US senators warn UK digital services tax could derail trade talks

US senators warn UK digital services tax could derail trade talks

Top members of the US Senate committee overseeing trade have issued a warning shot to the UK over its hopes of a swift deal due to the country’s newly implemented digital services tax.

Chuck Grassley, the Republican chairman of the Senate finance committee, and Ron Wyden, the committee’s top Democrat, said that London’s digital services tax “unnecessarily complicates the path forward for a US-UK trade deal”, and urged the UK to “reconsider this punitive action against its ally”.

The finance committee typically must approve any full trade agreement struck by the US administration.

Washington has grown increasingly anxious that the largest US technology companies could face higher tax bills abroad as governments seek to boost revenues in the midst of the coronavirus pandemic. Some US officials have argued that the taxes unfairly discriminate against American technology companies.

The warning from Congress comes as UK and US negotiators prepare for a third round of trade talks next week, highlighting the increasing transatlantic tensions over the tax.

Several other contentious issues between the two sides include agricultural standards and market access, as well as protections for pharmaceutical patents and procurement mechanisms. 

The UK government has now abandoned hopes of reaching a trade deal with the US ahead of the presidential election in November. Congressional aides and trade experts in Washington have long held that a deal would not be done by that time.

The bill containing the UK digital tax became law on Wednesday. The UK government has said it hopes to raise almost £500m a year from the measure, which it has pressed ahead with despite threats of tariff-based retaliation from Washington. 

In January the Trump administration threatened to impose tariffs on British car exports if the UK went ahead with its tax.

The US withdrew in June from talks with European countries over plans for a new global tax framework for technology companies under the auspices of the OECD, with Steven Mnuchin, the US Treasury secretary, telling European finance ministers that they had reached an “impasse”.

Last month, the US announced an investigation into a number of countries that are adopting digital services taxes, including the UK, Italy, Brazil, Indonesia and the EU as a bloc, which could lead to punitive tariffs by Washington and exacerbate global trade tensions.

Earlier this month, the US said it would impose tariffs of 25 per cent on $1.3bn worth of French goods in 180 days if Paris pressed ahead with its own digital services tax.

The US trade representative’s office said it would not immediately levy tariffs on the items — which include handbags, soaps and make-up — to allow more time for talks on a multilateral solution through the Paris-based OECD.