After nearly 140 countries agreed to a two-part global tax agreement in mid-October that could raise taxes on multinational companies by tens of billions of dollars per year and reallocate tens of billions of dollars more, NTU noted that one of several outstanding issues for members of Congress to monitor was the elimination of other countries’ discriminatory digital services taxes, or DSTs. A new agreement between the U.S. and five European countries regarding the latter five countries’ DSTs is a good start in the process of eliminating DSTs, but unfortunately does not go as far as we would like to see in eliminating tax burdens on U.S. companies and workers.
The first part of the two-pillar global tax deal will give potentially dozens of countries new taxing rights on the profits of multinational technology companies, a plurality of which are based in the U.S. In exchange for the U.S. government agreeing to join and implement this part of the deal, countries with DSTs have agreed to “remove all [DSTs] … and to commit not to introduce such measures in the future.” Read more from NTU on the two-pillar deal here.
As for the U.S. announcement with five European countries -- Austria, France, Italy, Spain, and the United Kingdom (UK) -- there’s a mix of good news and bad news for American companies, workers, and taxpayers.
The good news is that the U.S. has won a concession from these European countries while their DSTs remain in place in 2022 and 2023. During that time period, a U.S. company subject to DSTs can receive a credit for the amount DSTs exceed what the company will pay under the new Pillar One regime from 2024 onward. The credit offsets companies’ future Pillar One liability in 2024 and subsequent years. More good news is that the credit can be carried forward indefinitely, meaning that over time companies will be able to take advantage of the full value of the credit (rather than having unused credits go away after an arbitrary time period).
The deal could be much better, though. For one, the Treasury Department acknowledges that it did not win on its position -- “the United States had preferred withdrawal of Unilateral Measures immediately as of October 8, 2021, the date political agreement with respect to Pillar 1 was reached.”
Second, these five countries’ DSTs remain in place for certain -- albeit with the credit mentioned above -- while Pillar One implementation is far from certain. If Pillar One implementation fails, the DSTs under this agreement could stick around indefinitely and U.S. companies will no longer benefit from a future credit.
Third, this agreement takes care of only a few DSTs already adopted. Notably, DSTs remain in India, Indonesia, and Turkey. Canada still plans to “go ahead” with their DST, but will merely delay its implementation until 2024. U.S. taxpayers deserve certainty about the repeal or unwinding of DSTs in these countries as well.
Treasury should be commended for continuing to insist on the immediate and full repeal of DSTs. However, NTU hopes that future deals actually provide for immediate repeal. This is easier said than done, but the financial health of American companies and workers remains at stake.