G20 Ministers Discuss Digital Tax as US Tariff Threat Looms

Talks on a global tax deal are continuing – for a fourth week – past a June 30 deadline at a G20 finance leaders meeting this week, as governments try to get progress on a stalled plan to shift taxing rights on large multinational companies.

The “Pillar 1” arrangement, which was part of a 2021 global two-part tax deal, aims to replace unilateral digital services taxes (DSTs) on US tech giants such as Google, Amazon and Apple through a new mechanism that would share taxing rights on a broader, global group of companies.

The stakes in the negotiations are high. A failure to reach agreement on final terms could prompt several countries to reinstate their taxes on US tech giants and risk punitive duties on billions of dollars in exports to the US.

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Standstill agreements under which Washington has suspended threatened trade retaliation against seven countries – Austria, Britain, France, India, Italy, Spain and Turkey – expired on June 30, but the US has not taken steps to impose tariffs.

Discussions on the matter are continuing. An Italian government source said that European countries were seeking assurances that the US tariffs on some $2 billion worth of annual imports from French Champagne to Italian handbags and optical lenses remained frozen while the talks continue, including at the G20 meeting in Rio de Janeiro.

A European Union document prepared for the G20 meeting lists finalizing the international tax deal as a “top priority.”

It said the G20 should urge countries and jurisdictions participating in the tax deal “to finalize discussions on all aspects of Pillar 1, with a view to signing the Multilateral Convention (MLC) by summer end and ratifying it as soon as possible.”

Canada to impose digital services tax

Meanwhile, Canada in July became the eighth country to impose a unilateral digital services tax, with Finance Minister Chrystia Freeland saying it was “simply not reasonable, not fair for Canada to indefinitely put our own measures on hold” after the June 30 deadline passed without a Pillar 1 agreement.

The US maintains that such taxes are discriminatory because they specifically target the local revenues of US technology firms that dominate the sector.

“Treasury continues to oppose all tax measures that discriminate against US businesses,” a US Treasury spokesperson said in response to Canada’s move. “We encourage all countries to finalize the work on the Pillar 1 agreement. We are in active discussions on next steps related to the existing DST joint statements.”

A spokesperson for the US Trade Representative’s office added that the OECD/G20 negotiations “offer the best path to address challenges that digitalization of the economy poses to the international tax system.”

India and China blocking deal

Treasury Secretary Janet Yellen told Reuters at a G7 finance meeting in May that India and China were hindering agreement on the alternative transfer-pricing mechanism known as “Amount B.”

A second pillar of the tax deal, the 15% global minimum tax on corporate profits is separately being implemented by many countries, but the US Congress has not ratified it.

Yellen said in May there were two “red line” issues for the US in the talks, related to transfer pricing and the “Amount B” system for simplifying the calculation of transfer pricing.

While most countries support the US position on these issues, “we have a problem with India. India will not engage with us,” she said.

This mechanism would apply to thousands of companies below the $20 billion annual revenue threshold for “Amount A”, and is aimed at delivering tax certainty to these firms through an objective way of calculating tax liability, Danielle Rolfes, head of KPMG’s Washington National Tax Practice, said.

“It’s in the interest of all the countries around the table to try to keep it alive,” Rolfes said.

At the G20 meeting in Rio de Janeiro, Yellen will also face questions from counterparts over the continuity of US policy commitments in the wake of President Joe Biden’s decision to end his re-election bid and growing international angst over a potential return of Donald Trump to the White House.