

Britain isn't convincing anyone

But President Trump’s threat to treat the digital tax proposals as another front in his push to redraw global trade rules more to his liking may be enough to shatter even that fragile coalition.

Msr Le Maire sought to put on a brave face on things on Thursday, saying allies needed to settle differences "without using threats".

"France is a sovereign country, its decisions on tax matters are sovereign and will continue to be sovereign," he said.

That may be so, but for now it feels like President Trump may have done enough to kill off plans for a meaningful digital tax at least for the foreseeable future.

That’s partly because Britain’s plans, set out yesterday, are already looking questionable.

Their primary author, Philip Hammond, is only likely to be Britain’s Chancellor for a few more days before Boris Johnson becomes Prime Minister and almost certainly replaces him.

In his quest to smooth over ties with the US in pursuit of a UK-US trade deal, Johnson seems unlikely to live or die by a 2pc digital services tax cooked up by a rival with whom he disagrees on the most fundamental issue of the day.

Instead, Johnson has made it amply clear that cutting, not raising taxes will be at the heart of his agenda to boost the economy post-Brexit.

That’s why, in the face of modest pressure to drop it from his friend Donald Trump, it’s reasonable to assume Johnson may end up folding like a cheap suit.