The US’s hidden export subsidy
The news emerging from high-level talks this week is that France has postponed its new “digital services tax” (DST) – aimed partly at U.S. tech giants like Apple, Google and Amazon – in the face of threatened U.S. tariffs on French wine, cheese and make-up.
European nations are unhappy that the U.S. only lightly taxes the European profits of U.S. multinationals, while at the same time current rules bar them from stepping in to fill the gap. France’s unilateral imposition of a DST – along with threats to follow suit from the U.K., Italy, Austria and Turkey – are symptoms of growing frustration with U.S. foot-dragging in multilateral negotiations at the Organization for Economic Cooperation and Development (OECD).
Indeed, shortly after France’s apparent retreat, the U.K. struck a defiant tone with the U.S. on its own version of the DST, planned for April.
It is not obvious why the French and their European partners are so upset with the current system. But what is most puzzling is why U.S. taxpayers are not at least as furieux.
International economic law is permeated with the pretense that trade issues – like tariffs on imports and subsidies on exports – are separate from income tax issues, like how foreign-derived profits are taxed by home countries. These are different bodies of domestic law, on different shelves in the law library, with different treaties and different cadres of experts.
But events surrounding France’s DST help us see through the legalistic partitioning. The DST is clearly a response to gaps in U.S. income taxation. Yet it is structured – as tariffs generally are – as a tax on sales not profits. Meanwhile, Washington talks about the DST as a trade issue. And its retaliatory threats against the DST are tariffs plain and simple.
This newly explicit linkage between tax and trade frees us up to call the U.S. income taxation of U.S. multi-national enterprises’ (MNEs) foreign profits what it is: An export subsidy.
The U.S. taxes the foreign profits of U.S. MNEs at roughly half the rate as on domestic profits. Nowadays this happens primarily through a combination of two provisions from the 2017 tax law, known by their acronyms, GILTI and FDII. Roughly speaking, GILTI taxes the profits that U.S. MNEs earn through foreign subsidiaries at 10.5 percent rather than the full 21 percent corporate rate. FDII gives a similar benefit for export profits earned directly from the U.S.
There is some debate about whether GILTI and FDII amount to an export subsidy under arcane international trade law. But there should be no debate that they are export subsidies as a practical matter. An export subsidy arises when the government pays an exporter for exporting. It makes no difference whether that payment happens to be settled by reducing what the exporter otherwise owes.
That leads to the observation that an export subsidy is an odd duck as a matter of policy. The exporter can be expected to pass some of the subsidy on to foreign purchasers. And so the U.S. government, which is to say the U.S. taxpayer, is essentially kicking in some cash to help the French consumer buy iPhones.
Why would France complain about this? Why would the U.S. choose to do it in the first place?
The most probable reason for French dismay is that they see themselves falling prey to the old competitor ploy from the 1990s. Lower price below cost, drive competitors out of business, gain market power, tap into scale economies, raise prices and make it up on the backend. The French will claim that this is really what is going on, and they will blame U.S. tax policy for slowing organic growth of the French high-tech industry.
What then is in it for the U.S. taxpayer? Are U.S. taxpayers, who are enabling the price reduction on the front end, ever going to make it up on the back end? Not in their capacity as U.S. taxpayers if U.S. international tax law remains anything like it is. Perhaps some will, to some extent, in their capacity as shareholders of U.S. companies like Apple, Google, and Amazon, and thus owners of those companies’ back end profits.
But that possibility takes us to the other strange thing about subsidizing U.S. MNEs’ exports. To say that a company is a U.S. company is really just to say that its articles of incorporation are filed in the U.S. It is not to say that its shareholders are necessarily U.S. citizens. In fact, it is nearly impossible to gain a clear picture of who on any given day actually owns these so called U.S. companies, let alone who might own them ten days later.
This means that, to some very uncertain extent, the backend benefit of the U.S. export subsidy might not be going to U.S. citizens at all, let alone in any sensibly apportioned manner. It also means that there is little stopping the French from parrying U.S. export subsidization with stock purchases of U.S. companies. They can even use what they are saving on iPhones.
In the end, with a little extra thought it is possible to understand why the Europeans might still be upset about being on the receiving end of a U.S. subsidy. What’s not so understandable is why their protests are not being drowned out by complaints from the U.S. taxpayers on the giving end.
Chris William Sanchirico is the Samuel A. Blank Professor of Law, Business, and Public Policy at the University of Pennsylvania Carey Law School and the Wharton School.