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A new trade war? U.S. opens new investigations into countries planning digital taxes

Key Points
  • The U.S. trade representative said it investigating Austria, Brazil, the Czech Republic, the European Union, India, Indonesia, Italy, Spain, Turkey and the United Kingdom for implementing or planning to put forward new taxes on digital giants.
  • The OECD is due to present a plan by the end of 2020.
  • The U.S. signaled at the start of the year that it would support some aspects of a digital tax if the plan would be voluntary rather than compulsory for American companies.

The United States is stepping up pressure on other countries over negotiations for a digital services tax, opening new probes into nations planning higher duties on tech giants.

The U.S. trade representative announced Tuesday it is investigating Austria, Brazil, the Czech Republic, the European Union, India, Indonesia, Italy, Spain, Turkey and the United Kingdom for implementing or planning to put forward new taxes on digital giants. The subject has sparked division between the U.S. and France before, and it could ultimately mean higher tariffs for these countries.

"A warning shot from USTR to signal seriousness and urgency, and to put more pressure on the OECD process to go quickly and in the US direction," David Livingston, a senior U.S.-based analyst at Eurasia Group, told CNBC Tuesday.

France was the first major economy to legislate a digital services tax, but after threats from the United States that it would charge more from French exports, Paris decided to postpone collecting payments until 2021.

In the meantime, the Organization for Economic Cooperation and Development has been working on a plan that would bring together the U.S., France and other countries over how to tax digital firms.

The OECD is due to present a plan by the end of this year. France has said that if international talks fail, tech firms will still have to pay the tax.

Chances of an OECD agreement

"If the U.S. continues with its objective of making the tax voluntary, an agreement is very unlikely, so the move puts pressure in these markets as to whether they'll want to stick with (the tax) if tariffs are introduced," Dexter Thillien, a senior industry analyst at Fitch Solutions, told CNBC Wednesday.

The U.S. signaled at the start of the year that it would support some aspects of a digital tax if the plan would be voluntary rather than compulsory for American companies. This idea sparked criticism from French officials because the U.S. has the biggest tech companies in the world.

"It is interesting timing," Jeremy Ghez, an affiliate professor at H.E.C. Business School in Paris, told CNBC Tuesday.

"You have to recognize that a fairer share of the tax burden could help a wide range of economies better adapt to coming waves of transformation," he said, referring to the growing shift to digital economies.

At the same time, many countries are desperate for fresh cash as the coronavirus crisis has brought new challenges. In this context, the European Commission, the executive arm of the EU, said last week the bloc should implement a new duty on tech giants as a way to increase revenues at a time of severe economic difficulty.

The Brussels-based institution has previously said digital companies pay on average an effective tax rate of 9.5% in the EU — compared to 23.2% for traditional businesses. Tech giants have argued that they pay as much tax as they are legally obliged to.

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