Pronouncements from world leaders take on a Delphic quality at the best of times, so little wonder the G-7 announcement about a global tax on tech companies is sowing confusion. To cut through the political obfuscation: Yes, these leaders are proposing a new tax on American tech giants, despite their effort to hide it from the U.S. Congress.
Some uncertainty is understandable—and probably intentional—since the communiqué from Treasury Secretary Janet Yellen and other G-7 finance ministers carefully skirts around the main targets of their proposal. They frame the overhaul as a response to the “globalization and digitalization of the economy.” But when it comes to describing the new tax on tech giants, they omit the words “tech” or “digital.”
Instead they say of their plan: “We commit to reaching an equitable solution on the allocation of taxing rights, with market countries awarded taxing rights on at least 20% of profits exceeding a 10% margin for the largest and most profitable multinational enterprises.”
Translating the jargon, this means new rules would allow jurisdictions where global companies earn revenue (“market countries”) to tax a portion of the resulting profits. This would upend a century of global standards that tax companies where their headquarters are based.
The G-7 makes it sound like this would apply to all large, global firms. One might even think it’s an improvement on the patchwork of “digital-services taxes” the G-7 promises to replace. Those taxes, in places like the United Kingdom and Italy, explicitly target Silicon Valley.
But Ms. Yellen and her peers didn’t devise this idea in a vacuum. Their proposal builds on negotiations underway at the Organization for Economic Cooperation and Development (OECD) for taxes that would apply specifically to digital companies. That remains the clear intent.
The exemption of profits up to a margin of 10% is a clue. In only a few industries do companies consistently achieve profit margins above that threshold. Digital services is one such industry, and negotiators are carving out exclusions for other industries that otherwise would have to pay the tax. A few non-tech companies may eventually get caught, but witness the efforts to minimize their number.
One step is Ms. Yellen’s offer this spring to limit the new tax to companies with revenue above $20 billion, which captures most American tech firms and excludes the vast majority of the world’s other multinational companies. OECD negotiators have agreed to exempt extractive industries such as oil drilling or mineral mining from this tax regime.
Meanwhile, Ms. Yellen’s peers have lost no time demanding exemptions for other industries vulnerable to the 10% profit threshold. U.K. Chancellor Rishi Sunak insists on a carve-out for banks and financial-services firms. Expect French Finance Minister Bruno Le Maire to be along shortly explaining why high-margin luxury companies such as LVMH should be exempt. If leaders eventually bargain up the threshold, say to a 15% profit margin, it will be partly to make sure German auto makers avoid the dragnet of what the Germans call a “Digitalsteuer.”
So why not call this thing the tech tax that European officials freely admit it is? Because Ms. Yellen and her G-7 colleagues understand truth in advertising could kill this measure on Capitol Hill. Lawmakers might bristle at a tax aimed primarily at U.S. companies. They especially will notice the goal is to shift to other governments tax revenue Washington might otherwise claim for itself.
Treasury secretaries used to use this political reality to America’s advantage. Washington long insisted the OECD broaden the scope of a “digital-services tax” to include more foreign companies—as a poison pill that up to now stymied negotiations.
Ms. Yellen’s innovation is to keep that rhetoric while finding other ways to give European tech taxers what they want, such as the $20 billion revenue threshold and the 10% profit-margin exemption. In return, she secured agreement for a global minimum tax the Administration hopes will blunt the damage to American competitiveness from its enormous proposed corporate tax increases.
That’s a bad bargain whatever you call it, and especially once Congress figures out that Ms. Yellen is bargaining away Washington’s taxing rights over American companies. A global tech tax by any other name is still bad for America.
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Appeared in the June 12, 2021, print edition.