By Alex M. Parker

Law360 (May 21, 2020, 8:13 PM EDT ) The coronavirus downturn in trade has taken "some of the teeth" out of the U.S. threat to impose sanctions on countries that enact a digital services tax, a top official for the Organization for Economic Cooperation and Development said Thursday.

Pascal Saint-Amans, director of the OECD's Center for Tax Policy and Administration, said the COVID-19 pandemic caused by the new coronavirus had heightened the global trend toward national taxes targeted at digital activities, as countries go into debt and tech companies thrive. And threats from the United States to enact retaliatory tariffs against the digital services taxes, which U.S. officials claim discriminate against American companies, appear to have lost their bite as countries have fewer exports to tax, he added.

Saint-Amans spoke at a webinar co-hosted by the University of North Carolina Tax Center and the Tax Policy Center, a Washington, D.C.-based think tank co-founded by the Brookings Institution and the Urban Institute.

The U.S. began an investigation of France's 3% tax on revenue from online activities in 2019 under Section 301 of the Trade Act of 1974, which allows the president to impose tariffs against countries found to be unfairly targeting U.S. companies. The United States trade representative found that the tax was discriminatory, but the White House is holding off on tariffs for 2020 as part of a truce with France, while countries negotiate at the OECD for a multilateral agreement.

In the meantime, many other countries have enacted their own digital services taxes, including several in the past few months.

"Interestingly, I would see the impact of COVID on trade as probably pulling some of the teeth out of the mouth of 301, the threat by the U.S. to take sanctions against countries moving unilaterally," Saint-Amans said. "We can see Indonesia, India, Nigeria, Egypt joining France, the U.K., Spain, Italy, Austria, Turkey, and I could name many others that are going to move if we don't have the solution very quickly."

While the U.S. and OECD had pushed to avoid "ring-fencing" the digital economy with digital-specific taxes, many countries now believe "the digital economy has ring-fenced itself," he said.

"If you look at your street, you will see the retail shops closed, and you will see the delivery of whatever on online sales platforms," Saint-Amans said. "A number of governments say: 'You know what, this is something that we need to do because these companies are thriving through the crisis. Some of them are doing extremely well.'"

The situation has only heightened anger at digital companies, he said.

"What seems for sure is that digital is still the focus, not to say the target," Saint-Amans said. "Having something tangible on digital will be highly expected."

The OECD's project on digital taxation began in 2017, as countries began to explore digital services taxes amid public outrage over the perception that tech companies avoid taxes by exploiting an outdated tax system ill-suited to capture digital commerce. The OECD and Group of 20 advanced economies hoped that countries could negotiate a multilateral solution to the issue that could prevent a disruption of global taxing norms.

Last year officials seemed close to an agreement that would allow countries to tax remote multilateral corporations based on sales into a jurisdiction. But the U.S. announced opposition to the proposal in December, asking that it only be considered as an optional alternative to the existing tax system. Since then the project has proceeded under a cloud of uncertainty, which has only darkened as the coronavirus pandemic forced officials to negotiate through teleconferencing.

Despite the difficulties, OECD officials said they were committed to finishing work by the end of 2020, the deadline given by the G-20, even as they expressed some weariness about the pace.

"I wouldn't mind having more time," said Achim Pross, head of international cooperation and tax administration at the OECD. "But the political masters that run the overall time frame are still very much in a 2020 time frame."

Pross spoke during an online conference held by Bloomberg Tax & Accounting, also on Thursday.

Saint-Amans said that the organization still hoped to have something to release by October, before a planned meeting of G-20 finance ministers on Oct. 15. But first the OECD would need to hold public consultations on technical aspects of the plan that negotiators have hammered out over the past few months, such as how to determine a taxable nexus, how to define the tax base and how to consider different business lines of a corporation.

"Then we'll see whether October is realistic, or if more time will be needed," he said.

Even if the OECD reaches an agreement, some remain pessimistic that the organization can stop the spread of unilateral digital taxes and potential trade skirmishes.

"It will take time before a new system is implemented. And this would be happening while countries are even more hungry for revenue in this COVID environment," said Karine Halimi-Guez, managing director for tax at FedEx Corp., also speaking during the Bloomberg conference. "I don't want to sound gloomy, but I am a little bit pessimistic as to our ability to avoid seeing the multiplication of unilateral measures, especially in this interim period."

Saint-Amans urged U.S. businesses not to oppose or try to delay the project, out of their own self-interest.

"The current circumstances are not conducive to multilateralism. That's another reason to support multilateralism," he said. "Otherwise, countries will move unilaterally, and at a time of nationalism, of selfishness by the countries, you may be the victim of bad actions."

--Editing by Vincent Sherry. 

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