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In a tough break for global efforts to reach an agreement on how to best tax digital companies, the US has opted to drop out of the OECD-led negotiations.

In a June 12 letter directed to the French, Spanish, Italian and British finance ministers, US Secretary of Treasury Steven Mnuchin said negotiations with the OECD had reached an “impasse,” as the US can’t even agree on a basic level to what has been proposed up until now.

Mnuchin said, “Attempting to rush such difficult negotiations is a distraction from far more important matters,” adding, “this is a time when governments around the world should focus their attention on dealing with the economic issues resulting from Covid-19.”

Furthermore, the US Secretary of Treasury said, “The United States remains opposed to digital services taxes and similar unilateral measures” and, “if countries choose to collect or adopt such taxes, the United States will respond with appropriate commensurate measures.”

With this in mind, the US Treasury Department released a statement calling for a suspension of the negotiations.

It said: “The United States has suggested a pause in the OECD talks on international taxation while governments around the world focus on responding to the Covid-19 pandemic and safely reopening their economies.”

U.S. Trade Representative Robert Lighthizer reiterated this position during a hearing earlier this week at the House Ways and Means Committee.

Lighthizer said, “We were making no headway and the secretary made the decision that rather than have them go off on their own he would just say we’re no longer involved in the negotiations.”

“We have a situation where a variety of countries have decided that the easiest way to raise revenue is to tax somebody else’s companies and they happen to be ours,” Lighthizer said, adding that “the United States will not let that happen.”

However, Lighthizer did emphasize the fact that a compromise can be reached without the US having to impose tariffs on its European counterparts.

“The answer is that we need an international regime that not only focuses on certain size and certain industries but where we generally agree as to how we’re going to tax people internationally,” he concluded. “So I think there is clearly room for a negotiated settlement.”

This decision throws a huge wrench into the OECD’s plan to find an optimal and global way to tax digital companies and is bound to anger the EU as its member states are in dire need of additional revenue following the crisis wrought on the region by COVID-19.

The OECD’s plan consists of two pillars: the first is designed to tax digital companies based on the profits they make from sales carried out in individual jurisdictions, while the second focuses on establishing a minimum global corporate tax rate to prevent jurisdictions from dropping their corporate tax rates to attract profit shifting.

This decision opens the door for more countries in Europe and throughout the globe to follow in France’s footsteps and unilaterally impose their own digital services taxes.

Besides France, Austria, Spain, Hungary, Italy, Turkey and the UK are in the advanced stages of establishing their own DST, while the Czech Republic, Slovakia, Latvia, Norway and Slovenia are holding discussions on potentially setting one up.

Bruno Le Maire, France’s Finance Minister, referred to the letter as “a provocation.”

“It's a provocation towards all the partners at the OECD when we were centimetres away from a deal on the taxation of digital giants," he said. 

On his Twitter account, Dan Neidle, a Partner with Clifford Chance in the UK, laid out three potential (and mostly bad) scenarios moving forward.

First, Neidle wrote, the OECD could “proceed anyway with the…project, and apply the new rules to US-headquartered corporations,” which would in turn “break countries' tax treaties with the US, which most countries won't be willing to do (and some countries, and the EU itself, can't legally do).”

Second, he explained, the OECD could “proceed anyway, but accept the new rules don't apply to the US.”

However, in this case, “given the significance of US-headquartered multinationals, that would render the rules toothless. Worse still, it would give a competitive advantage to US MNEs vs. EU and other MNEs.”

Finally, everything breaks down, he said, and “we see a plethora of unilateral digital services taxes, turnover taxes, etc.”

“The only real thing these taxes have going for them is that they don't need the US's consent - they are outside the scope of tax treaties. Otherwise an unprincipled mess,” he concluded.

Grab your popcorn, y’all, and stay tuned to see how this saga unfolds.