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Disclosure Highlights Cost of Digital Tariffs on U.S. Companies

In his three years in office, Republican President Donald J. Trump has made disrupting the balance of global trade a hallmark of his administration. Thus, it is no surprise that ‘international trade restrictions and protectionism’ is the fastest-rising 10-K risk factor of 2019. Most notably, the White House’s decision to raise tariffs on imports from China touched off an ongoing trade war between the two economic powerhouses. Now Trump is pushing back against a perceived global rewrite of corporate tax rules to account for the rise of the digital economy.

Last week, Treasury Secretary Steve Mnuchin wrote to the Organization for Economic Cooperation and Development (OECD) conveying the Trump administration’s concerns over digital services taxes. In July, France enacted legislation applying a tax of 3% on digital services revenue retroactive to the start of January 2019. The country’s government maintains that France’s tax system previously failed to account for the economic value generated by digital services provided within its borders. An analysis of the French digital services tax by the Office of the U.S. Trade Representative determined that it discriminated against U.S. companies.

“The United States firmly opposes digital services taxes because they have a discriminatory impact on U.S.-based businesses and are inconsistent with the architecture of current international tax rules, which seek to tax net income rather than gross revenues,” Mnuchin said in his Dec. 3 letter to OECD Secretary-General Jose Angel Gurria. “We urge all countries to suspend digital services tax initiatives, in order to allow the OECD to successfully reach a multilateral agreement.”

It doesn’t come as a surprise that U.S. business interests would balk at the new foreign taxes. Disclosures from publicly traded technology companies indicate that the French digital services taxes are impacting their financial performance on the margins.

For example, in its latest quarterly report, New York-based internet company IAC/InterActiveCorp revealed its expense for non-income taxes increased by $2.7 million. IAC, the owner of online brands such as HomeAdvisor, Vimeo and The Daily Beast, attributed the charge primarily to the French digital services taxes.

Similarly, travel and restaurant website company Tripadvisor Inc. said in a November filing that it recorded a charge of $3 million as an estimate of its liability under the French digital services tax. Online travel company Expedia Group Inc. also disclosed a significant increase in its third-quarter cost of revenue over the year-earlier period, which it said was due in part to the French digital services tax.

Look for more companies to begin following suit with their disclosures as countries start to follow France’s lead. The Czech government already approved a 7% digital services tax last month. Meanwhile, India and South Africa are threatening to impose new tariffs on digital trade.

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