While the trade war between China and the United States has hogged headlines and driven market anxieties over the past year, an equally large threat to the global economy has gotten little attention: a looming tax war. Since the early twentieth century, countries have largely agreed on how to tax income earned by multinational corporations that conduct business across borders. But this long-standing regime is coming apart, imperiling the broader international economic order.

The current system, established through decades of practice and convention, provides a basis for determining which country can tax income earned in one jurisdiction by a business that resides in another. The regime rests on the norms set in domestic tax laws as well as a patchwork of almost 4,000 bilateral treaties. For decades, the system was stable and functional enough that no one other than international tax lawyers even talked about it.

The digital age, however, has generated new concerns for these long-established norms. The Internet and advances in telecommunications have smoothed the way for businesses to participate meaningfully in the economic lives of countries where they have no physical presence—and to do so without paying significant income taxes in those countries. European governments, especially the French government, have attempted to impose digital services taxes on giant technology firms. Their efforts have rankled the United States, which views such new taxes as unfairly singling out U.S. companies.

Other critics believe that the basic architecture of the international tax regime is a relic of an earlier time. Services and intellectual property form a growing proportion of the global economy. China, India, and other emerging markets are reshaping the economic order. Especially from the perspective of emerging market economies, these shifts bring into question the structure and utility of tax agreements reached long ago in a very different world.

As a result, a century-old consensus on how to manage international taxation has eroded, with potentially far-reaching consequences. In the absence of clarity and consensus, cross-border income could become subject to double or multiple taxation. Multinational corporations would then pull back from trade and investment. The effect of those diminished transactions would spread well beyond big companies and their shareholders, because the activity of multinationals is the backbone of the success of globalization. In the short term, the global economy could slow down and in some places slump toward stagnation or recession. And in the longer term, global economic activity could be hit hard.


In July of last year, France enacted a digital services tax aimed at large technology companies. The French tax is imposed at a three percent rate on gross revenues from digital activities involving French users, as well as revenues from selling digital advertising or providing online intermediary services (such as ride sharing) within France. Three percent sounds low until one considers that this is a tax on gross revenues, not on net income. For a business with a 12 percent profit margin, a three percent tax on gross revenues is equivalent to a 25 percent tax on net income. Italy implemented a similar digital tax at the beginning of January. And nearly 40 other countries, including Australia, India, Mexico, New Zealand, South Korea, Spain, Turkey, and the United Kingdom, are in various stages of considering or enacting taxes of the same kind.

Most of these taxes apply only to companies with global revenues surpassing a high threshold, often approaching $1 billion. As they have been proposed and enacted, these digital taxes generally apply only to social media platforms, online search engines, and online marketplaces, with a special exception for online financial marketplaces. The narrow and selective reach of these taxes is hard to justify, because the whole global economy is digitalizing. Segregating the digital economy from the rest of the economy is not intellectually coherent.

When U.S. President Donald Trump tweeted in July that “France just put a digital tax on our great American technology companies,” he was right to be indignant. The narrow definition of the type of businesses the tax would cover, combined with the revenue thresholds, surgically targeted U.S.-headquartered companies such as Amazon, Facebook, and Google. European digital startups, on the other hand, were intentionally spared.

Trump was right to be indignant at France for its new digital services tax.

The initial U.S. response to the French tax was to investigate it under the trade sanction authority established in the Trade Act of 1974. In December, the office of the U.S. trade representative finished its investigation and found that the tax “discriminates against U.S. companies, is inconsistent with prevailing principles of international tax policy, and is unusually burdensome for affected U.S. companies.” This conclusion lays the groundwork for the president to impose retaliatory tariffs on France (and on any French good) at any time.

So far, Washington has not imposed new tariffs and is trying instead to resolve the disagreement through negotiations now underway under the auspices of the Organization for Economic Cooperation and Development (OECD). As the leading multilateral institution in international corporate tax matters, the OECD has convened 135 countries in an attempt to defy the global economic zeitgeist by reaching a multilateral agreement that would renovate the international tax regime. The group hopes to finalize a deal by the end of the year.

A lot rides on these talks, which have been made more complicated by the spat between Washington and Paris. If the OECD negotiations fail, many more countries will adopt digital service taxes. A number of large U.S. digital firms will then face the economic equivalent of a tariff around the world. The U.S. government will come under domestic political pressure to respond with retaliatory measures, setting in motion a cycle of confrontation that could be as damaging for the global economy as the U.S. trade war with China has been.


Digital services taxes are just the most visible symptom of the breakdown of the old international tax regime. Measures that depart from historic international tax norms are popping up across the board, including in countries such as Australia, China, Germany, the United Kingdom, and the United States, to name just a few. Many of these measures—including the diverted profits tax, in the United Kingdom, and the base erosion and anti-abuse tax, in the United States—tax foreign multinationals based on the location of those who consume their goods and services, rather than on where the company is headquartered or conducts its operations, as was traditionally commonplace. To complicate matters, the countries adopting such taxes still insist on taxing, under traditional principles, the multinationals headquartered within their borders whose customers are abroad. By asserting one taxing principle for foreign firms and another for domestic firms, the new measures undermine the hundred-year-old effort to coordinate the taxation of income earned across borders.

