What's Happening?
The United States has recently announced 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.
Notably, the agreements with Cambodia and Malaysia prohibit the imposition of Digital Services Taxes (DSTs) that discriminate against US companies. This prohibition is also included in the framework agreement with Thailand, though not yet with Vietnam. The agreements aim to prevent these countries from imposing DSTs or similar measures that could disadvantage US companies. Additionally, the agreements include provisions related to Value-Added Taxes (VAT), with commitments from Cambodia and Malaysia not to impose VATs that discriminate against US companies. These clauses are included in trade agreements rather than tax treaties, highlighting a strategic approach by the US in addressing tax issues within trade negotiations.
Why It's Important?
These trade agreements are significant as they reflect the US's strategic approach to protecting its companies from discriminatory tax measures abroad. By prohibiting DSTs and ensuring non-discriminatory VAT practices, the agreements aim to safeguard US businesses operating in these countries. This is particularly important as DSTs have been a contentious issue globally, with several countries imposing such taxes on US tech giants. The agreements could serve as a framework for future negotiations with other countries that have DSTs, potentially influencing global tax policy. Moreover, the inclusion of tax-related clauses in trade agreements rather than tax treaties indicates a shift in how the US is addressing international tax challenges, potentially setting a precedent for future trade negotiations.
What's Next?
The agreements with Cambodia and Malaysia could pave the way for similar negotiations with other countries that have imposed DSTs on US companies, such as those in Europe. The US may use these agreements as a model to negotiate the rollback of DSTs with countries like Austria, France, Italy, Spain, and the UK. Additionally, the US-Vietnam framework agreement is still in progress, with digital trade provisions yet to be finalized. Monitoring the implementation of these agreements and their impact on tax policies in Cambodia and Malaysia will be crucial. The US's approach in these agreements may influence its future negotiations within the OECD/G20 Inclusive Framework, particularly concerning Pillar Two discussions.
Beyond the Headlines
The inclusion of tax-related provisions in trade agreements rather than tax treaties highlights a strategic shift in US international trade policy. This approach may reflect broader geopolitical considerations, as the US seeks to protect its economic interests in the face of increasing global tax challenges. The agreements also underscore the complexity of international tax negotiations, where issues of discrimination and fairness are central. As countries navigate these challenges, the US's approach may influence global tax norms and practices, potentially leading to more standardized international tax policies.
