What's Happening?
On October 26, the United States announced new trade agreements with Cambodia and Malaysia, along with framework agreements with Thailand and Vietnam. These agreements primarily focus on bilateral trade and customs duties but also address significant
tax issues, including Digital Services Taxes (DSTs) and Value-Added Taxes (VAT). The agreements prohibit Cambodia and Malaysia from imposing DSTs that discriminate against U.S. companies, a commitment also included in the framework agreement with Thailand. However, Vietnam's agreement does not yet include a commitment on DSTs. The agreements also address concerns about VAT regimes potentially discriminating against U.S. companies, although most tax specialists argue that VAT applies equally to foreign imports and domestic producers.
Why It's Important?
These trade agreements are significant as they aim to protect U.S. companies from discriminatory tax practices in Asia, particularly concerning DSTs and VAT. By preventing these countries from imposing taxes that unfairly target U.S. businesses, the agreements could enhance the competitiveness of U.S. companies in these markets. Additionally, the agreements reflect the U.S.'s strategic approach to trade negotiations, focusing on tax issues within trade agreements rather than tax treaties. This could set a precedent for future negotiations with other countries that have imposed DSTs on U.S. companies, potentially influencing global tax policy and trade dynamics.
What's Next?
The agreements with Cambodia, Malaysia, and Thailand are in place, but the U.S. is still negotiating with Vietnam on digital trade commitments. The success of these agreements could influence future negotiations with European countries that have imposed DSTs on U.S. companies. The U.S. may use these agreements as a framework to negotiate the rollback of DSTs with countries like Austria, France, Italy, Spain, and the UK. Monitoring the implementation of these agreements and their impact on U.S. companies will be crucial in assessing their effectiveness.
Beyond the Headlines
The inclusion of tax clauses in trade agreements rather than tax treaties highlights a shift in U.S. negotiation strategies. This approach may reflect broader geopolitical strategies, aiming to strengthen economic ties with Asian countries while addressing tax issues that have been contentious in international trade. The agreements could also influence domestic tax policy discussions, particularly regarding the U.S.'s Foreign Derived Intangible Income regime, which has faced scrutiny from the European Commission.