The result of all these new measures, combined with the old ones, will quite likely be a substantial increase in double tax disputes, in which countries disagree as to which one of them has the primary right to tax income a corporation has earned through cross-border activities. Multiple countries can end up taxing the same item. Some double taxation is hard to avoid in the international economy, but widespread double taxation can substantially constrain cross-border trade and investment.

Negotiators in the OECD talks must grapple with fundamental questions about the international tax regime in order to forestall such an outcome. They will seek to answer the basic question of where corporate income should be taxed: in countries of “destination”—that is, the markets for the goods and services companies provide—or in the countries that house corporate headquarters and where the industrial and business activities take place.

Under historic international tax rules, governments taxed the profits of multinationals based on where intellectual property was owned, where financial risk was borne, where the parent of a multinational corporation was headquartered, and where management, research, and development took place. Countries such as China and India have long advocated major changes to the international tax system to allow more taxation of profits in “market jurisdictions”—where the customers of a corporation’s goods and services reside—and less to the places where intangible property was invented or owned.

If more of Amazon's income is to be taxed, then so should more of Luis Vuitton's income be taxed.

In response to the proposed digital services taxes and the broader pressures on the international tax system, the Trump administration relented on the traditional American view that the profits of multinationals should be taxed under the historic rules. Instead, the United States has asked the OECD to reexamine taxation rights for a broad range of multinationals—not just technology giants. In effect, the U.S. position became that if more of Amazon’s income is to be taxed where its customers are located, then more of Louis Vuitton’s income should be taxed where its customers are located, too.

The logic is hard to deny. Indeed, the OECD itself concluded in a report four years ago that to ring-fence the digital economy for tax purposes was neither possible nor desirable. According to the OECD, the entire economy is “digitalizing,” which means that no boundary between digital and nondigital can be successfully maintained. As a result, over the last two years, the debate over international taxes has broadened from a narrow consideration of the digital economy to a reassessment of the conventions for determining how governments allocate tax rights over the profits of multinationals.

Countries with export-oriented economies—such as Germany and Japan—feel threatened by that change. For them, a shift to a regime that taxes more multinational income in countries where consumers reside (and less in the countries where a multinational is headquartered or conducts research and development) would almost certainly lead to a loss of tax revenue. On account of that concern, the OECD negotiators have also taken up the question of whether there should be a global corporate minimum tax. Such a tax would assess whether multinational corporations paid a minimum level of tax in the foreign jurisdictions in which they operated. If not, it would require those same corporations to pay a top-up amount to the country where they are headquartered.

The OECD Secretariat recognized that neither the idea to shift taxing rights to the market countries nor the proposal of a global minimum tax on corporate income would, on its own, successfully generate a new international tax consensus among states, so it proposed pairing the ideas. Negotiators hope that this linkage will produce a new agreement. But such a plan puts almost everything about the existing international income tax regime on the table.

Those tax policymakers around the world who yearn for clarity in the international tax regime have placed their hopes in the OECD process. There is no plausible alternative. But the sheer breadth of what the OECD now contemplates may make the old consensus even harder for countries to adhere to should these negotiations fail.


If the OECD fails to reach an agreement, the old order will continue to decay, only faster. Many countries will almost certainly adopt digital service taxes. Governments will likely continue seeking to tax corporations headquartered outside their jurisdiction, and the conflicting rules of different governments will likely lead to frequent cases of double taxation.

Amid all of today’s threats to the international liberal order, some important arenas still boast a degree of functional multilateralism, with meaningful U.S. participation. The OECD talks are one such arena. But substantive disagreements over how to fix or stabilize the international tax regime could nonetheless produce another international economic flashpoint.

Without a compromise, multinational corporations face punishment with levies equivalent to tariffs, except on both goods and services. The consequences of inconsistent taxation of cross-border activity go far beyond the current dispute between the Trump administration and France, and they don’t only affect technology giants. All U.S. officials and companies should be deeply concerned about the perilous state of the international tax system.

CORRECTION APPENDED (January 22, 2020)

As a result of an editorial error, an earlier version of this article stated that President Donald Trump had the authority to impose retaliatory tariffs on any French good or service. Trump has the authority to impose retaliatory tariffs on French goods and to impose fees or other restrictions on French services.

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  • ITAI GRINBERG is a Professor of Law at Georgetown University Law Center. He served as an official in the Office of International Tax Counsel at the U.S. Treasury in the George W. Bush and Barack Obama Administrations and as Counsel to the 2005 President’s Advisory Panel on Federal Tax Reform.
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