The delicate truce between the US and France over digital taxation was on a knife edge on Thursday ahead of another round of crunch talks between Bruno Le Maire, the French finance minister, and Steven Mnuchin, US Treasury secretary.
If the talks go well, officials said that international efforts to reform the way companies are taxed could get back on track, but they added that another rupture, generating a transatlantic trade dispute, was also possible.
France has argued that its digital tax would ensure that the world’s technology giants paid the appropriate taxes for transactions even in countries where they have no major physical presence. But the US says the tax unfairly discriminates against US technology companies including Google and Amazon. As a result, Washington has threatened to place tariffs on $2.4bn of French goods such as wine if Paris does not back down.
Although both the US and France stepped back from the brink this week, with the US postponing its declared tariffs on French goods until the end of the year and France pledging to keep its digital tax in place but not collect revenues until December, the truce remains fragile.
On Wednesday evening, Mr Le Maire said he had to be clear that the US side was negotiating in good faith. One official close to the talks said that both sides were sitting with loaded guns on the table and had decided not to shoot for now, but the situation was extremely fluid.
Mr Le Maire toughened the French position after facing criticism at home for capitulating under US pressure. Speaking about the French digital tax, he said: “I want to be very clear. [There has been] no suspension of the French taxation, no withdrawal of the French taxation. Either there is an international agreement in 2020 and in that case the international agreement will replace the national taxation, or there is no agreement at the OECD, and in that case, since the French taxation remains in place, the companies will have to pay.
“In any case, digital companies in France will have to pay their due taxes in 2020.”
He then threatened to tear up the limited agreement reached between President Emmanuel Macron and President Donald Trump on Sunday. “We need to be clear about the specifics and the basis of the agreement,” Mr Le Maire said. “I do not want to have something that will not be clear, efficient or a solid starting point.”
The French side said there was an 80 per cent chance of a deal, a position echoed by Angel Gurría, the secretary-general of the OECD, which has proposed the compromise deal on international taxation.
Mr Gurria said that an international agreement still needed “a lot of political will and a great spirit of compromise”. Failure, he added, would lead to a “cacophony” of national actions.
The US complains that digital taxes largely hit US companies and are destroying international taxation conventions. France, the UK, Italy and others argue that the nature of business has changed and question why the world’s most profitable companies should pay little to no domestic corporate taxes because profits are shifted abroad. Sajid Javid, the UK chancellor, said on Wednesday in Davos that “there has been a growing disconnect between where customers are based for these businesses and where the profits are generated”.
The UK’s resolute attitude, committing itself to bringing in its own digital tax in April even in the face of Mr Mnuchin’s threats to impose “arbitrary” tariffs on its car industry, has emboldened the French.
As recently as October, no one thought international corporate taxation would become the subject of a stand-off. Talks at the OECD were initially progressing smoothly towards a grand bargain in which more countries gained corporate taxing power at the expense of multinationals that had to pay more tax and low-tax jurisdictions such as Ireland and the Netherlands.
Under OECD proposals, countries would gain the right for the first time to levy a tax on highly profitable multinationals based on the location of their customers. This would hit companies such as Google, but also big French luxury brands and German car companies. A global minimum corporate tax rate would reduce the scope for companies to shop around for the lowest tax jurisdictions in which to locate their profits. In a December U-turn, Mr Mnuchin called for the first part of the proposal, the tax on multinationals, to be optional. Mr Le Maire said “an optional solution is not a fair and efficient starting point for an OECD solution”.
There is an OECD meeting next week to discuss the plans, with the aim of agreeing an international framework by the end of this year.