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US digital tax negotiations continue with Europe and OECD

Tuesday, 4 February, 2020

OECD member states expressed concerns last week about the US proposal of opting-out from the organisation’s new transfer pricing and nexus rules, and reaffirmed their intention to reach a negotiated agreement in 2020 on new tax rules for multinational companies that sell digital services.

In a statement on January 31, the OECD’s Inclusive Framework on base erosion and profit shifting (BEPS) said that many of the Framework’s members expressed concerns about the US proposal to implement a system with a “safe harbour” option at their meeting on January 29-30.

The US’ suggestion is that companies can choose whether to be subject to existing rules or the new Framework arrangements, with US Secretary of the Treasury Steven Mnuchin saying last year that there are “serious concerns” around moves to abandon existing taxation structures, which could have a severe financial impact on the larger digital players.

Meanwhile, US threats of tariffs on goods from France and the UK in response to proposed digital service taxes (DSTs) prompted both European governments to address when such taxes might be implemented.

On January 22, the French government agreed to suspend collection of its proposed DST until December 2020. However, the UK Chancellor of the Exchequer, Sajid Javid, has said that the UK will continue with its plan to implement its DST from April 2020.

Counter-measures have also reportedly been threatened against the Czech Republic’s planned 7 percent digital tax, the Czech News Agency (ČTK) reported last week. According to ČTK, Czech Minister of Foreign Affairs Tomáš Petříček said that the digital tax would be “only temporary until an international solution is found.”

The OECD hopes to reach a consensus on a “long-term solution to the tax challenges arising from the digitalisation of the economy” at a final meeting in July, aiming for G20 leaders' approval at the G20 Riyadh summit on 21-22 November.

While international negotiations are ongoing, two US states have introduced Bills proposing to tax the revenue earned by businesses engaging in the digital economy. Maryland’s Bill would create a new tax on digital advertising revenue, while legislators in Nebraska have proposed expanding the state’s current sales tax to incorporate gross receipts from digital advertising.

If enacted, the Bills would take effect between October and December 2020, and would likely have a significant impact across other US states considering putting in place or expanding taxation of digital services.