By Paul Hannon and Richard Rubin 

The stakes for thrashing out a global deal on how to tax tech giants doing cross-border business are getting higher now that individual governments are taking matters into their own hands.

French lawmakers last week gave final approval to a new tax on large tech companies like Alphabet Inc.'s Google and Amazon.com Inc., retroactive to the beginning of 2019. Other countries such as the U.K. are on a similar path, and the U.S. is already pushing back.

Negotiators have long known that failing to agree a collective response to an increasingly digital world could mean companies pay tax on the same profit stream across multiple locations, and senior officials from the Group of Seven most developed nations are due to discuss it in Chantilly, France, on Wednesday and Thursday.

But tax experts say there now is a growing risk that governments issuing their own unilateral tax moves could trigger a fresh run of trade disputes if the U.S. or other governments sense their country's companies are being treated unfairly.

"Trade disputes are very troubling," said Will Morris, deputy leader for global tax policy at business services firm PwC. "Tax disputes are troubling. When you mix them up, you stand the chance of supercharging the disputes."

Just before the French vote, U.S. Trade Representative Robert Lighthizer said his office would investigate the tax under the same broad law the Trump administration relied on for its trade conflict with China, which is known as a 301 procedure that could lead to tariffs.

Last week's salvos will likely add to the difficulty the G-7 faces in finding common ground in a wider round of talks shepherded by the Organization for Economic Cooperation and Development, aimed at reaching a solution to replace individual nations' digital tax plans by 2020.

"The process to get to an agreement at the OECD is already very difficult and so anything that makes it more difficult may reduce the odds," said Carol Doran Klein, vice president and international tax counsel at the U.S. Council for International Business, a trade group.

"The unilateral measures and 301 probably don't make it easier," she said. "I think in all likelihood, it makes it harder."

If they are to succeed, negotiators will have to stop trading blows and engage in some give and take, participants say.

"If we are not able to find a compromise on Wednesday and Thursday, I think it will be difficult to find a compromise at the OECD level," said French Economy and Finance Minister Bruno Le Maire in an interview.

The rise of the big tech companies and the growth of digital trade is threatening to undermine a system designed over decades to tax profits made by manufacturing companies in one country selling to customers overseas -- and only once.

Companies providing digital services don't require any local physical presence such as warehouses or factories. This enables them to lower their tax bills by registering their patents and trademarks -- to which their profits accrue -- in low-tax countries. And the sums involved are spectacular.

The OECD estimates that avoidance, including this practice of recording profits in low-tax jurisdictions, deprives governments of between $100 billion and $240 billion in revenue each year.

The loss to France alone is estimated at 6% to 23% of its corporate tax revenues annually. It isn't known how much of that is generated by the heavily online business targeted by the new French tax, or how much large U.S. corporations add to the total.

But one clear divide between the U.S. and France is the question of whether those companies should be singled out for special treatment or all businesses should be treated equally.

The U.S. stands firmly against special treatment, arguing that many businesses now, and even more in the future, have aspects of digitization, such as automobiles and aircraft. Washington argues that countries should follow the OECD-led, multilateral approach. That is a view backed by technology companies.

"For tax reform to be ambitious and fair it needs to be global and cover all industry sectors," said Christian Borggreen, vice president for Europe at the U.S.-based Computer & Communications Industry Association, a trade group that includes Google, Facebook Inc. and Amazon.

A spokesman for Facebook said the company supports the OECD-led process, and a spokesman for Google referred to a late June blog post in which the company expressed such support. A spokesman for Amazon didn't immediately respond to a request for comment, but last week said the company supports "multilateral efforts to reform the global tax system."

The overriding question is which countries win and lose under any of the proposals.

One key feature under any new regime, said Mr. Morris at PwC, is that it shouldn't deprive any single government of a large chunk of its tax revenue.

"It can't be a third of your tax base," he said.

--Noemie Bisserbe and Sam Schechner in Paris contributed to this article.

Write to Paul Hannon at paul.hannon@wsj.com and Richard Rubin at richard.rubin@wsj.com

(END) Dow Jones Newswires

July 16, 2019 14:14 ET (18:14 GMT)

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