Escalation is becoming ever more likely.
23 Jul, 2018FORTUNE.COM
The U.S. and Europe continue to be at loggerheads over the taxation of digital giants such as Amazon amzn and Google googl --an argument that was on display at yesterday’s meeting of G20 finance ministers in Argentina.
Back in March, well before the Trump administration launched a metals tariff offensive against the U.S.’s European allies, the European Commission proposed new tax rules that would see big tech firms pay 3% on their European revenues, rather than on their profits as is traditionally the case. That’s an interim measure; in the long term, the Europeans want such companies to be taxed on the profits they earn in the locations of their customers and users, rather than the location of their headquarters.
According to a Euractiv report, EU economic chief Pierre Moscovici said at yesterday’s meeting that “what we are talking about here is fairness”--the bloc wants a new international taxation agreement for dealing with digital companies that know no borders, and that are effectively taxed at a far lower rate than the smaller, local companies they displace.
U.S. Treasury Secretary Steven Mnuchin has previously set out American opposition to proposals that “single out digital companies,” as these firms are a big part of the U.S. economy. And the Europeans are very conscious of the fact that the Americans may see the further taxation of big tech as an anti-American move.
Some see that as a reason for caution, but one European official told Euractiv that the stance could be a way of “proving that Europe is united and strong” at a time when President Trump is threatening to escalate the U.S.’s trade war with the EU.
All this demonstrates how Trump’s trade war is sucking a variety of issues into its orbit. Just on the subject of the digital economy, the EU’s taxation proposal falls into in a long-running and urgent discussion about how to levy taxes fairly when dealing with highly globalized, competition-slaying online giants.
Yes, today’s online giants are American, but tackling the problem shouldn’t be filed under anti-U.S. aggression. The same goes for the EU’s big antitrust fine against Google, over its anticompetitive Android ecosystem practices--Trump seems convinced that this is a demonstration of the EU “taking advantage” of the U.S., but the case was largely based on complaints from a group funded by Oracle orcl , an American company. And in any case, it is only fair for the EU to crack down on a company that flouts its laws, no matter where it comes from.
The new reality may be that regulatory moves affecting the U.S. tech giants--particularly if Europe is involved--now either go on hold or risk being sucked into the vortex of Trump’s trade war. As the former option may itself be seen as weakness, escalation becomes ever more likely.