Americans should be encouraged by the United States Trade Representative’s (USTR) office’s recent announcement that it is ramping up its defense of innovative American companies from aggressive digital tax plans being cooked up in Europe. For years, foreign countries have been crafting schemes to impose digital taxes that unfairly target American companies in a naked attempt at squeezing them for more revenue. While the Trump administration has long opposed these efforts, USTR has indicated that it is reaching deeper into its toolbox to help mount a defense against these efforts.
The Trade Representative’s announcement stated that it was investigating several nations, including Austria, Brazil, the Czech Republic, the European Union, India, Indonesia, Italy, Spain, Turkey, and the United Kingdom for imposing taxes that negatively affect U.S. commerce, using its authority under Section 301 of the 1974 Trade Act. While USTR should be careful in wielding this very sharp tool, lest it lead to injuries like those caused by so many other trade barriers, it is a strong indication that the administration is taking the digital tax threat much more seriously than before.
Digital taxes have been gaining momentum in recent years. Advocates argue that they allow governments to maintain an equitable tax code by taxing an “undertaxed” digital goods industry. This is not the case, as digital firms pay effective tax rates that are roughly equivalent to traditional firms. Whether a good or service is provided digitally or traditionally should not be a factor in determining tax treatment.
Instead, digital tax proposals represent attempts by countries to target a growing and successful — and largely American — industry for added tax revenue. Multinational digital firms are seen as potential cash cows that revenue departments fully intend to milk for all they’re worth. Attempts by foreign nations and the Organization for Economic Cooperation and Development (OECD) to design taxes that target these American businesses represent clear aggression that the United States has the right to defend itself against.
And digital services taxes remain legally dubious. A recent analysis by Georgetown University, in partnership with the Tax Foundation and Tradelab, came to the conclusion that the French digital services tax, one of the first to be passed into law, could face serious legal challenges under bilateral tax treaties, international trade law, and European Union law.
The fact that digital tax proposals have even begun to catch on among American state legislatures underlines the importance of nipping in the bud the growing international efforts to impose them. Maryland’s governor recently had to veto a digital tax proposal that would almost certainly not have survived legal challenges on several counts, while other states such as Nebraska and New York have also flirted with the idea. Should national governments succeed in their efforts to tax American digital firms, more states may be too distracted by the dollar signs in their eyes to resist following suit.
This move by the Trade Representative is unlikely to be the end of the issue, as the United States has since pulled out of digital tax negotiations with the Organization for Economic Cooperation and Development over European intransigence. Nonetheless, taxpayers should be encouraged that their government is taking a more forthright approach to defending Americans from these misguided efforts. After all, if the pandemic has illustrated one thing, it is the importance of nurturing the growth of the internet — not hindering it with discriminatory taxes.
Andrew Wilford is a policy analyst with the National Taxpayers Union Foundation, a nonprofit dedicated to tax policy research and education at all levels of government.