RPT-BREAKINGVIEWS-US tax weaponisation launches messy European fight

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Liam Proud

LONDON, Feb 5 (Reuters Breakingviews) - The minutiae of corporate tax policy are usually only of interest to firms and their armies of consultants. In 2025, however, a transatlantic spat over digital levies could morph into a fight with broader consequences. There are signs that President Donald Trump wants to weaponise the U.S. tax system to apply pressure on countries, like France and Britain, that are slapping special taxes on American technology giants. It’s hard to see room for a quick compromise, meaning foreign companies and investors present in the world’s largest economy could get caught in the crossfire.

As part of his post-inauguration flurry of activity last month, Trump released a memo making clear that he had no intention of complying with a 2021 global corporate tax deal or what he sees as part of a “global tax surrender”, negotiated through the Organisation for Economic Co-operation and Development and backed by his predecessor, Joe Biden. Trump also instructed Treasury Secretary Scott Bessent to investigate potential “discriminatory or extraterritorial” taxes levied by other governments.

The new administration is upset about two things, policy consultants and academics told Reuters Breakingviews. First is a string of special digital taxes present in France, Italy, Spain, the United Kingdom and several other countries – usually a levy of around 2% to 3% on some of the local revenue of large technology giants like Amazon.com AMZN.O and Facebook-owner Meta Platforms META.O. These were supposed to be temporary measures pending a broader global rethink of the rules, but they’ve quickly turned into important earners for European finance ministries.

The second target of Trump’s ire is an aspect of the OECD deal, usually described as a global corporate minimum tax rate. The idea works by allowing governments to charge top-up levies on foreign companies that pay less than 15% tax overall. In theory that shouldn’t be a problem for the United States, where the corporate rate is 21%. But some in Washington fear that well-meaning domestic firms might end up paying less than 15% once research credits and other tax-code subsidies are taken into effect. In that scenario, the OECD rules could then allow foreign governments to charge top-up taxes on the U.S. groups to enforce the global minimum rate, effectively taking money away from the U.S. Treasury.

Many of these debates have a long history. What’s new are the missiles Trump is threatening to launch to get his way. One of his January memos mentioned section 891 of the U.S. tax code, a never-used provision dating back to the 1930s that was designed to prevent foreign governments from unfairly taxing U.S. firms and individuals. It allows the president to double the rates applied to any companies or citizens from that country that happen to pay tax in the United States. So, in theory a French firm like LVMH LVMH.PA with taxable profits on the other side of the Atlantic, or a Brit or Spaniard working in New York, could get whacked with higher taxes as result of the digital fight.

Lawmakers in Trump’s party have similar ideas, according to legislation proposed last month by Republicans on the House Ways and Means Committee. The Defending American Jobs and Investment Act requires the Treasury to retaliate to any discriminatory foreign taxes by adding five-percentage-points each year to the rates owed by companies and citizens from that country, up to a maximum of four years. The bill’s authors said it would even apply to the “U.S. income of wealthy investors”. That would be a sharp contrast to the last standoff over digital taxes, where Washington threatened 25% tariffs on a fairly narrow suite of products like Spanish seafood, Italian handbags and British shaving brushes.

The key questions now are whether the Europeans will blink, and whether Trump would follow-through on this weaponisation of the tax code. The returning president’s willingness to threaten tariffs on major trading partners Mexico and Canada over the weekend, before quickly reversing, suggests that he might be amenable to compromise. Paris, London, Rome and Madrid could simply hold off from enforcing the contentious top-up rate on U.S. firms. Those governments might not care much to protect the overseas profits of rich individuals.

The digital taxes are different, however, because they’re already important earners for governments that have seen their borrowing costs surge recently over budget concerns. UK Finance Minister Rachel Reeves, for example, will pull in $1 billion this fiscal year from the digital service tax, according to the Office for Budget Responsibility. A 2022 National Audit Office report found that the affected companies paid more in such taxes than they did in normal corporate income tax, and that 90% of the takings came from just five firms. It didn't disclose the companies' names, but Alphabet GOOGL.O, Apple AAPL.O and Amazon have publicly acknowledged paying the levy. Meanwhile, France expects to bring in $800 million from its version of the charge in 2025. Neither sum is huge relative to the size of either country’s economy, but scrapping the taxes would create a hole for already stretched finance ministries.

And there’s an important broader principle at stake, from the European perspective. In recent decades, the pool of global corporate profit has shifted inexorably towards U.S. companies, and in particular digital ones. It’s reflected in valuations: S&P 500 .SPX technology firms trade at 29 times forward earnings, compared with 14 times for non-U.S. stocks. State bean-counters in London, Rome, Paris and elsewhere view this as a structural problem: software groups can generate profit in a country without having much of a taxable local presence. It’s hard to envision policymakers caving in to Trump on digital levies after they’ve spent years trying to get a slice of revenue. That raises the chances that Washington’s untested tax arsenal will see action later this year.

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