Washington threatens Prague with tariffs over digital tax plans

The US government has threatened the Czech Republic with tariffs on the country’s goods if its parliament adopts a 7 per cent digital tax. According to Foreign Minister Tomas Petricek, the Czech Republic could face counter-measures by the US if it introduces the tax after comments made by US embassy spokesperson Eda Findlay.
Washington threatens Prague with tariffs over digital tax plans

(Piqsels, Public domain)

Reports in November suggested the Prague government would impose a 7 per cent digital tax, more than double the 3 per cent imposed by France. Ministry officials estimate imposing a digital tax on global internet players could generate an additional CZK5bn in revenues annually. Under Czech Ministry of Finance proposals, online companies with a global turnover of over EUR750m (CZK18.8bn) that have an annual turnover in the Czech Republic of at least CZK100m for the taxable services provided should be subject to tax in the country.

A similar levy is already in place in France and has sparked a spat between Paris and Washington in which the latter has threatened imposing new US tariffs on French goods, a move that some worry could have escalated into a broader trade war. But in January, the French President Emmanuel Macron and the US President Donald Trump agreed to strike a temporary truce, suspending both proposed tax and tariffs. The EU failed to reach a bloc-wide agreement on digital taxation in 2018.

The deal between France and the US allows time for other EU countries, including the Czech Republic, to determine the best step forward while still insisting that digital companies pay “fair taxes.” Mr. Petricek said that he understood the US position, however, “on the other hand, we are trying to explain that this step is only temporary until an international solution is found,” the minister added.

“The US government has clearly formulated its position on the topic of digital taxation. Ambassador King [the US ambassador to the Czech Republic] expressed this opinion in his December commentary and the US treasury secretary Steven Mnuchin also talked about the topic at the World Economic Forum in Davos,” Ms. Findlay told CAN. „While some argue that it will only affect some large companies, the reality is that it will mainly affect consumers, because companies will transfer it to their customers in the form of higher prices,” she told the newspaper Lidove Noviny last year.

Czech Finance Minister Alena Schillerová stressed that the digital tax is a countervailing tax that corrects the current imbalance, as the internet giants do not pay taxes in the Czech Republic, which is unfair to other companies. She also confirmed that in the long term, the country supports finding a common international solution within the EU and OECD.

Nothing to fear?

Ms. Schillerová has played down fears of the US action, telling Radio Prague she did not fear retaliation. This tax would prevent US companies such as Google, Amazon, Facebook and Apple from avoiding taxes through by shifting profits through third countries. According to Ms. Schillerová, the tax will be put in place over a 4-year period, but that in light of a “global situation” the tax can be immediately repealed.

The US President Donald Trump has insisted that US companies should be taxed within US borders. Mr. Trump has relied on tariffs to settle disputes that he believes contradict the interests of the US, and the proposed digital tax is no exception.

However, Ms. Schillerová has said that if the US does apply punitive measures on any EU country, then it would be a matter for the European Commission. Her French counterpart, Bruno Le Maire, said earlier that agreement was close on a universal tax proposal put forward by the OECD but that the US had to take the “last step” to secure a compromise solution.

In 2018, the European Commission unveiled a proposal to alter the way tech giants are taxed in the EU, but has so far failed to reach an agreement.

An OECD proposal developed in late 2019 solidified this further, outlining that countries should be able to tax multinational corporations even if they are not owned or operating inside their borders, but rather based on where consumption occurs, stating that “in a digital age, the allocation of taxing rights can no longer be exclusively circumscribed by reference to physical presence.”

Czech exporters have asked Prime Minister Andrej Babiš to reconsider the government’s proposal to introduce a digital tax. They fear damage to Czech-American business relations and possible retaliatory measures from the US.

According to the Chamber of Commerce the move could backfire „It is necessary to realize that the volume of Czech exports to the US is about CZK100bn. If entrepreneurs were unable to find an alternative outlet for their production, their losses could lead to a fall in tax revenue of the state budget several times higher than the projected revenue from digital services” President of the Chamber of Commerce Vladimír Dlouhý said in a statement.

In an interview for Bloomberg published last week, Ms. Schillerova declared she had “asked the Prime Minister to schedule a debate at the coalition council about a potential change of the rate from the current 7 per cent to 5 per cent”, adding that the government coalition partners might also consider postponing the date when the digital tax is due to come into effect.

(Piqsels, Public domain)

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