U.S.-Europe Relations Tested as Talks on Taxing Multinationals Fall Short

By Paul Hannon

World governments have failed to agree to new rules on taxing the profits of multinational companies, a long-running point of tension between the U.S. and Europe over levies paid by the likes of Apple Inc. and Google and one that has raised the threat of trans-Atlantic tariffs.

More than 130 governments have been trying for years to hash out new rules about how to apportion the profits of multinational companies, aiming to do so by this year.

The frictions are so high that the U.S. has threatened tariffs if European countries impose new taxes on American tech giants without an international agreement.

But the Organization for Economic Cooperation and Development, the forum for the talks, said on Monday that governments have failed so far to agree on new rules.

The talks ran into trouble late last year when the U.S. government said its companies should be able to opt out and stick to existing rules, while the coronavirus pandemic made the search for a compromise more challenging.

However, officials involved in the talks say a great deal of progress has been made on how to implement the new rules.

"We are not at the end of the road," said Pascal Saint-Amans, the top tax official at the OECD. "We have the blueprints. All countries are prepared to go further, and not even the U.S. says we should stop here. "

One of the main obstacles to an agreement is a U.S. demand that American businesses be free to choose whether or not to be subject to a future tax regime.

There are looming dangers. For one, U.S. tariffs on French exports that were imposed in retaliation for Paris's decision to go it alone with a tax on digital profits of companies such as Facebook Inc. and Alphabet Inc.'s Google are due to take effect in January. That could spark a broader trade dispute as the European Union rallies behind one of its leading members.

Other countries have enacted but suspended digital taxes, but on the understanding that a deal would be done in 2020. If an agreement doesn't seem likely soon, they may press ahead with their levies -- and face U.S. retaliation.

Tech companies and lobby groups have said they support a multinational agreement on corporate taxation, in part because they want to fend off a patchwork of overlapping national taxes.

A multilateral solution "is the best way to resolve the strain on our global tax system," said Sarah Shive, vice president of government affairs at the Information Technology Industry Council, a trade association that includes Amazon.com Inc., Apple, Facebook, Google and Microsoft Corp., among other tech companies.

"The alternative is an increasingly fractured system that will inevitably result in double taxation and even more uncertainty for businesses," she said.

The OECD warned a slide into tax-linked trade disputes could reduce global economic output by 1%. That would be a significant drag on the expected recovery from the economic losses inflicted by the pandemic.

The search for new tax rules was partly driven by the rise of new technology companies over recent decades, most of which are from the U.S.

Current rules generally allocate corporate profit for tax purposes based on where value is created. But modern multinationals can sell their products across borders in ways that leave little taxable profit in a country where those products are consumed.

Many big European countries say tech companies should pay more taxes in the countries where their products are consumed, something that could boost their tax revenues by billions of dollars. But the U.S. has opposed any solution that is too targeted at tech companies.

The OECD said that under the new rules, some 100 billion euros, equivalent to $118 billion, in existing tax revenues would be reallocated among governments, with the big losers likely to be "investment hubs" such as Ireland. It said a further EUR100 billion in new revenues would be raised by the introduction of a minimum rate similar to that introduced by the U.S. government in 2017.

The costs to governments of supporting businesses and workers during the pandemic has raised the stakes in the tax talks. Profits earned by U.S. tech giants such as Google and Facebook are becoming even more tempting to European nations.

Should the talks on reallocating existing taxes remain deadlocked, one option would be to proceed with the minimum tax rate. For now, most governments want to deal with the two issues together.

--Sam Schechner contributed to this article.

Write to Paul Hannon at [e-mail]

(END) Dow Jones Newswires

10-12-20 0650ET