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US, five European countries bury hatchet over digital services taxes and related tariff threats

The United States and the five European countries that have enacted digital services taxes agreed a tax-and-tariff truce during USTR Katherine Tai’s ongoing visit to Europe and ahead of Friday’s G7 trade ministers meeting in the United Kingdom.

The move follows on the international agreement-in-principle reached this month at the OECD and the G20 over corporate taxation. The Inclusive Framework agreement redefines taxing rights by national governments to take into account the digitalisation of the global economy.

The deal has two main elements: the setting of a minimum floor for corporate taxes to avoid tax base erosion and a tightly defined right for countries to tax corporate income generated digitally on their territory by multinational companies with more than € 10 bn turnover even if their headquarters are not located in the taxing country.

The deal clinched today covers the latter – also called Pillar One in the jargon.

The US on the one hand and Austria, France, Italy, Spain, and the United Kingdom on the other, agreed that the latter would not enact de facto digital taxes starting on 8 October – the day the deal was announced – and this until the deal formally comes into effect. The entry into force is expected in early 2023.

“In defined circumstances, DST liability that US companies accrue during the interim period will be creditable against future income taxes accrued under Pillar 1 under the OECD agreement,” explained USTR.

In return the United States commits not to proceed with Section 301 tariffs on imports of products from these countries.

Today’s agreement puts in practice an agreement in principle reached at the OECD on 8 October that states that: “This package will provide for appropriate coordination between the application of the new international tax rules and the removal of all Digital Service Taxes and other relevant similar measures on all companies.”

In the early months of its coming to power the Biden administration finalised investigations initiated by the preceding Trump administration which concluded that the digital taxes discriminated against United States firms, and hence would be subject to unilateral punitive tariffs.

The Biden administration however immediately suspended the enactment of these tariffs to allow room for the OECD-led negotiations to be finalised.

Washington’s political leverage gained by the continued threat of tariffs on European countries’s exports of agricultural and industrial products has visibly played its role in ensuring the US get the immediate benefit of the new tax deal, and this before they have come round to ratifying the Inclusive Framework deal.

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