By Greg Ip 

DAVOS, Switzerland -- Italy and Britain will face U.S. tariffs if they proceed with a tax on digital companies such as Alphabet Inc.'s Google and Facebook Inc., U.S. Treasury Secretary Steven Mnuchin warned.

Mr. Mnuchin issued the warning after France agreed to delay the imposition of its own digital tax in the face of threats of steep U.S. tariffs on French exports. Mr. Mnuchin said French President Emmanuel Macron agreed to hold off on the tax through the end of the year while the two countries work out a permanent resolution.

The truce is "the beginning of a solution," Mr. Mnuchin said an interview with The Wall Street Journal at a Journal-sponsored event on the sidelines of the World Economic Forum in Davos.

France announced the tax last year as a way of collecting revenue from web-based companies that pay little or no tax on substantial sales in France. Italy's parliament passed a similar tax last year that was set to take effect this year. Britain is scheduled to implement a similar tax this year.

Mr. Mnuchin said the U.S. was clear it thought France's digital tax was an unfair levy on gross revenue and hoped Britain and Italy would suspend their plans. "If not they'll find themselves faced with President Trump's tariffs. We'll be having similar conversations with them."

Countries working through the Organization for Economic Cooperation and Development recently arrived at a plan for apportioning taxes paid by multinational companies on activity that spans borders and isn't easily captured by existing income tax schemes, including digital activity. The U.S. has signaled it objects to the plan but supports a mechanism to resolve global tax disputes that would give multinational companies a safe harbor.

With a "phase one" trade deal with China in place, Mr. Mnuchin said phase two wouldn't necessarily be a "big bang" that removes all existing tariffs. "We may do 2A and some of the tariffs come off. We can do this sequentially along the way."

Mr. Mnuchin also said the Trump administration would propose a new middle-class tax cut later this year. "We are working on what we call tax cut 2.0...which will be additional middle-class tax cuts. We are in the process of designing it and will be rolling it out shortly." Mr. Trump is set to deliver his State of the Union address early next month. The administration's budget is expected to follow shortly afterward.

Mr. Mnuchin said the U.S. would run deficits of about $1 trillion for the next two years, because of some provisions of the tax cut such as expensing of investment, and increased government spending agreed to as part of an agreement with congressional Democrats. But "I'll stick with my projections that the tax deal will pay for itself," he said.

Write to Greg Ip at greg.ip@wsj.com

(END) Dow Jones Newswires

January 21, 2020 04:44 ET (09:44 GMT)

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