Report from Bloomberg
In Brief – The massive budget reconciliation tax and spending bill passed by the House of Representatives includes a tax provision that aggressively penalizes foreign countries that impose “unfair” taxes on US companies, bringing the House Republicans strongly onside with the Trump Administration’s effort to force countries to withdraw their digital services taxes (DSTs) that primarily impact US-based tech giants. During his first term, President Trump used tariff threats to delay implementation of new digital tax regimes enacted by countries like France and the UK. US policy shifted under President Biden. A major two-part global tax policy deal was negotiated at the OECD to increase taxes on digital giants and set a country-by-country minimum corporate tax of 15 percent, a Biden policy priority to combat low-tax havens. The US Congress never approved the OECD agreement and many countries that had enacted national DSTs began collecting revenue from US companies. On the first day of his second term, President Trump pulled the US out of the OECD deal and threatened to again use tariffs to penalize countries with DSTs. The latest move adds a huge tax penalty threat to the mix, with the “Section 899” proposal increasing US income taxes by up to 20% on business and passive income of non-US individuals, corporations and sovereign entities based in countries that impose an “unfair foreign tax” on US companies, including DSTs.
Context – There have been many questions raised about whether Big Tech’s public support for President Trump in his encore has resulted in tangible policy returns. On the antitrust front, at least in US courts, it hasn’t seemed so. But AI policy and DSTs are different matters. Tariff threats as the main tool to fight DSTs were somewhat undermined by the President’s massive wave of “reciprocal” tariffs on scores of countries, some with DSTs and some without. Countries like India, Brazil, and Italy expressed a willingness to step back on DSTs, and the US Treasury Secretary said he wants the EU to address the issue in a trade deal, but stopping the UK DST was not in the first framework trade deal. Section 899, if enacted, is another matter.