US, India extend digital tax truce to Sunday as deadline approaches

US, India extend digital tax truce to Sunday as deadline approaches

The United States and India have extended a standstill agreement on U.S. retaliation over India's digital-services tax until Sunday, aligning it with a fast-approaching deadline for a global deal to reallocate taxing rights on the world's biggest and most profitable companies, the U.S. Treasury said on Friday.

In a brief announcement, the Treasury said that a November 2021 political compromise that expired March 31 would be extended through the end of the month, as negotiations on the "Pillar 1" tax agreement continue.

The Pillar 1 deal is in danger of collapse, as the U.S., India and China have failed to agree on key elements of the deal related to calculation of transfer pricing to help determine local tax liabilities.

The stakes of the last-minute negotiations are high. The deal's failure could prompt several countries to reinstate their taxes on U.S. tech giants such as Apple, Alphabet's Google, and Amazon.com and risk punitive duties on billions of dollars in exports to the U.S.

The extension of the U.S.-India agreement also aligns it with the expiration of similar deals with six other countries that had enacted digital-services taxes: Austria, Britain, France, Italy, Spain and Turkey.

These countries suspended their digital-services taxes shortly after a two-pillar tax deal was struck in October 2021 by nearly 140 countries to impose a 15% global minimum corporate income tax and complete negotiation on reallocating some taxing rights on large multinationals to countries where they sell goods and services. This was meant to replace the digital-services taxes.

At the same time, the U.S. Trade Representative's office agreed to suspend planned trade retaliation against the digital taxes while negotiations were completed.

U.S. negotiations are being led by the Treasury, where a spokesperson declined to comment on the state of negotiations.

A USTR spokesperson also declined to comment on next steps, but added: "As we've said previously, we oppose digital-services taxes that unfairly target U.S. companies and the OECD/G20 Inclusive Framework negotiations offer the best path to address the challenges that digitalization of the economy poses to the international tax system."

Treasury Secretary Janet Yellen told Reuters at a G7 finance meeting in May that India and China were hindering agreement on the alternative transfer-pricing mechanism known as "Amount B," but that talks were continuing.

Italy's finance minister also blamed the U.S. demands for the inability to agree on terms. Italy is seeking an extension of the U.S. standstill agreement and sources told Reuters earlier on Friday that Italy has asked Google to pay $1 billion in unpaid taxes.