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US, France reach tax deal averting broader trade war

US President Donald Trump gives a press conference at the World Economic Forum in Davos, Switzerland, on January 22, 2020. (Photo by JIM WATSON / AFP) (Photo by JIM WATSON/AFP via Getty Images)

DAVOS, Switzerland — France will delay its tax on the digital business of big tech firms like Google and Facebook in exchange for the United States’ promise to hold off retaliatory sanctions – a deal that could avert a broader trade dispute.

Finance Minister Bruno Le Maire said Wednesday he had agreed on the truce with U.S. Treasury chief Steven Mnuchin, at a meeting on the sidelines of the World Economic Forum in Davos, Switzerland.

Le Maire said France would delay collection of the digital tax until December – through the next U.S. election cycle, potentially easing pressure for President Donald Trump as he seeks reelection.

But the French minister said his country would never scrap it entirely until an international accord can be reached.

“Digital companies will pay their fair tax in 2020,” Le Maire told reporters in Davos.

The U.S., in turn, will hold off imposing retaliatory tariffs that it had threatened to slap tariffs on French wine, cheese and other products.

The move appears to dial down the risk of a wider trade war between the United States and the European Union, of which France is part. President Trump also last week reached an interim trade deal with China, which de-escalates a trade war between the world’s two biggest economies just as the presidential campaign begins to heat up.

Le Maire and Mnuchin agreed to talk about setting up a global framework on how to tax online business.

Dozens of governments have enacted or are contemplating such taxes on companies that operate in their countries, prompting threats of retaliatory tariffs from the Trump administration. Beyond the tariffs on French products, President Donald Trump has also held out a bigger threat, to slap tariffs on cars made in the EU, where automaking is a huge industry.

Set up in July, the French measure hits big internet companies including Google and Amazon with a 3% tax on the revenues from digital business made in France.

Faced with U.S. outrage over the tax, France agreed in August with the U.S. to try to create an international agreement on how to tax digital business by mid-2020.

The Organization for Economic Co-operation and Development, which advises the world’s rich countries on policies, is trying to come up with an internationally agreed-upon way to tax digital business.

Le Maire, Mnuchin and the head of the OECD, José Ángel Gurría, will meet Thursday to work on this.

“I absolutely expect we will come to a solution because there is no plan B,” Gurría told The Associated Press earlier in Davos.

The French measure is an attempt to get around tax avoidance measures by multinationals, which pay most of their taxes in the EU country they are based in — often at very low rates. That effectively means the companies pay next to no tax in countries where they have large operations.

The tax applies to the digital business of companies that have global revenues of over 750 million euros ($833 million), and French revenue over 25 million euros. The revenue threshold is supposed to allow more room for startups. France argues that tech companies are abusing their market dominance, notably through tax avoidance, and preventing others from a fair chance of competing.

While France has taken the lead on pushing for change in taxing digital business, other countries are also considering similar measures, including Austria, Italy, Spain and Britain.

Speaking Wednesday on CNBC from Davos, President Trump faulted Europe for being “very tough” with the United States, though he had had a “great talk” with EU Commission President Ursula von der Leyen a day earlier.

“But I said ‘If we don’t get something, I’m going to have to take action. And the action will be high tariffs on their cars and other things that come into our country.’” he said. “Now saying that, I don’t want your audience to get nervous. They (Europe) are going to make a deal because they have to.”

“They have no choice,” he said.

President Trump has used tariffs – or the threat of them – repeatedly to wrest trade concessions from U.S. trading partners including China, Mexico and Canada.

Last year, his Commerce Department concluded that auto imports posed a threat to U.S. national security that could justify hitting them with tariffs. But the administration has refused to release Commerce’s report or to make any decision about going ahead with auto tariffs, using the looming threat as leverage in talks with the EU and other trading partners.

Britain, which is scheduled to leave the European Union on Jan. 31 and is keen to strike a trade deal with the U.S. as well as with its former partners in the bloc, has become caught up in the dispute, too.

Britain is due to impose a 2% levy on the digital business of firms making 500 million pounds ($640 million) a year in global revenues from April.

Britain’s Treasury chief, Sajid Javid, sought to walk a fine line on the issue.

“We plan to go ahead with our digital services tax in April,” he told a panel discussion in Davos. “It is a proportionate tax and a tax that is deliberately planned as a temporary tax. It will fall away when there is an international agreement.”

Mnuchin told the same panel that the two men would have “some private conversations about that.”

“We’ve been pretty clear that we think the digital tax is discriminatory in nature,” Mnuchin said.

Alluding to plans by dozens of countries contemplating such taxes, he said: “If people want to just arbitrarily put taxes on our digital companies, we will consider arbitrarily putting taxes on their car companies.”

Gurría urged those involved to give “time and space” to the effort to create a global deal on the issue.

“Everybody will gain from that and then you won’t have to be having these bilateral confrontations,” he said.

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