Steve Mnuchin started a tax war between the US and OECD – opinion

If any country proceeds with a digital service tax, the US threatens “appropriate commensurate measures.”

Secretary of the Treasury Steve Mnuchin  (photo credit: REUTERS)
Secretary of the Treasury Steve Mnuchin
(photo credit: REUTERS)
The Bible recounts how Samson leaned against the pillars of the Philistine temple and brought it tumbling down. In a letter of June 12, US Treasury Secretary Steven Mnuchin brought down Pillar 1 of an OECD international tax reform. All this on top of the coronavirus pandemic.
What is Pillar 1?
Pillar one is an OECD proposal to allocate a minimum amount of income to market countries: (1) even if the users in the market countries don’t pay, they are merely users with cookies in their computers for analytical and advertising purposes, and (2) even if the multinational operates online from outside the market country concerned.
Taxable profit would be measured according to the line of business segments per group financial statements. Taxable profit would be split into three amounts – A, B and C.
Amount A will be residual profit above a certain level allocated to market countries according to a formula –  but mainly automated digital services and consumer facing businesses with annual revenues above a certain level to be decided.
Amount B will be a fixed remuneration to be decided for defined distribution and marketing activities in a country.
Amount C will be additional profit for additional activities.
There is also a Pillar 2 which calls for a minimum tax in the supplier’s home country.
What did the US Treasury say?
The US treasury letter objects to Pillar 1 as it would change most of the fundamental principles of international tax in a way that falls predominantly on US-based enterprises.
The US wants such changes to be implemented on a safe harbor (i.e. optional) basis – other countries have rejected this.
The US treasury regards this as an impasse, and calls upon the OECD to “pause” discussions of Pillar 1. This is opposed by an OECD-led coalition of 136 countries.
The US Treasury letter of June 12 was addressed to the finance ministers of France, Spain, Italy and the UK and rejects a digital services tax (aka “Google tax”) they are each introducing pending international agreement on Pillar 1.
If any country proceeds with a digital service tax, the US threatens “appropriate commensurate measures.”
To reinforce this, the Office of the US Trade Representative published a notice on June 6 inviting public comment before action is taken against 32 countries that are in the process of imposing a digital service tax at rates of 2%-7.5% of local revenues if global revenues exceed certain levels: Austria, Brazil, the Czech Republic, the EU, India, Indonesia, Italy, Spain, Turkey and the UK.
The probably US isn’t bluffing. Last December, the US delayed the imposition of a French digital service tax by a year by threatening to impose heavy customs duties on French exports to the US.
What the US Treasury did not need to say is that the US tax reform of 2017 brought US multinationals back into the US tax net. The US apparently welcomes any OECD plan that reflects the US 2017 tax reform, nothing else.
What did the OECD reply?
The OECD replied on June 18 that a trade war, especially at this point in time, where the world economy is going through a historical downturn, would hurt the economy, jobs and confidence even further. The OECD will therefore maintain its schedule of meetings to offer all members of the “Inclusive Framework” (137 involved countries) a place in the design of a multilateral approach.
In other words, the OECD isn’t backing down. It was hoping for consensus for Pillar 1 but the US is in fact outnumbered by 136 other countries.
What does it all mean?
There is essentially a tax war – the US versus 136 other countries aligned with the OECD.
This means uncertainty for digital enterprises and e-commerce firms about their tax bill. It also means uncertainty for 136 governments around the world that are desperate to start taxing “cloud” operations of multinationals and to finance covid-19 support measures.
Israel has been quiet and smart. It doesn’t have a digital service tax, but it could start imposing VAT on foreign companies.
Israel already has free trade agreements with the USA and EU among others.
By contrast, the UK pulled out of the EU, may not get a free trade agreement with the US because of the UK digital services tax, and may not get much from China due to disputes over Hong Kong and 5th generation phone technology.
Investors and businesses should watch how the tax war develops between the US and most of the rest of the world.
As always, consult experienced tax advisers in each country at an early stage in specific cases.
The writer is a certified public accountant and e-commerce tax specialist at Harris Horoviz Consulting & Tax Ltd.