What Will Trump Do About Digital Services Taxes?

Most presidents wait until they’re in office before conducting foreign policy. But Donald Trump isn’t like most presidents.

Those in the U.S. trying to enjoy the Thanksgiving holiday may have had their festivities interrupted when the president-elect announced, on his self-owned social network Truth Social, that he would impose steep tariffs on both Mexico and Canada if they did not halt the alleged flow of illegal immigrants and drugs such as fentanyl into the country.

More precisely, he vowed to “sign all necessary documents,” on Jan. 20, “to charge Mexico and Canada a 25% tariff on ALL products coming into the United States,” to remain in place until the two neighboring countries solve the intractable drug and illegal immigration problems.

The precise wording left some room for interpretation–the president has wide leeway over tariff policy, but he has less control over the schedule. Most of the laws do require a procedure and timeline, so even if Trump signed the “necessary documents” upon entering office, there would be time to de-escalate the threats.

But we didn’t even have to wait that long. A few days later, Trump seemed to declare victory, touting a “wonderful” and “very productive” conversation with Mexico President Claudia Sheinbaum, and claiming that the threats had already led to reduced illegal traffic. On Canada, he also met with Prime Minister Justin Trudeau, although that was apparently less productive, with Trump reportedly suggesting that the country agree to annexation by the U.S.

If the markets are taking Trump’s statements seriously, they don’t seem to be worried about it. No doubt real 25% tariffs on two of our closest trading partners would send stocks tumbling. (He’s also threatened new tariffs against the BRICS nations to protect the U.S. dollar.)

Aside from his penchant for capricious governing through social media, the dust-up shows that his enthusiasm for tariffs hasn’t abated since his election victory in November. It also shows how he doesn’t view them as merely an economic tool, but as a potential weapon to use in disputes of any kind. If implemented, these would be more akin to the sanctions imposed on outlaw nations like Afghanistan or Iran, than a traditional tariff. He clearly still believes that the U.S. has the economic clout to impose terms on other nations, even powerful allies–if only the president has the strength to do so.

But it also shows that Trump the dealmaker isn’t gone. His eagerness to highlight meetings with both leaders–all while he is still a private citizen–fits a familiar pattern of blustery action followed by proclaimed victory. Those hoping that Trump views his universal tariff proposal as more of a ploy than a literal policy saw some reason to be calmed.

I’ve already written a bit about possible scenarios where the Trump administration could re-enter the discussions at the Organization for Economic Cooperation and Development about the 15% global minimum tax. Who knows, he could even keep the U.S. involved, despite Republican opposition, in an "only Nixon can go to China" way.

But that’s not the only tax dispute right now. There’s also Pillar One–all but officially dead–and the question of what to do about national digital services taxes set to go into effect around the world.

These levies take various forms, but they typically target select “digital” activities like online advertising and data collection, and tax a small percentage of the revenue (not profit) of the company derived from those transactions. (On trickier issues like how to source income between national boundaries in ambiguous cases, or distinguishing those activities from similar ones, it’s basically on the corporation to do their best.)

The countries that have passed these rules claim they compensate for inequities in the current system that allow companies in new fields to avoid taxation–through the lack of a physical presence, for instance. Officials and lawmakers in the U.S. beg to differ, decrying DSTs as an unethical cash grab targeting Silicon Valley. The taxes themselves don’t distinguish nationalities, but because so many of the world’s biggest tech companies are based in the U.S., it’s relatively rare that they would tax non-U.S. companies. Opposition to DSTs is as close to a bipartisan issue as you’re going to see in today’s D.C.

The OECD's Pillar One was supposed to provide a consensus solution between nations. Ironically, the process began under the first Trump administration, and culminated in “Amount A,” which would allow market countries to tax a sliver of income from sales in the jurisdiction, regardless of whether there’s a physical presence. (Because Amount A applies broadly, it resolves the issue of specifically targeting industries, or the U.S.) The Trump White House seemed to support it, until demanding that it be made an optional safe harbor late in 2019. When Biden took office Treasury re-started negotiations and a deal was struck, but the OECD has faltered in providing finalized text and everyone knows the Senate wouldn’t support it anyways.

