Congress gets into the global tech tax battle

Politico

14 hours ago

With help from Aaron Mak
There's been a high-stakes global tax fight over tech for a decade, with billions of dollars at stake for leading U.S. companies. The fight is over digital services taxes — fees charged on search engines, online marketplaces and social media services — which more than 30 countries around the world have imposed or approved since 2016.
Now, Congress is pushing a very Trumpian way to fight back: a revenge tax.
The proposal for the tax, included in the reconciliation bill moving on Capitol Hill, is upsetting U.S. allies, foreign companies and American business lobbyists.
And although U.S. tech companies would benefit from the measure, it's not clear that the industry even wants this solution.
The argument is raising questions over what's possible — and wise — when it comes to the U.S. fighting overseas tech regulation.
American tech companies hate digital services taxes, and have openly asked for help in fighting them. Six industry groups, including the Computer and Communications Industry Association, the Consumer Technology Association and the Information and Technology Industry Council, wrote on June 3 to Treasury Secretary Scott Bessent, Commerce Secretary Howard Lutnick and U.S. Trade Representative Jamieson Greer. The groups called for 'decisive action' on 'discriminatory' digital services taxes.
In particular, the letter pointed to Canada's newly imposed DST that applies a 3 percent levy on revenues from some digital services, and the U.K.'s tax, which imposes a 2 percent levy on similar revenues, saying the two together 'represent the largest burden on U.S. firms and the U.S. Treasury, costing billions of dollars in lost revenue.'
President Donald Trump vowed to respond to digital services taxes with tariffs and other tools in a February memo, writing: 'American businesses will no longer prop up failed foreign economies through extortive fines and taxes.'
Trump also called for a possible renewal of unfair trade probes from his first term into countries that impose DSTs, including France, Austria, Italy, Spain, Turkey and the United Kingdom.
As that happens, Congress has entered the fray with a remedy. Deep inside the 1,000-plus-page megabill passed by the House lies the 'revenge tax,' also known as Section 899 — a provision that would target countries with tax policies the U.S. says are unfair to Americans. Those include the digital services tax that applies to online business, as well as another mechanism known as the undertaxed profits rule, which some countries could use to tax U.S.-based businesses under a global tax treaty signed by more than 140 countries.
The measure will allow the U.S. to impose higher taxes — up to 20 percentage points phased in over four years — on foreign companies, investors and individuals from countries that impose those 'unfair taxes' on American business interests.
Bessent recently told Congress, 'This bill will allow us to prevent our corporate revenues from being drained into foreign treasuries — and that is in the hundreds of billions of dollars.'
This revenge tax has scared foreign business leaders, especially from Canada, which is set to collect its first digital services tax payment on June 30. Gaphel Kongtsa, director of international policy for the Canadian Chamber of Commerce, said he and some 30 business leaders spent last week lobbying the Senate against the 'revenge tax.'
Kongtsa said his message to Congress is twofold: First, Canada's DST is unpopular and a new government there may roll it back. And second, the U.S. tax measure could deter Canadian investment and further destabilize trade relationships at a time when American and Canadian leaders are working on a trade deal that could include lifting the digital levy.
'We feel like there's ways to resolve this problem without Section 899,' he said, adding, 'what we don't want is to shift what is now a trade war into a capital war.'
Other global industry groups are weighing in as well. The Global Business Alliance, representing 200 major international companies including Taiwanese chip giant TSMC and Dutch ASML, met with some 60 offices in Congress last week, according to its president Jonathan Samford. The group put out a report last week finding Section 899 could eliminate up to 700,000 U.S. jobs. A tax expert from Japan, granted anonymity to speak freely, said leading companies from his country also hit the Hill last week to press against the revenge tax.
The overseas tax issue certainly has the American tech industry's attention — but conversations with the groups that signed the June 3 letter show they have mixed feelings on retaliating against DSTs via Congress. The CTA has not commented on Section 899. Nor has the CCIA, although it said it is urging American trade officials 'to negotiate a resolution to this trade dispute before the end of the month.' The ITI has yet to weigh in on the megabill measure either; its most recent statement once again asked the White House to act against Canada's DST 'and ultimately secure its withdrawal.'
