It’s just expectable to hear that Mr Trump started, in his heavy-handed CEO fashion, to send and use his own hand to sign threatening letters to Europeans in the build-up to the NATO summit, asking them to increase their contribution to the organisation or, in other words, to step up their remuneration for the services provided by the parent company.

In an accurate, be it just political, audit, one could argue that the services delivered by the Headquarters (which is de facto seated in Washington) are indeed indispensible to keep up the organisation – in their substance, as we are saying in transfer pricing, in terms of the related functions and risks – and that operating costs have risen in the meantime, the circumstances are different etc. etc. Briefly, remuneration must be adjusted!

And also that in fact we, as Europeans, should be happy to have so minimised the damage, since, in the meantime, you may have heard the news, we’ve been in an inter-ally (intra-group) war. And, as in any group, disputes must be driven pragmatically as they are about profit allocation.

We have a small-scale example in what is going on across the Channel. They call it Brexit. It is not about us ceasing to be Brits’ allies, it’s just that we disagreed on the remuneration of services we provide to each other. Since it goes on between the two shores of the Atlantic, the game could be easily dubbed Atlant-exit. It is yet to be named officially, but it must include an ”e”. To show that there is (also) a firm digital side to it.

While we’re still at threats, let’s talk serious threats. As early as the summer of 2016, that is when not even Trump expected to move into the White House, Mr Obama’s Washington had no more patience to act diplomatic and told Europeans: guys, the tax to Uncle Sam is where we draw the line!

Both Brussels as a whole and the big Member States individually, were then in the thick of the anti-BEPS campaign – which was officially the fight against taxable base erosion and abusive shifting of profits by the multinationals, obviously. A politically brave campaign meant to salvage European budgets but which, some may say, leaves room for interpretation as regards the existing fiscal agreements and rules. However, the targets are almost entirely American. We talk the famous technology GAFA (Google, Apple, Facebook, and Amazon) but also – just to avoid claims that it’s all about technology - Starbucks, Chrysler-Fiat or McDonalds. Face-offs are only seen in Justice for now, but, irrespective of its outcome, war is on.

And it’s not us that kicked it off, the Americans could say. And the current American retaliation, i.e. the traditional industry, is also engaged under a politically noble banner (saving American jobs), but this is equally far-fetched in terms of the modern commercial rules.
Last January, Trump cited two lengthy reports by his Commerce secretary which suggested something along the lines of – that’s not right, imports of steel and aluminium undercut our national security. These magic words are all he needs and then he’s free to juggle with customs duties to the extent of his negotiation skills (1).

It’s what the president himself said in early March – now I’m waiting for the rest of the world for negotiations until 1 June. Those who presented themselves were handed some dispensations (South Korea, Australia, Argentina, Brazil made steel arrangements, Australia and Argentina made also aluminium deals). Europe played hard to get and ended up with 25% import duties on steel and 10% on aluminium. ‘cause that’s how it goes between disagreeing allies.
Trump makes no secret of its target. After all, in order to finally make it to the negotiations, you need to start by hitting your opponent where it hurts, don’t you? He loves the EU all right, but identifies Europe and China as the two-fold source of the evil inflicted on the American economy by excessive imports. Therefore now ups his ante with a probe into car imports (from the EU, mostly from Germany).

Consider Germany, with which the United States had a trade deficit in goods of about $64 billion in 2017. While the United States tariff on cars made in Germany and elsewhere in the European Union is 2.5 per cent, the European Union tariff is four times as high, at 10 per cent. No wonder Germany sells us three cars for every one we export to Germany […] Even when Germany’s automakers build facilities in the United States, these so-called factories are more like assembly plants. S.U.V.s in the BMW X series that are assembled in the United States actually contain only 25 per cent to 35 per cent American-built content — the high-value engines and transmissions are manufactured in Germany and Austria – says assistant to the president for trade and manufacturing policy, Peter Navarro.)

With such affront between pals, Europa simulates a re-balancing attack at the level of traditional economy and compiles a 10-page list of surtaxes applied to US imports from sweet corn through to choppers of more than 800 ccm (who could it be?) and well, playing cards (the whole list here, to see for yourselves).
It looks already like an unbalanced/losing game for Europeans. However, les jeux ne sont pas faits, the French cry loudest for all Europeans.

Enter taxation of digital economy

Starting March the Europeans came up with the ”temporary digital tax”, which amounts to an (over)taxation of sales made on the EU market by the giant online platforms (from software, music, movies downloads, from users’ data, from brokerage services etc.). A meagre 3%, just to put together EUR five billion (that would be half of the budget loss to be incurred after Brexit), it’s not the end of the world, is it?, and it’s just temporary, no one knows for how long, but we intended it as temporary. Accidentally, out of the 120-180 companies with a EU ”digital presence” targeted by this tax, half are American and just a third purely European. But, please remember, this is not aimed at the American companies in any manner whatsoever – insisted Financial Commissioner Pierre Moscovici (accidentally a Frenchman) in a special meeting organised by the American Enterprise Institute in April. However, he failed in convincing the audience from over the Pond as to why, out of the whole project for harmonisation of corporate income tax across the EU, this precise segment of the new economy had been singled out, which is to incur a turnover tax, no less. At least, it will be deductible for the purposes of corporate income tax, Mr Moscovici was eager to assure them.

It is a most uncanny coincidence (or maybe not) that this happens when, nota bene, the very Trump’s US have gotten the best of Europeans in matters of anti-BEPS fighting: since early this year, under their new tax reform, they have made sure that the US multinationals pay nothing more than a minimum rate on the profits they make abroad. They have come around and embraced a territorial system of global profit taxation...

