French Finance and Economy Minister Bruno Le Maire (L) greets US Treasury Secretary of State Steven Mnuchin.
The United States has shocked Europe by pulling out of negotiations over an international digital tax and threatened to retaliate if the region moves ahead with plans on its own.
A number of European countries were hoping to impose taxes on digital companies above a certain revenue threshold, which would hit mainly U.S. tech firms given their size.
However, according to the Financial Times, in a letter to France, Italy, Spain and the U.K., the U.S. said international talks had reached an impasse and there wasn’t even room for an interim deal. The move effectively ends any chance of a deal soon.
An official working for one of the ministries, who didn’t want to be named due to the sensitivity of the issue, confirmed to CNBC Wednesday the existence of the letter, adding that a joint response was being prepared. France’s Finance Minister Bruno Le Maire told a radio station Thursday that the U.S. letter was a “provocation.”
“The United States does not want to continue negotiations on digital taxation at the OECD,” Le Maire said on Twitter. “I confirm that there will indeed be a taxation of digital giants in France in 2020 as in 2019,” he added.
The U.S. and Europe have been at odds over taxing tech giants for some time. In early 2019, European governments failed to implement an EU-wide digital tax and took the negotiations to the Organization for Economic Cooperation and Development seeking an international approach.
In the meantime, some European countries decided to implement a digital levy nonetheless. This was the case of France, which was the first major economy to do so.
However, the French decision sparked tensions with the United States, with U.S. Trade Representative Robert Lighthizer arguing the new tax was unfair on American companies. He said the U.S. would impose tariffs on certain French goods in response.
Both countries agreed in January to continue the talks at OECD level and the proposed trade tariffs and digital taxes were put on hold.
The U.K., Italy and Spain have, in the meantime, developed their own digital tax proposal in case OECD talks fail. The organization was due to present a proposal later this year.
Irrespective of the OECD negotiations, the U.S. announced earlier this month that it would investigate Austria, Brazil, the Czech Republic, the European Union, India, Indonesia, Italy, Spain, Turkey and the United Kingdom for implementing, or proposing, new taxes on digital giants.
“I expected this, but not so soon,” David Livingston, a U.S.-based analyst at Eurasia Group, told CNBC Wednesday.
“We’re entering into a world of realpolitik in the digital trade space now. With the most important country – the United States – no longer taking part in the multilateral governance discussions, and with the WTO essentially on the sidelines amid the search for its next Director General, the US will try to deter other countries from following through on their plans through the threat of retaliatory measures,” he added.
Meanwhile, Dan Neidle, a tax partner at Clifford Chance, said in an email that “there’s a real prospect we end up with a trade war.”
“The only real thing these taxes have going for them is that they don’t need the U.S.’s consent – they are outside the scope of tax treaties. Otherwise an unprincipled mess. But this is almost certainly now what will happen,” Neidle said.