The long-term projected effects of Section 899 are mixed. An estimate of the bill's effect by the nonpartisan Joint Committee on Taxation found it would at first raise tax revenue in the U.S., but would likely lead to lower tax revenues within eight years because it would drive foreign investors away.
Adam Michel, a tax expert at the libertarian Cato Institute, said he could see a world where the 'revenge' portion of Section 899 scares countries into removing their digital services taxes. 'But if it doesn't have the intended effect of changing foreign tax policy,' he said, 'then you're left with both the original bad taxes and a new very destructive tax on top of it.'
The Wall Street Journal pushed back against what it called 'a freakout' over Section 899. It said in an editorial the retaliatory tax is not a 'blunt-force protectionist tool', and that it leaves time for other countries to negotiate their taxes down.
What's next? Kongtsa, from Canada's Chamber of Commerce, thinks Ottawa should make a strategic concession on the DST: He says he hopes Canada will drop the tax as part of negotiations with the U.S. and Mexico to review the USMCA agreement hammered out in Trump's first administration.
For the House Ways and Means Committee that passed Section 899 in the first place, perhaps that was the whole point, according to a recent statement from its chair, Rep. Jason Smith (R-Mo.).
'If these countries withdraw these taxes and decide to behave, we will have achieved our goal,' he said.
Tech execs get even closer to the Pentagon
Just how close is the Trump administration to Palantir?
Apparently, when a group of new tech executives joined the Army Reserve, it was Palantir's idea.
On Friday, Army Chief of Staff Gen. Randy George swore four tech executives into the U.S. Army Reserve: Palantir CTO Shyam Sankar, Meta CTO Andrew 'Boz' Bosworth, OpenAI Chief Product Officer Kevin Weil and Thinking Machines adviser Bob McGrew.
POLITICO's Christine Mui spoke to George's communications adviser, Col. Dave Butler, over the weekend for the California Decoded newsletter, and he told her the idea came from Sankar.
'Shyam, in his overwhelming patriotism came to us, and said 'I want to join the Army. I want to wear the cloth of the nation. Just doing what I can do to help from Palantir isn't enough,'' Butler said. 'Then he said, 'I've recruited three other guys to come with me.''
Sankar and his associates will serve as lieutenant colonels, but won't be required to resign their corporate jobs. They will advise the military on issues like recruiting high-skilled workers and integrating commercial technology. The appointments are part of a new military initiative known as Detachment 201, which seeks to retain tech executives for guidance.
Sankar's role in driving the appointments is notable given Palantir's increasing involvement with the administration. Co-founder Peter Thiel was one of Trump's earliest backers from the tech industry. Trump tapped the company to help implement his March executive order to augment data sharing across agencies, potentially providing it extensive access to Americans' personal information.
Microsoft fortifies European 'cloud sovereignty'
The European Union just got a little closer to keeping control over its troves of data.
Microsoft announced new features on Monday enabling European cloud clients to better supervise their data, as Mathieu Pollet reports for POLITICO EU. The upgrades include a new system called Data Guardian, which ensures that only Microsoft employees residing in Europe can remotely access cloud systems in the area, building on the company's previous 'sovereign cloud' initiatives.
This raft of new cloud features comes as the EU works toward 'technological sovereignty,' a term that European Commission President Ursula von der Leyen began using in 2019 for her strategy to turbocharge the union's innovation and help it compete with the dominant American and Chinese tech players. The EU appointed Finland's Henna Virkkunen as its inaugural tech sovereignty commissioner in December.
Von der Leyen's vision has gained momentum over the past year, especially as the Trump administration gets pushy on international trade. Yet practical obstacles still stand in the way given the extent to which the EU currently depends on foreign tech. Notably, the data in the new system is still being managed by Microsoft, an American company.
The European Commission released an International Digital Strategy in early June emphasizing the need to strengthen transnational partnerships, especially given 'the superior ability of the US to innovate, scale-up globally and succeed in the tech sector.'
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Stay in touch with the whole team: Aaron Mak ([e-mail]); Mohar Chatterjee ([e-mail]); Steve Heuser ([e-mail]); Nate Robson ([e-mail]); and Daniella Cheslow ([e-mail]).