Moreover, for a couple of days, the Americans have been acting just as European in their fiscal approach of digital economy. You can find the story here on transferpricing.ro. (in Romanian) For 50 years (51 to be precise), the US Supreme Court was expected to rule whether a distance seller (i.e. using then the mail system, then the online environment) can be reasonably held to pay their sales tax where they sell, even if they are not physically present in that place. In short, can they be deemed as maintaining a taxable presence (aka nexus) while not maintaining a brick-and-mortar representative office there?

Yes, they can, the Court ruled several days ago, with the Court virtually stating the European notion of significant fiscal presence. The physical presence rule has these days become ”entirely artificial, unhealthy and unfair”. Today you are present here, your presence may become permanent just as well by merely operating a website that leaves cookies saved in the computer of your customer here or with that customer having downloaded your mobile application on their phone. (see page 15, Court’s opinion, South Dakota v. Wayfair, Inc.).

The tightest possible score (5/4) suggests that the Court itself had a hard job attempting to reach this historic verdict. Justice Kennedy – the most influential voice of the Court’s panel – decided to revise his own 25-year old ruling (when he voted for linking taxation to physical presence alone) claiming that during all these intervening years the brick-and-mortar traditional approach has created an (inadvertent) advantage to e-commerce, with the online and the offline ceasing to play on a level fiscal playing field, which significantly affected the budgets of the respective American states. A point has been reached where e-retailers boast that, unlike retailers, they don’t have to charge their customers the sales tax.

Even though the decision made 25 years ago, if looked upon in the current context, may be deemed as ”wrongly decided”, this cannot be a reason for the Court to make, instead of the Congress (Parliament) a decision which is to impact the business environment and to hit first small online retailers, who are not able to equip themselves with ”software systems or outside counsel to assist with compliance related questions” – claims Court’s chief justice Roberts, (joined by a further three justices) in his dissenting opinion.

This being said, it is not by mere happenstance that the US Congress has consistently failed to take such responsibility. Now maybe more than 25 years ago, the world is experiencing an even more painful transition from the traditional to the new, when you are at a loss as to what to save first – is it steel industry jobs, automotive jobs, small online businesses, technological giants etc.?

How should we play it then? By the rules, if possible!

No one knows who actually started playing this Transatlantic trade and tax warfare game. However, in such a tense climate, the Europeans’ archaic, brutal, anti-business and ... provisional turnover tax, which is not intended against the Americans, can only fan the flames.
Americans, notably in the Trump era, cannot keep hands in their pockets when commissioner Moscovici notifies that the tax directive is to be adopted on a fast-track basis by the end of the year, while still admitting that all of the EU Member States’ votes are still to be secured. (2)

It seems that Romania will not be on the side of the troublemakers, as shown last year when it rushed to sign France’s call for such radical approach. However, since I reacted when PSD (the gorverning party) moved to bless us with a turnover tax, I now claim that the European initiative is no better.

Europe does not need this since it already has a far-flung project named fiscal harmonisation (CCCTB), which, by the way, cannot be music to American ears either. However, at least CCCTB is, or should be, a field for negotiation. Economy, also due to its fiscal implications, has become so complex and even complicated, that it can only be ”worked out” through negotiations in a joint search for win-win solutions. In the build-up to its presidency of the Council of the EU, Romania must show the leadership required to address the urgent European matters.

This is why here’s hoping that in officially dealing with this dispute we will not, as we typically have as a Member State, tractably rally or complaisantly conform to what the big shots say. There is no straight benefit for us in the game – we sell not so much steel to the US, we sell no cars, we will not fill our deficits from taxes on GAFA sales etc. Instead, we stand to win in the long term if we show consistency in our commitment to principles, be they fiscal, and openness to honest dialogue and pragmatic negotiations.

 

PS. On the same pragmatic note, I shall highlight a good business opportunity for the Romanian IT companies. After the US Supreme Court’s ruling, the American market is becoming highly attractive. Hundreds of thousands, maybe more than a million owners of small online stores in the US need an effective, versatile, reasonably priced solution: with a (ZIP-based) knowledge of customer’s location, they should automatically know what fiscal treatment is applicable to the specific goods purchased in the relevant jurisdiction (anywhere between 10,000-12,000 jurisdictions across the US) and where to direct the sales tax then, and sure enough they will need to go through the whole paperwork. This could therefore amount to a good business opportunity.

 

Notes:
(1) The problem of defence and security is roughly posed like this: military’s requirement for steel is a meagre 3% of the American output (as claimed in Secretary of Defence’s letter) while the domestic output covers an extra up to 70% of the current consumption. However, the volumes of imports grow higher every year and it’s reasonable to surmise that the EU was a little bit excited, as an aggregate EU have rose to rank second as a steel source: German imports (8th rank individually) saw a 40% rise during 2011-2017, the Netherlands (13), a 14% rise, Italy (14), an 86% rise, Spain (16) a 106% rise. Meanwhile, China backslid to 11th, as Chinese imports dropped by 31% during 2011-2017.
Steel works closed down, with the surviving ones being under the critical threshold of 80% and one third of the jobs being lost. This state of affairs is deemed to impair capability to cover the critical infrastructure in case of national emergency, and also, nota bene, the domestic industry’s capacity to innovate, as needed to keep up with the market’s existing requirements.

(2) The most vocal againsters are Ireland and Luxemburg. However, Nordic states themselves make no bones about claiming that ”a digital services tax deviates from fundamental principles of income taxation”. In Germany, too (which is pro officially) its powerful business environment says ”it’s not the right time.”

 

Article by Adrian Luca, TPS, published on ZF.ro, (Ro), July 2018