Tax News & Views International Weekly: Digital Taxes and Trade

Scrutiny of digital services taxes is building in Washington. While the U.S. Department of the Treasury offers a (small) olive branch, members of Congress are starting to turn up the heat.

Rep. Ron Estes, R-Kan., a member of the House Ways and Means Committee, said he would soon introduce a resolution opposing such taxes. That would be the first step towards more aggressive action, Estes said, noting that opposition to DSTs is one of the few remaining areas of bipartisan agreement in Congress.

“What we plan to do with that resolution is intentionally remind governments that we have every tool available,” Estes said. Those options could include tariffs or something similar to Sec. 899, a proposed law which would have enacted new taxes on companies doing business in the U.S., which are based in countries using so-called discriminatory taxes. The provision was removed from the One Big Beautiful Bill Act when the U.S. reached an agreement with other countries about the 15% global minimum tax, the primary policy that the Trump administration was trying to alter.

Those who followed the global minimum tax saga will recognize this carrot-and-stick approach, as Treasury officials look for potential areas where negotiation is possible, and Republicans in Congress press for retaliatory measures should those negotiations fail. But DSTs are a very different animal than the global minimum tax. They’ve already been enacted in Europe and around the world, with no coordination at the Organization for Economic Cooperation and Development or any other global body.

And as smaller, unilateral levies, they in some ways are closer to tariffs than taxes—and that puts them at the cross-section of the two spheres, which continue to converge and blur.

Digital services taxes grew out of global discussions over perceived inadequacies with the international income tax system, including how it taxes purely online transactions. Claiming it would be a temporary patch until broader changes were instituted, countries enacted DSTs targeting certain online activities such as advertising or data collection. They also tax revenue, rather than income, which supporters said would prevent them from being gamed. U.S. officials, on the other hand, said this was a violation of basic tax norms.

They also say that capturing only digital commerce is about targeting the thriving American tech sector, rather than restoring any fairness.

During President Trump’s first term, Treasury pursued negotiations at the OECD on a new regime that would have allowed market jurisdictions to capture some income from online-only transactions. But at the same time, the United States Trade Representative began investigations under Section 301 of the Trade Act of 1974, which allows the president to enact retaliatory tariffs on countries he finds have discriminated against U.S. companies or citizens.

The OECD negotiations led to Pillar One–part of the plan which also produced the 15% global minimum tax. But the U.S. dropped its support, and Pillar One has remained merely a proposal with little hope of becoming law.

Treasury officials have now said they are looking for potential areas of common ground for a fresh start on the issue. But the 301 avenue remains, and this issue could get tied up in the controversial trade disputes the administration has engaged in throughout Trump’s second term.

Noteworthy Items This Week

OECD Digital Tax Talk Prospects Overshadowed by ‘US Fatigue’ – Lauren Vella and Saim Saeed, Bloomberg Tax:

The US’s top delegate to the OECD, Rebecca Burch, said in recent remarks at the US Chamber of Commerce that the US is currently in a position to listen to countries’ feedback on the issue.

“Let’s challenge the assumptions, let’s challenge whether the problem we thought we were solving for exists—is different, is bigger, is smaller,” she said.

But that call is unlikely to fly with countries that aren’t willing to remove existing digital taxes or wait to impose new ones, especially when budgets are tight and taxing rich, foreign companies is more politically viable.

U.S. Pushes EU to Revisit Pillar 1 Basics Before Acting Solo – Sophie Petitjean and Elodie Lamer, Tax Notes ($):

A U.S. Treasury official has warned the EU about rushing into a solution — at the international or EU level — that would not secure U.S. support, a scenario she said she “is trying to avoid.”

The United States is interested in a constructive dialogue on the future of the OECD’s plan to address the tax challenges of the digital economy, but that dialogue should begin by reassessing the basics, Rebecca Burch, Treasury deputy assistant secretary for international tax affairs, said during the EU Tax Symposium on March 17.

The Politics of Tariffs Are Shifting Again, Thanks to Trump – Shawn Donnan, Bloomberg News ($):

Cracks in the GOP pro-tariff consensus began emerging even before the Supreme Court decision, when six House Republicans (Bacon included) broke ranks by voting with Democrats to pass a resolution to repeal Trump’s tariffs on Canada on Feb. 11. With surveys showing that affordability remains a top concern for US households aggrieved by the rising costs of electricity, groceries, rent and, now—with the attack on Iran—gasoline, the number of Republicans daring to defy their president is bound to grow if the administration’s policies rekindle inflation.

Uncertainties Remain As UN Cross-Border Tax Talks Progress – Natalie Olivo, Law360 Tax Authority:

During meetings at the U.N.'s headquarters in New York City last month, negotiators broadly reiterated their view that the current international rules, which base corporate income taxation on physical presence, are unfit for today's digital economy, where companies can provide services remotely. But divisions remain regarding how specifically to structure a cross-border tax that would move past these rules as well as how to tackle potential treaty clashes..

Unfavorable Tax Treatment Is an Add-On to Sanctions – Carrie Brandon Elliot, Tax Notes ($):

U.S. sanctions on the governments of Cuba, Iran, Russia, and Venezuela have been in the headlines. Tax penalties relevant to sanctioned countries include disallowing foreign tax credits under section 901 and removing tax exemptions for earned income and housing allowances under section 911. There are four countries subject to the FTC disallowance and one subject to the section 911 disallowance. That could change as diplomatic relations evolve with countries in which U.S. sanctions remain under discussion. The unfavorable tax treatment is triggered by deterioration in diplomatic relations, a state-sponsored terrorism designation, or violations of national security-related travel restrictions.

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: Crimebuster

Debut Year: 1942

Debut Publication: Boy Comics #3

Origin Story: Chuck Chandler was a military cadet, before the deaths of his parents inspired him to fight evil, using his hockey uniform to form a new identity.

Superpowers: No superpowers, but aside from his natural fighting skills he has help from Squeeks, his pet monkey.

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: Digital Taxes and Trade

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Alex Parker