In the meantime, the first Trump administration began the process to impose tariffs against countries with DSTs, although President Biden suspended them pending the outcome of the Two Pillars negotiations. Indeed, Trump's threat to tax French wine in response to France’s DST is about the only time I can recall him mentioning the tax proceedings at all. (They ultimately dropped that idea following outcries from U.S. wine retailers, instead opting to target iconic French products like makeup and handbags.)

As with lots of things about Trump 2.0, it’s anyone’s guess how this will proceed. Given his enthusiasm for economic retaliation, his Treasury Department would presumably begin the 301 process again. But with so many proposed tariffs, it’s possible that these ones will get lost in the shuffle.

And I wouldn’t rule out the chances that they’ll seek a deal–again.

One thing is clear to me, though. If there are new negotiations over this issue, they won’t be at the OECD. The once-obscure foreign organization has become a bogeyman to Republicans since Biden touted the agreement as an early accomplishment of his term. And Trump clearly prefers one-on-one dealmaking anyways–the kind where leaders end up in a room and can be browbeaten. Multilateralism is out, a new form of bilateralism is in.

Of course, the international tax system has always been primarily bilateral. It still needs double tax treaties to function, with the OECD simply defining the basic language for the negotiations. But in recent decades, as countries and the global public have expressed strong dissatisfaction with the current rules, looking to international fora for broader agreements has become a strong new trend. It’s difficult for countries to agree to rules that might work against their immediate economic interests, but a broad multilateral process makes it possible.

Trump can’t make that trend go away. But he can change how it works. If the U.S. departs from the OECD entirely, it could raise the profile of the United Nations recent project to set new global standards. (I don’t think Trump is a big fan of the U.N., either.)

Individual countries can still exert some influence on the process by sticking with (or repealing) the DSTs. But it’s become a small part of a much bigger global game now, with unclear rules and no known outcome.

DISCLAIMER: These views are the author's own, and do not reflect those of his current employer or any of its clients. Alex Parker is not an attorney or accountant, and none of this should be construed as tax advice.

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LITTLE CAESARS: NEWS BITES FROM THE PAST WEEK

• Speaking of Trump proclamations by tweets, the tax world took notice on Wednesday when he announced that he would appoint former Missouri representative (and auctioneer) Billy Long to be the Internal Revenue Commissioner. What made this announcement somewhat surprising is that the current IRS commissioner, Danny Werfel, is only midway through his term, and prior convention has been that presidents don't pick a new commissioner upon entering office. But, Trump has no hesitation about violating convention when it suits him or his agenda. Likely, one of the reasons that Trump wants a fresh start is Werfel's association with the ramp-up in new tax enforcement authorized by the 2022 Inflation Reduction Act. Republicans have been very critical of the agency's efforts, claiming they are focused more on punitive investigations than customer service. Long seems to have little to no tax experience, but is a partisan loyalist who will no doubt be informed by this debate as he approaches the job. (Unlike Trump's previous pick for IRS head, Charles Rettig, a longtime tax attorney and IRS advisor.) If Long de-emphasizes these new initiatives to increase enforcement against high-income taxpayers, this will surely affect IRS investigations into the foreign holdings of both corporate and individual taxpayers.
• As Congress readies to debate yet another federal tax overhaul, Treasury and the IRS are still working on implementing the last overhaul, enacted in 2017. Specifically, Treasury on Friday released long-awaited proposed rules on avoiding double taxation of previously taxed earnings and profits (PTEP). This will no doubt make for some fun holiday reading for hundreds of tax practitioners.
• The OECD released a database Friday of "technology tools and digitalization solutions" used by more than 100 tax administrations around the world. Given the digital arms race between taxpayers and tax authorities (now including technologies like A.I.), people are definitely interested in seeing what the best practices are in this area.

PUBLIC DOMAIN SUPERHERO OF THE WEEK

Every week, a new character from the Golden Age of Superheroes who's fallen out of use.

Black X, first appearing in Feature Funnies #13 in 1938. A spy and federal bureaucrat who faked his own death and created his alter-ego to fight crooks and Axis spies abroad. Created by comics icon Will Eisner.

Contact the author at amparkerdc@gmail.com.