Much of the recent trade discussion has focused on how the coronavirus has increased tension between the United States and China, energized efforts to localize supply chains, and spawned countless export control measures. But the coronavirus has also contributed to another disturbing trend – momentum for digital service taxes in countries around the world.
The United States is engaged in bilateral trade negotiations with many of the key culprits, and must condition outcomes on clear commitments to refrain from adopting unilateral and discriminatory tax measures that target America's most innovative companies.
Digital services taxes are nothing new, of course. France, a primary proponent, has been working on its policy for years and encouraging its European neighbors to follow suit. France claims the tax is necessary to address the under-taxation of digital companies, but the measure's design and comments by local politicians suggest a more discriminatory intent.
Indeed, the U.S. Trade Representative's Section 301 investigation into the French measure reveals that policymakers carefully calibrated it to squeeze as much revenue from American companies as possible while exonerating local competitors. And many French politicians did not even try to hide the true purpose, simply calling the measure the "GAFA" tax, shorthand for Google, Amazon, Facebook and Apple.
Unfortunately, the pressure to fund coronavirus-related fiscal stimulus has helped turn a largely European problem into a global one. In recent weeks, India and Indonesia adopted new digital service taxes. Kenya continued its consideration of a similar policy. Brazil and Chile, among others, have openly debated the merits of taxing big tech to fund their economic stimulus. The European Commission itself is reportedly considering whether taxing American tech companies should be a core part of the continent's "recovery" strategy. And, as for France, Finance Minister Bruno Le Maire recently declared that "never has a digital tax been more legitimate or more necessary."
Digital tax policies have always posed a threat to the U.S. economy and tax base, but this threat is exacerbated by the coronavirus. Increasing taxes on our companies will make our own economic recovery more difficult, and looting our tax base will make an already troubling fiscal situation worse.
The United States has sought to address this problem through multilateral negotiations and trade enforcement investigations, but as more discriminatory taxes appear, new incentives appear needed. Fortunately, the United States is actively negotiating with the European Union, the United Kingdom, Kenya, India, and Brazil – all of whom are considering digital services taxes and have much to gain from a U.S. deal.
EU trade negotiators are striving to show progress on bilateral problems to build momentum for joint multilateral efforts and cooperation on China. The U.K. needs a deal with the United States with Brexit looming and negotiations with the EU in a precarious position. Kenya wants to solidify its position as a leader on the continent by being the first sub-Saharan country with a U.S. free trade agreement. India is working hard to position itself as a key beneficiary of growing distrust with Chinese supply chains. Brazilian President Jair Bolsonaro has staked his foreign policy on stronger ties with the United States.
An administration that has been unafraid to play hardball to achieve important results for the United States in its trade negotiations must not back down now. It should condition outcomes in each of these ongoing bilateral negotiations on commitments to pursue sensible digital tax policies. Among other things, the parties should agree to prohibit taxes that either directly or indirectly discriminate against U.S. companies, taxes that place unreasonable burdens on U.S. companies due to their unique design (e.g., retroactivity), taxes that single out particular industries, or taxes that are inconsistent with prevailing international tax principles.
As we all continue to grapple with the impact of the coronavirus on the trade agenda, issues like China, supply chains, and our ability to obtain medical supplies will all receive their fair share of attention. But the United States must not lose sight of this other growing challenge and must use its considerable trade negotiating leverage to stop discriminatory digital taxes from becoming a global norm.
Clete Willems is a CNBC contributor, a partner at Akin Gump Strauss Hauer & Feld, former deputy director of the National Economic Council (2018-19), and is representing U.S. tech companies fighting trade barriers abroad.