U.S. Drops Digital Tax Demand, Opening Door to Global Deal

The U.S. has dropped a key demand in negotiations over digital taxation of technology companies such as Alphabet Inc.’s Google and Facebook Inc., lifting a barrier that had raised transatlantic trade tensions and prevented an international deal.

Treasury Secretary Janet Yellen told her counterparts at a virtual meeting of Group of 20 finance officials that the U.S. is no longer calling for a so-called safe harbor rule that would allow U.S. companies to opt out of paying such a tax overseas, according to a Treasury spokeswoman.

Yellen said the U.S. will now engage robustly in negotiations on both that issue and on a global minimum tax, the spokeswoman said.

The talks between around 140 countries on how to overhaul tax rules stumbled last year when Donald Trump’s administration demanded there should be a safe harbor regime. Most other countries said they couldn’t accept such optionality on paying tax.

“Today we saw a strong tailwind for a fair taxation of the large digital corporations,” German Finance Minister Olaf Scholz said. “My U.S. colleague Janet Yellen declared today at the G20 finance ministers that the U.S. will join in.”

Way to Go

There is still some distance to go to get a global deal on digital tax. Beyond the issue of safe harbor, the U.S. and Europe have long been at odds over the scope of any new rules. There are also outstanding issues over the amount of profit to be reallocated to different jurisdictions and how to ensure and enforce tax certainty.

“The devil is in the details and going from an accord on guidelines to a detailed one with lots of small and big issues to be defined won’t be a walk in the park,” Italian Finance Minister Daniele Franco said at the G20 press conference.

There are large sums at stake. The Organization for Economic Cooperation and Development, which is charing the talks, estimates that minimum and digital tax reforms together would boost tax revenues by between $60 billion to $100 billion, or 4% of global corporate income tax.

Disagreements over digital taxation morphed into a tit-for-tat transatlantic trade dispute in 2019 and 2020 as the negotiations dragged on.

European officials welcomed with the U.S. giving up on safe harbor, with Scholz describing it as a “giant step” to meeting the OECD objective of concluding talks this summer.

“Getting an agreement by the summer is within reach, above all since the U.S. has confirmed it has given up on the safe harbor principle,” French Finance Minister Bruno Le Maire said.

©2021 Bloomberg L.P.

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