Q&A: McDermott Will & Emery partner assesses updates in DST talks

On June 17, the Financial Times reported that US Trade Representative Robert Lighthizer confirmed the US was stepping away from negotiations on the Google, Amazon, Facebook and Apple (GAFA) tax – a surprise for the OECD that believed the pandemic had strengthened the appetite for a global consensus around the digital tax. In response to the US’ decision, the OECD Secretary-General Angel Gurría stated in a press release that “all members of the Inclusive Framework should remain engaged in the negotiation towards the goal of reaching a global solution by year-end,” reiterating its commitment to tackling tax evasion.

In an interview with Accountancy Age, James Ross, partner at international law firm McDermott Will & Emery and specialist in international and domestic tax issues, explains how European economies’ ambition to implement the Digital Services Tax (DST) has reinforced reluctance from the US to adopt the tax that targets its most profitable firms.

Why has the US pulled out of DST negotiations?

It’s about rewriting the rules of the international tax system which determine what gets taxed where. This is why the US is getting uncomfortable about it. It’s mainly about tech companies that generate a lot of activity, a lot of attention in countries, without having a taxable presence there. The problem with this, as far as the US’ concern, is that there is a sense that it is targeting its tech companies. It’s aimed at US tech companies, even though it might be phrased in neutral terms.

Perhaps unsurprisingly, we’ve ended up with the US saying, ‘we’re not on board with this, because we think this is a land grab by primarily European countries.’ They are worried about being railroaded into something they can’t agree to because they are essentially being asked to give up a portion of these profits and their companies are being penalised for being successful.

The US is behaving like this because it can and there is an element of gravity asserting itself here. It is a powerful economy and to that extent, it feels that it can get its own way.

Why is Europe so eager to implement the digital tax?

It’s an easy target for European legislators – these companies are not necessarily popular. It’s easier to tax someone else, less politically palatable, than raising taxes on your own citizens. The government borrowed £55bn in the last month and we’re squabbling over whether they will be introducing a new tax that raises £400m a year. It’s negligible. There’s a fair amount of symbolism involved.

The UK initially said it favoured a global solution. Do you believe that despite the US dropping out of negotiations, the UK will still implement the tax?

The UK is in a very interesting position here because it is no longer in the EU, so there is a desire to try and find a trade agreement. Does it have to give up in the interest of reaching a trade deal in the end? It’s very much a possibility that it will have to trade in the end, but that all depends on whether there is a realistic possibility of reaching a trade agreement with the US at all.

What would happen if a global solution isn’t implemented?

The real danger with where we are now is that you just don’t have a consensus solution and different countries go off and do their own thing. The consequences will be in terms of distortions of the market and potentially double taxation, and in particular, the real operational challenges that a lot of companies are going to face in terms of working out whether they are liable to the digital tax in loads of different jurisdictions. All these taxes will have different scope, different charging provisions, with every risk that some of the big corporates will cut off service in certain countries, saying ‘if by making ourselves available to users in certain countries we’re exposing ourselves to tax there, then we will just try and stay away from those markets as far as we possibly can.’ That will not benefit the consumers in those countries.

It would be far better if there was some sort of coherent principles-based approach, a change to the regime that was adopted by reference to consensus within the existing international tax framework which was adopted by all major economies and enshrined in their tax treaties.

Could the permanent establishment threshold be changed to have a wider application of the tax?

There’s no reason why it couldn’t be changed. And in many respects, it’s entirely understandable that it is. Different countries may say that they are trying to come up with a principles-based approach, but they’ve always got an eye to their own interests in terms of where that threshold should lie.

Every country is going to face the same competing pressures depending on the nature of its economy.