Trump Win Raises Pressure on Countries to Rethink Digital Taxes

President-elect Donald Trump’s victory has dialed up the pressure on countries to alter their taxes on US tech firms or risk retaliation.

Countries are “absolutely” feeling the pressure to change their digital services taxes to avoid repercussions from the incoming Trump administration, according to Pascal Saint-Amans, partner at the Brunswick Group and former director at the OECD’s Center for Tax Policy and Administration.

Nations such as Italy, the UK, France, Spain, Austria, Canada, and India must choose between eliminating or tweaking their digital services taxes on companies like Meta Platforms, Inc., Amazon.com Inc., and Google or keep them and risk exacerbating looming trade tensions with the incoming administration.

“Countries with a DST should stand ready to face increased acrimony from the United States,” Saint-Amans warned.

In his first term, Trump imposed tariffs on countries with DSTs—levies applied to revenue from online services such as the sale of digital ads—against US tech companies.

Just this week, Trump said he would impose a 25% tariff on Mexico and Canada in an effort to get the countries to halt the influx of illegal drugs and migrants into the US. And on the campaign trail, he laid out a protectionist agenda that would include 10% to 20% tariffs on the rest of the world, including the EU.

Congress also has slammed existing DSTs as discriminatory. Earlier this year, Republicans called on the Biden administration to take a harsher stance with Canada and open an investigation into its DST under Section 301 of US trade law.

Pascal Saint-Amans, former director of the OECD Center for Tax Policy

Photographer: Patricia de Melo Moreira/AFP via Getty Images

Government Response

Governments are responding to this pressure in different ways.

Italy proposed to change its digital services tax to include a larger swath of companies, not just the largest US tech firms. Italian Economy Minister Giancarlo Giorgetti said in early November the change was made to allay concerns from the US that these taxes are inherently discriminatory toward its companies.

Spain and the UK haven’t yet budged on their levies while France proposed in October to raise its digital taxes from 3% to 6%, citing the need to raise revenue.

If the president-elect imposes blanket tariffs on imports to the US, EU countries may not worry about creating, maintaining, or expanding their DSTs.

“If the US is going down the route of tariffs, I think it takes away some hesitance from the EU side to just continue down the route of DSTs,” said Vinod Kalloe, a former EU Commission official and head of international tax policy at KPMG Netherlands.

Trump transition officials didn’t immediately respond to a request for comment.

OECD Stalemate

Countries have been locked in a stalemate for months over signing a measure that could eliminate digital taxes—a multilateral treaty, known as Amount A of the global tax pact—that’s under negotiation at the Organization for Economic Cooperation and Development.

It’s unclear whether the Trump administration will engage in negotiations at the OECD. Even if the US takes part, it’s far from certain that US lawmakers would ratify the treaty—a step that’s needed for the treaty to take effect.

Still, countries remain optimistic they will be able to work together with the US under Trump to tackle thorny tax and trade issues.

Canadian Finance Minister Chrystia Freeland told reporters Nov. 6 that US-Canada relations wouldn’t suffer during a second Trump presidency because the relationship is governed by the United States-Mexico-Canada free trade agreement negotiated during his first term.

“Our partnership in no way undercuts American workers, and I know that that is at the heart of the concerns of President Trump and his team because that is at the heart of our new NAFTA deal that we concluded with them,” Freeland said.

The US is negotiating Canada’s DST in a dispute resolution process under the USMCA.

The EU, too, has remained steadfast in its support for Amount A following the US election.

Benjamin Angel, the EU Commission’s senior official for direct taxation, said during a tax subcommittee hearing at the European Parliament last month that the bloc is “not willing to lose hope or stop pushing” for the Amount A treaty.

Growing Frustration

If agreement on the multilateral treaty fails, countries may choose to keep or impose their own DSTs—even with the threat of US retaliation.

Angel said the alternative was “double or triple” taxation for companies in the absence of an agreement.

Abdul Muheet Chowdhary, senior program officer at the South Centre Tax Initiative, said for developing countries, “the risk of facing trade sanctions and tariff retaliations from the US from the incoming Trump administration for exercising their legitimate taxing rights has certainly increased.” The South Center is a policy research center that focuses on aiding developing nations.

But there’s always been a risk of retaliation, he added. Therefore, he said, the South Centre is continuing to encourage developing countries not to waste time waiting for an agreement on the Amount A treaty and to adopt DSTs.

There’s a growing frustration in Europe that large companies aren’t paying their fair share, Rasmus Andresen, a Greens Party member of the European Parliament, told Bloomberg Tax.

“It’s not about Europe against the US, but it’s about fair taxation,” he said. If there’s no will to collaborate on the part of the US, he added, the EU bloc should try to find a solution to address the issue, like a uniform DST.

DSTs aren’t bringing in a ton of revenue, and they bring with them the threat of serious tariffs, said Alistair Pepper, managing director at KPMG US.

If countries analyzed the risk, “it’s very likely to be that the cost-benefit analysis would say to get rid of your DST,” he said.

—With assistance from James Munson in Toronto.