Trump Dials Down Tariff Threats Over European Tech Tax

The news coming out of the G7 conference at the weekend is that Trump and his irate tweeting against France might have been all for nothing. It's good news for French wine makers, but it could also be good news for the UK.

The background is that EU governments have been fed up with the tech giants managing to shift revenue, perfectly legally, to lower tax jurisdictions so their tax bills in the Western Europe's big markets look decidedly small compared to income. 

The French were first out of the blocks with a 3% Digital Sales Tax and the UK, from April next year, will follow with the 2% Digital Services Tax. To skirt over the detail, if you're making a lot of money in France and, after April the UK, there will be a new direct tax to pay on each transaction. This way, the governments get the money up front, rather than waiting for the revenue to disappear into some lower tax regime.

Trump has been loudly opposed to the French move, and so it is already apparent that there is a major impediment to any potential trade deal with the US post-Brexit, despite both Trump and Boris Johnson claiming an agreement could be hammered out at speed.

The soft point to hit out at France was rather obvious -- wine. The US has a domestic market to protect, and France needs the revenue from one of its best known -- and most enjoyable -- exports. Hitting the French in the vineyard was a threat that Trump knew would get headlines to earn fear in France and support at home, particularly in the Napa Valley.

It is not clear what the exact terms of the compromise are that have led Trump to back down on his tariff threat, but The Telegraph is reporting that peace appears to have broken out. There is a heavy hint in the article that it is the result of the French emphasising the new tax will be dropped as soon as the OECD announces better rules for dealing with tech giants and their smart accountants. 

To be honest, this was always going to be the case anyway, and there has always been a proviso that businesses would not pay more through the new tax than if they had accounted for profits in France.

The UK has also been clear that the Digital Services Tax is a measure born out of frustration of slow progress at the OECD which, after several years work, now appears to be settling down to announce new tax guidance next year.

Did someone explain to Trump that the taxes hit giants from any country and are only to be feared by those who direct profit to low tax regimes, rather than account for it where it was really earned?

Or did they warn that if the OECD does publish guidance next year, the tech giants can expect to see a major increase in their tax bills where they are actually earning the money anyway? Perhaps the complication of imposing tariffs on one country with the huge trading bloc of the EU was explained too?

Whatever happened, it appears the threat of a France-US trade war -- which could have escalated to an EU trade war -- has been dialled down.

That can only be good news for the UK as it faces the prospect of being outside the EU at the start of November and in desperate need of a trade deal.

My suspicion is that if this is the case, the new British tax will be dropped, however. It will be positioned as being pointless with new OECD guidance coming later that year, but the real reason will be not wanting to ruffle any feathers at a tense time. 

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