Treasury Secretary Janet Yellen has decided to end U.S. opposition to establishing a global corporate tax with the European Union, making way for negotiations to implement a tax system for the digital economy of the future.
On Friday, Yellen stated that the U.S. will no longer be a “safe harbor” where paying taxes would be optional. Yellen made her remarks to finance ministers from the G-20, the group of advanced and emerging economies. According to the Wall Street Journal, Yellen will follow the recommendations of the Organization for Economic Cooperation and Development (OECD) to again modify the corporate tax and impose a minimum sales tax on companies such as Google and Amazon.
In 2020, Emmanuel Macron reinstated the so-called Google tax in France which levies a 3% tax on sales made in the country on any company with revenues exceeding €25 million in France or €750 million internationally.
In response to Macron’s Google tax, former President Donald Trump threatened to impose tariffs on products from France equivalent to more than $1.3 billion, but this measure was reversed by the government after Joe Biden became President.
The European Union had already tried to pass a ‘Google tax’ last year but this was blocked by Ireland and the Nordic countries. Although a base tax has not yet been agreed to, it is suspected that it will be in the order of the one proposed in the European Parliament of 3% of a country’s sales revenue for any company with a revenue turnover of €50 million in a country, or €750 million around the European Union.
For the time being, only France, Spain and the United Kingdom have a Google tax, but other countries may soon introduce it. The OECD warns that if a global sales tax agreement cannot be reached for digital companies, there is a risk that countries will start implementing it independently, leading to arbitrage and double taxation problems.
It is not clear that Yellen will be able to reach an agreement as several European nations have already imposed sanctions on companies such as Facebook and Alphabet (Google). Negotiations would involve the lifting of these sanctions by European countries on American companies, but they have shown little willingness to do so.
The OECD is leading an initiative involving 139 countries to establish a corporate tax on digital companies, where an agreement is expected to be reached by June. An agreement was previously expected to be reached by the end of 2020, but the vote had to be postponed due to the pandemic.
Despite the intentions of Yellen and the OECD, such a tax would not come without consequences, even if a global agreement is reached. According to Julian Jessop of the Institute of Economic Affairs, “a company getting an additional 3% tax on its profits, but with a real profit margin of 6% would be facing an effective corporate tax of 50%”, affecting companies with low-margins of business, such as Amazon.
Naturally tech companies will not be absent from these negotiations, as between a range of separate taxes in a dozen countries and a single unified tax, they naturally prefer the second alternative. Christian Borggreen Vice President of the Computer & Communications Industry Association, a technology law firm representing companies like Amazon and Facebook, said, “We are optimistic that we will reach consensus on global tax reform for the digital age this year.”