E.U. Delays Digital Levy as Tax Talks Proceed
The postponement came as Treasury Secretary Janet Yellen arrived in Brussels to continue pushing for a global minimum tax.,
BRUSSELS — The United States secured a diplomatic victory in Europe on Monday when European Union officials agreed to postpone their proposal for a digital levy that threatened to derail a global effort to crack down on tax havens.
The delay removes another potential obstacle to the broader tax agreement, which gained momentum over the weekend after finance ministers from the Group of 20 countries formally backed a new framework. That deal, which officials hope to finalize by October, would usher in a global minimum tax of at least 15 percent and allow countries to tax large, profitable companies based on where their goods and services are sold. If enacted, the changes would represent the biggest overhaul of the international tax system in a century.
With those negotiations in their final stretch, the European Union was planning to propose a 0.3 percent tax on the goods and services sold online by all companies operating in the European Union with an annual sales of at least EUR50 million. That was intended to help fortify a fiscal recovery fund and had been in development since last year, when the international talks taking place at the Organization for Economic Cooperation and Development appeared to be on life support.
But that new levy had been unacceptable to U.S. officials, who viewed it as disproportionately hitting American firms. As Treasury Secretary Janet L. Yellen arrived in Brussels to pressure the European Union to drop or delay the plan, officials announced on Monday that it would be shelved.
“I think we will work together to reach this global agreement,” Paolo Gentiloni, European commissioner for economy, told reporters after a meeting with Ms. Yellen. “In this framework I informed Secretary Yellen of our decision to put on hold the proposal of the commission of a digital levy to allow to us to concentrate, working hand in hand to achieve the last mile of this historic agreement.”
A European Commission spokesman suggested that the delay would remain in place until October, a time frame that is in line with the deadline set by the O.E.C.D. to finalize a global tax agreement.
Ahead of a meeting with the Eurogroup, a club of euro area finance ministers, Ms. Yellen had waved off questions about the significance of the digital levy delay. A Treasury Department spokeswoman said she had no comment.
At a news conference in Venice on Sunday, Ms. Yellen made clear that she believed that the new E.U. proposal ran counter to the broader talks over a minimum tax and the elimination of digital services taxes in Europe and other countries.
“It’s really up to the European Commission and the members of the European Union to decide how to proceed, but those countries have agreed to avoid putting in place in the future and to dismantle taxes that are discriminatory against U.S. firms,” Ms. Yellen said.
Other finance ministers indicated that the delay was another sign of progress.
“It’s very, very good that we are now going to the next step, discussing how we will implement this at the European Union and that the European Union is deciding not to go with its own proposal to the public today,” Olaf Scholz, Germany’s finance minister, said as he entered the meeting.
The E.U. digital levy proposal faced a difficult path to becoming law in Europe, but the prospect of a new proposal that could be construed as a tax that targets American companies would have represented another distraction for the fragile negotiations.
The United States has already been angered by other digital taxes that countries like France, Italy and the United Kingdom have enacted, which are separate from the new proposal. More than a dozen countries have enacted or announced plans in recent years to move forward with their own digital taxes.
The Biden administration has asked countries to immediately drop their digital taxes and has prepared retaliatory tariffs on a wide swath of European goods, including cheese, wine and clothing. As part of the global tax negotiations, countries have said they are willing to do so in exchange for additional tax on the largest and most profitable multinational enterprises, those with profit margins of at least 10 percent, that would be based on where their goods or services are sold, even if they have no physical presence there.
France, Europe’s biggest proponent of a digital tax, had no comment Monday. Finance minister Bruno Le Maire said this weekend that France would legally commit to withdrawing its digital services tax only after an agreement is in effect, which is unlikely to happen before 2023.
In remarks at the meeting on Monday, Ms. Yellen emphasized the importance of a close relationship between the United States and the European Union and underscored the importance of the global tax agreement that she has been helping to broker. She argued a deal over a global minimum tax would help European nations make important investments in their economies and reduce inequality.
“Long-run fiscal sustainability is critically important, which is one of the reasons why we need to continue working collectively to implement a global minimum tax of at least 15 percent, in line with the commitment the G20 made just days ago,” Ms. Yellen said. “We hope all E.U. member states will join the consensus and the European Union will move forward on this issue at E.U. level.”
Ms. Yellen made the case that fiscal sustainability should be achieved by taxing multinational companies, adding: “We need sustainable sources of revenue that do not rely on further taxing workers’ wages and exacerbating the economic disparities that we are all committed to reducing.”
The meeting also offered Ms. Yellen an opportunity to convince Ireland to join the global agreement. Ireland, along with Estonia and Hungary, have yet to sign on to a deal that is now backed by 132 countries and because support must be unanimous within the European Union, their resistance could scuttle the entire agreement.
The United States has been trying to make the case to Ireland that the proposed tax changes in the United States that aim to curb profit shifting would nullify many of the benefits Ireland has gained from having a tax rate of just 12.5 percent. They are also attempting to persuade Ireland that its status as a corporate hub would be secure even if it raises its tax rate, hoping to alleviate Irish concerns that joining the agreement would upend its economic model.
O.E.C.D officials believe that Ireland is withholding its support for the agreement until the Biden administration demonstrates that it can pass tax legislation in the United States. Ms. Yellen will return to Washington on Tuesday and will be working with members of Congress to win support for the deal.
Following a meeting with Ms. Yellen, Paschal Donohoe, Ireland’s finance minister and president of the Eurogroup, offered an optimistic tone, but made no commitments. He said that he had a “very good engagement” with the Treasury secretary and that there is “further work ahead.”
“I affirmed to Secretary Yellen that Ireland remains very committed to the process,” Mr. Donohoe, said promising that he would remain “constructively engaged.”
Liz Aldermancontributed reporting from Paris.