Digital tax talks heat up at G20 amid looming US tariff threat

As the world watches, talks over a global tax deal have continued to drag well past the initial June 30 deadline. Governments are now pinning their hopes on this week’s Group of 20 (G20) finance leaders’ meeting to make headway on a stalled plan that aims to reallocate tax rights on large multinational companies, including U.S. tech giants like Alphabet’s Google, Amazon, and Apple.

Central to these discussions is the “Pillar 1” arrangement, part of a groundbreaking 2021 global tax agreement. Pillar 1 seeks to replace unilateral digital services taxes (DSTs) imposed on U.S. tech companies with a new mechanism to share taxing rights on a broader, global scale. The stakes are high: failure to finalize the terms could see several countries reinstating their DSTs, thereby risking punitive tariffs on billions of dollars’ worth of exports to the United States.

Standstill agreements that had Washington suspending threatened trade retaliation against seven countries—Austria, Britain, France, India, Italy, Spain, and Turkey—expired on June 30. Despite this, the U.S. has not moved to impose tariffs. Discussions continue, with European countries seeking assurances that U.S. tariffs on some $2 billion worth of annual imports, ranging from French Champagne to Italian handbags, will remain frozen while talks progress.

An Italian government source confirmed that these assurances are being sought during the G20 meeting in Rio de Janeiro, reflecting the high priority placed on finalizing the international tax deal.

An EU document prepared for the G20 meeting emphatically states that finalizing the tax deal is a “top priority.” It urges participating countries to conclude discussions on all aspects of Pillar 1, aiming to sign the Multilateral Convention (MLC) by the end of the summer and to ratify it promptly.

Meanwhile, Canada has taken a unilateral step by imposing its own digital services tax in July. Finance Minister Chrystia Freeland justified the move by stating it was “simply not reasonable, not fair for Canada to indefinitely put our own measures on hold” after the June 30 deadline passed without a Pillar 1 agreement.

The U.S. Treasury maintains that such taxes are discriminatory, as they target the local revenues of U.S. technology firms that dominate the sector. “Treasury continues to oppose all tax measures that discriminate against U.S. businesses,” a U.S. Treasury spokesperson said. The spokesperson emphasized the necessity of finalizing the Pillar 1 agreement, noting that active discussions on next steps related to existing DST joint statements are ongoing.

A spokesperson for the U.S. Trade Representative’s office reaffirmed that the OECD/G20 negotiations “offer the best path to address challenges that digitalization of the economy poses to the international tax system.”

Treasury Secretary Janet Yellen had previously told Reuters that India and China were obstructing agreement on an alternative transfer-pricing mechanism known as “Amount B.” This mechanism is designed to apply to thousands of companies below the $20 billion annual revenue threshold for “Amount A” and aims to deliver tax certainty through an objective way of calculating tax liability.

“It’s in the interest of all the countries around the table to try to keep it alive,” said Danielle Rolfes, head of KPMG’s Washington National Tax Practice.

At the G20 meeting in Rio de Janeiro, Yellen will also face questions regarding the continuity of U.S. policy commitments, especially following President Joe Biden’s decision to end his re-election bid. The uncertainty surrounding U.S. policy has left international counterparts concerned about the potential return of Donald Trump to the White House.