Mnuchin Sees U.S. Congress as Key Hurdle to Digital Tax Deal

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U.S. Treasury Secretary Steven Mnuchin tempered expectations of a global tax agreement by the end of 2020, signaling that larger changes would require approval from Congress.

Mnuchin is meeting with his Group of 20 counterparts in Riyadh this weekend, with a deal on rules for taxing digital companies likeAlphabet Inc.’s Google andFacebook Inc. a key topic. Finding a solution this year is key to maintaining a tariff truce the U.S. and Europe struck after Franceagreed to delay the collection of a national levy.

Finance ministers from France, Germany and Saudi Arabia expressed confidence that a compromise could be found in time, though Mnuchin warned that he is somewhat hamstrung. “Let me emphasize: in the U.S., depending upon what the solutions are, these may require congressional approval,” he said during a discussion, sitting alongside France’s Bruno Le Maire.

The pair have held tense discussions since France introduced a 3% levy last year on the digital revenue of companies that make their sales primarily online. The move was supposed to give impetus to international talks to redefine tax rules, and the government has pledged to abolish its national tax if there is agreement on such rules.

The U.S. has argued the French measure discriminates against American companies, and threatened tariffs as high as 100% on $2.4 billion of French goods. Donald Trump’s government agreed to hold fire on import duties and France pushed back collecting the digital tax until the end of 2020.

“One of the things we’re balancing is sticking with the fundamental issue of taxing based upon where companies are — the more we change that to broaden this, the more we run into other issues,” Mnuchin said. He indicated Congress as a hurdle before any major changes on taxes can be agreed upon, but added “there’s a tremendous desire to get this done.”

Spain, Italy and Austria also want to impose a digital service tax. Turkey, a G-20 member, introduced a 7.5% levy in December, targeting companies from Google and Facebook toNetflix Inc.

Sticking Point

The key sticking point is a U.S. proposal to make the new digital tax rules a safe-harbor regime. Doing that, the U.S. has said, would address concerns of taxpayers about mandatory departure from longstanding rules. France and others have contested that could render the rules effectively optional, which would make agreement impossible.

In Riyadh, Mnuchin countered this interpretation.

“What a safe harbor is — and there’s lots of safe harbors that exist — you pay the safe harbor as opposed to paying something else, and you get tax certainty,” he said. “People may pay a little bit more in a safe harbor knowing they have tax certainty.”

Le Maire said he welcomed Mnuchin’s clarification.

“We are in the process of technically assessing what it really means and what might be the consequences of such a solution,” he said. “It is fair and useful to give all the attention to this U.S. proposal.”

To get agreement, Le Maire also said France would be open to a “phased” or “step-by-step” approach.

German Finance Minister Olaf Scholz said there’s more than a 50% chance that a deal is struck before the end of the year.

“Everyone has understood that it would be bad to push the debate into the next year or the year after that,” he told reporters in Riyadh. “We need something that helps protect us against the race to the bottom on taxes.”

The framework — developed under the leadership of the Organisation for Economic Co-operation and Development — will also include a deal on a global minimum tax, which the group is close to agreeing on, according to Mnuchin.

Most countries want any OECD deal to be accepted as a package: the digital service tax along with a global minimum tax.

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