Tax News & Views International Weekly: On Offense on Digital Taxes

After letting the issue quiet down for a bit, President Donald Trump thrust digital services taxes back into the spotlight Monday, threatening to impose harsh tariffs and other sanctions on the many countries which have enacted levies on online revenue.

With the ink barely dry on an agreement on the global minimum tax—and with many of its details still unknown—is there a chance for Trump to make another signature deal on the issue?

If so, there are many hurdles to be overcome.

While Trump lumped DSTs with other tech regulations which the European Union has imposed, it is actually not an EU policy. According to the Tax Foundation, about half of the countries of Europe have either enacted a DST or are considering one. To beat back the digital taxes, the administration may have to engage in bilateral negotiations with each one, as they did with Canada, which repealed its DST earlier this year.

Actually, most of these nations already did make an agreement with the U.S. to rescind the DSTs—under Trump’s predecessor. The “Two-Pillar” agreement at the Organization for Economic Cooperation and Development, announced by the Biden Administration in 2021, included “Pillar One,” a new system to apportion some sales income to the market jurisdictions. (Including online-only sales.) While the Pillar Two global minimum tax also grew out of that agreement, Pillar One never progressed far, especially considering that the U.S. Senate seemed unlikely to ratify the multilateral treaty to implement the policy.

While Democrats may not agree with Trump’s tactics, opposition to DSTs is one of the few widely bipartisan issues in D.C. Elected officials from both parties have claimed they discriminate against the U.S., by targeting only the largest tech giants, which happen to be mostly American. Trump initiated investigations into retaliating against several DSTs under Section 301 of the Trade Act of 1974 in his first administration—and while they were suspended, the Biden Administration never fully dropped them. That’s the likeliest way that Trump could impose tariffs against countries with DSTs.

Striking another deal—or several—on digital taxes is definitely possible. But with the U.S. at odds with the rest of the world over so many issues, it’s unclear how much of a priority it will end up being.

Noteworthy Items This Week

An About-Face on Discriminatory Gross Receipts Taxes – Mindy Herzfeld, Tax Notes ($):

The second Trump administration started off with a strong stance against other countries’ discriminatory taxes, issuing three early directives instructing various executive agencies to investigate taxes such as the undertaxed payments rule and digital services taxes, and to consider appropriate retaliatory responses.

But so far — several months past the deadline in which those investigations were supposed to be concluded — there’s little to show for the administration’s rhetoric. Its posture appears to have more bark than bite. Rather than acting against other countries’ harmful tax measures, the administration has coerced Congress into dropping its own proposed actions and is instead pursuing an ad hoc tariff policy that economists have a difficult time rationalizing.

Australia’s Focus on Data Centers Marks New Global Tax Frontier – Niv Tadmore, Benjamin Lancaster and Alice Robertson, Bloomberg Tax:

The ATO’s scrutiny of data centers is the latest installment of the agency’s focus on intangible assets, such as software and software-as-a-service platforms, consumer products, know-how transfers, and brands.

The ATO perceives data centers as a fundamental and valuable part of a corporation’s broader enterprise, and noted that they don’t view data center operators as merely providing low-value services to offshore group members. They also see the use of intellectual property in Australia, such as the know-how and software used to run data centers, and have concerns that royalty withholding tax isn’t paid under the typical structures seen in the industry.

U.N. Debate on Services Taxation Could Bring Trade-Offs – Sarah Paez, Tax Notes ($):

Countries face trade-offs in the design of the protocol, like whether it should be a binding treaty instrument or simply a political agreement with softer coordination tools, the brief says. They will also need to decide if the protocol will modify, complement, or completely bypass existing tax treaties. Countries with dense treaty networks and those with smaller treaty networks also have different goals, with the former preferring legal certainty and coherence among different international agreements, and the latter being able to rely on domestic law to mobilize revenue. Countries will also have to decide how and whether the protocol will apply to non-signatory countries.

“The final design of Protocol 1 may well reflect a layered compromise — with partial adoption, uneven implementation, and longer-term institutional reform evolving in parallel,” the brief says. “Even so, the process may yield normative and institutional effects — establishing new baselines, shifting negotiation dynamics, and reframing what future reforms must contend with.”

IRS, OECD Funding on the Table in Congress’s Appropriations Fight – Cady Stanton and Doug Sword, Tax Notes ($):

On the tax front, wide gulfs are expected between House and Senate positions, with House appropriators advancing proposals to reduce IRS funding to beginning-of-the-century levels, zero out U.S. contributions to the OECD, and disperse Tax Division lawyers throughout the Justice Department. Senate appropriators appear to be ignoring House and Trump administration plans for the Tax Division, while awaited responses on IRS and OECD funding are expected to treat the two agencies far more gently.

Any option will require bipartisan support because of a 60-vote threshold in the Senate, and Democrats have foreshadowed a battle on appropriations following the passage of a Republican rescission bill July 17 that clawed back $9.4 billion in funding, including money for the U.S. Agency for International Development and the Corporation for Public Broadcasting.

OECD’s ‘Side-by-Side’ Tax Deal for US Critiqued by 28 Countries – Lauren Vella and Saim Saeed, Bloomberg Tax ($):

Countries thus expressed worry that their companies, which would still be obliged to comply with the global minimum tax, would be put at a competitive disadvantage compared with US multinationals if an exemption is made.

The UK, France, Italy, and Germany — all members of the G7 that helped reach the side-by-side understanding — said the US should provide more data-driven economic analysis on the side-by-side system.

China went further, stating that any approach that targets one country “is a violation of the principle of fair competition. The solution should ensure that equal treatment be given in similar circumstances.” The country also argued the negotiation should demonstrate inclusiveness and ensure a level playing field.

Public Domain Superhero of the Week

Every week, a new character from the Golden Age of Comics, who’s fallen out of use.

This week’s entry: The Arrow

Debut Year: 1938

Debut Publication: Funny Pages #10

Origin Story: A mysterious hooded figure and archer with deadly aim, The Arrow was eventually reviewed to be a U.S. intelligence agent.

Superpowers: Allegedly the first superhero to use a bow-and-arrow, he also possessed impressive athleticism.

Eide Bailly's International Tax Team and our affiliates at HLB, The Global Advisory and Accounting Network, stand ready to assist with your worldwide tax needs.

Tax News & Views International Weekly: On Offense on Digital Taxes

We're Here to Help

Alex Parker