Washington Insider -- Wednesday

Possible Digital Tax War

Here’s a quick monitor of Washington farm and trade policy issues from DTN’s well-placed observer.

Report: China Will Not Boost Grain Import Quotas Under Phase One Trade Deal

China will not increase the tariff-rate quotas on corn, wheat and rice under the phase-one trade deal, according to Han Jun, a vice minister of agriculture, as quoted by Caixin media.

The TRQ is available to global markets and "we won't adjust it for one country,” Han said. Reuters reported there was no comment from the Chinese Ag Ministry on the matter.

China has previously set the TRQs at 9.64 million metric tons of wheat, 7.2 million metric tons of corn and 5.32 mmt of rice.

U.S. trade officials have been pressing China to fulfill the TRQs, but contacts indicate no increase was expected.

The U.S. challenged China’s operation of the TRQs at the WTO and won the case, and China said they would comply with the WTO ruling.

FSA Suspends Payments On 2018, 2019 Sugarbeet Losses Under WHIP+

USDA’s Farm Service Agency (FSA) is instructing state and county offices to not approve any sugarbeet pay groups on any application under the Wildfire and Hurricane Indemnity Program Plus (WHIP+) application, advising them that “additional guidance for processing sugarbeet losses will be forthcoming.”

The agency cited the Fiscal Year (FY) 2020 government funding package which provided new legislation for paying sugarbeet losses under WHIP+ that require USDA to pay 2019 and 2019 losses through cooperative processors.

“Due to the new legislation, 2018 and 2019 sugarbeet loss payments may be paid outside of WHIP+,” FSA said.

It is not clear what the new guidance referenced by FSA will be.

However, contacts advise the payments will be made.

Washington Insider: Possible Digital Tax War

Big internet companies have long been the target of complaints that they don’t pay enough taxes. In response, France imposed a 3% levy last year on the digital revenue of companies that make their sales primarily in cyberspace, such as Facebook Inc. and Alphabet Inc.’s Google, Bloomberg is reporting this week.

Other countries also are targeting big tech companies, many of which are American, that have multinational earnings that often escape the taxman’s grip.

The French law imposes the 3% levy on companies with at least 750 million euros ($834.5 million) in global revenue and digital sales of 25 million euros ($27.8 million) in France, a move that affects “about 30 businesses” Bloomberg says. While most of these are American, the list also includes Chinese, German, British and even French firms.

The idea is to focus taxation where users of online services are located, rather than on where companies base their European headquarters or book their earnings. Targeting revenue rather than profit gets around techniques many companies use to shift their earnings to lower-tax jurisdictions.

The taxation effort is not entirely French — Italy enacted a similar tax that took effect on Jan. 1. Turkey has proposed a digital tax of 7.5%. Legislation proposed in the UK last year would impose a 2% levy on the revenues of search engines, social media platforms and online marketplaces that “derive value from UK users.”

Austria, Spain and Belgium say they are also considering digital levies, typically following the French model, by taxing sales of electronic data, online advertising and the services of intermediaries such as Uber Technologies Inc. and Airbnb Inc. that connect users to products.

The U.S. government is charging that the French tax discriminates against American companies. In response, it proposed tariffs on roughly $2.4 billion in French products and says it’s exploring whether to open investigations into the digital taxes proposed in Austria, Italy and Turkey.

The authority for the U.S. move is Section 301 of the U.S. Trade Act of 1974 — the same tool used to impose tariffs on Chinese goods due to alleged theft of intellectual property. France says the European Union will retaliate against any U.S. sanctions.

France’s finance minister, Bruno Le Maire, said on Jan. 7 that he and U.S. Treasury Secretary Steven Mnuchin had resolved to try to find a compromise, and that France had said it would drop its tax if the U.S. and others agree to a global effort for a uniform approach under the stewardship of the Organization for Economic Cooperation and Development.

Before it adopted its digital tax, France pushed for a European Union-wide digital levy that was scrapped when four countries — Sweden, Finland, Denmark and Ireland — declined to sign off on it. Resolving the dispute without escalating trade tensions is a goal of Phil Hogan, the EU’s new trade commissioner.

Tax advocates argue that major tech companies are often domiciled overseas in low-tax jurisdictions such as Ireland or Bermuda shift money seamlessly across borders, and can easily avoid paying taxes in countries where they nevertheless make significant sales.

More fundamentally, France argues that the structure of the global economy has shifted to one based on data, rendering 20th century tax systems archaic. European Commission data indicate that global tech companies pay a 9.5% average tax rate compared with 23.2% for traditional firms.

Bloomberg points out that transatlantic tax wars aren’t new and that Apple Inc. was slapped with a 13 billion-euro bill for back taxes by the European Commission three years ago which the company called political. The U.S. Treasury tried and failed to sway the EU’s Apple investigation, which alleged that the company got an illegal subsidy in Ireland due to rules there governing the transfer of sales booked elsewhere in Europe.

The Commission has also probed Google’s Irish tax arrangements and ordered it to pay 250 million euros ($278.17 million) in back taxes to Luxembourg. Other U.S. companies, including non-technology firms such as Starbucks Corp. and Nike Inc., have also been targeted in tax probes.

The EU insists that the common thread isn’t that they’re American but that they’ve used complex legal structures and intellectual property licensing to limit their tax payments.

Bloomberg says that taxes are only part of a bigger EU backlash against big tech. Internet firms have been put on notice over issues ranging from privacy to market dominance — and they’re fighting back with lobbying and court cases. Google won a legal fight against a $1.2 billion French tax bill in April. Apple and Amazon are contesting their respective European tax decisions in EU courts, and a legal victory could halt that part of the bloc’s crusade. Some companies may be changing their tax structures or moving income outside of the EU to stay ahead of the curve, as some European lawmakers alleged about Apple.

So, we will see. Bloomberg editors have criticized both sides, arguing that the French tax is wrong, and so is the U.S. response. They may be right, since such fights often expand to include other vulnerable sectors well beyond the initial contestants — as the NAFTA fight did. Thus the digital tax issue is one producers should watch closely as it emerges and intensifies, Washington Insider believes.

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