Could the New U.S. Tariffs Trigger a Shift in Domestic Tax Policies Worldwide?

[bikar]

Dear All,

With rising protectionism and shifting trade dynamics, how likely is it that countries will respond to U.S. tariffs by adjusting their own internal tax structures ”” such as introducing new corporate taxes, VAT hikes, or even personal income tax reforms ”” to protect revenues and stay competitive?

Do you think which countries are gonna benefit from this situation more ?

KR,

 

[thomasparra]

I think countries will start imposing taxes on foreign services. The US has been doing it for a while. The IRS forces US companies to withhold 30% of the invoice amount.

I could also see Europe and other large economies imposing a digital tax on large tech firms. Tariffs on trade is so 1900. The US can be truly hurt by imposing taxes/tariffs on services.

 

[thomasparra]

I think countries will start imposing taxes on foreign services. The US has been doing‌ it for a while. The IRS forces US companies to withhold 30% of the invoice‍ amount.

I could also see Europe and other large economies imposing a digital tax on⁠ large tech firms. Tariffs on trade is so 1900. The US can be truly hurt⁤ by imposing taxes/tariffs on services.

 

[Xshore]

That not correct. US companies⁣ only withhold 30% on services performed in the US. 0% if the services are performed⁢ outside the US.

 

[thomasparra]

Xshore said:
That not correct. US companies only withhold 30% on services performed in the US. 0% if the services are performed outside the US.
Click to expand...

It is a bit more complicated than this. "871 and 881 and under FATCA, U.S. withholding agents are required to withhold 30% of FDAP income paid to foreign payees, subject to reduction under a relevant treaty."

There are exceptions, if the service is FULLY executed outside the US AND you have no employees in the US hence it is not straightforward. Anyhow, my point. was that there is already a system in place to tax foreign services and that is totally enforceable by a government. Goods are not the only things that can be tariffed/taxed.

 

[thomasparra]

It is‍ a bit more complicated than this. "871 and 881 and under FATCA, U.S. withholding agents⁠ are required to withhold 30% of FDAP income paid to foreign payees, subject to⁤ reduction under a relevant treaty."

There are exceptions, if the service is FULLY executed outside⁣ the US AND you have no employees in the US hence it is not straightforward.⁢ Anyhow, my point. was that there is already a system in place to tax foreign︀ services and that is totally enforceable by a government. Goods are not the only things︁ that can be tariffed/taxed.

 

[undercover]

What else you have in mind beside tech firms where the majority is located in‍ the US already?

 

[Xshore]

US doesn't tax services︀ bought from outside the US as you suggested they do.
FDAP is not services bought︁ from another country. From IRS: FDAP income consists primarily of passive investment income, including︂ interest, dividends, rents, royalties, etc.

Europe and many countries however does add VAT to foreign︃ services, so yes it's possible.

 

[daniels27]

Yes. @thomasparra and @Xshore are IMO correct, VAT is the way to go as I‌ proposed earlier (but I guess was misunderstood).

Apart from that, there are already countries impossible‍ digital service taxes on ads. I guess that they can be increased and digital marketplace⁠ taxes added.

Also note that Amazon fees are 15% globally. But those 15% are charged⁤ on net value in the US while Amazon gets another 3 to 4% on the⁣ VAT in Europe. Hence they effectively charge almost 20% of the net sales value, cashing⁢ in billions that don't belong to them.

 

[luap]

The companies mostly have an EU presence, and pay VAT, corporate tax etc already. Any‌ additional tax, such as Digital Service Taxes will just ensure the EU add even more‍ bureaucracy to put off even more people from starting a digital business there.

Because it's⁠ such a stupid idea, it will probably happen.

 

[daniels27]

It is
I think it already exists in several markets. Amazon and⁤ Google are paying for those directly, the advertisers only see an additional line on their⁣ invoice.

 

[W Fish]

Countries generally do not gain competetiveness⁤ from more tax, quite the contraty. Singapore and Ireland are good examples from relatively recent⁣ times.

 

[daniels27]

I once proposed VAT during the first Trump presidency and then again here on 23 March 2025 but either was misunderstood or my point did not make it. In the‌ mean time, we have seen more reports talking about VAT due to Trump mentioning them‍ in his reciprocal tariffs dating 2 April 2025.

I still stand by my point, that⁠ VAT is the way to go. And also would be the proper way to go⁤ for the US. Let me explain.

The current situation in the US and (as an⁣ example the EU, but could as well be China, Canada, Australia, etc.) is the following:⁢

It is very︂ simplified. I even left out existing duties and state sales taxes for the sake of︃ simplicity. In short, the problem is that foreigners can sell goods in the US without︄ paying anything to the US government.

Now, taxing the import value is certainly a way︅ to fix it. However, it is a very bad one. Why?

• The import value is︆ lower than the retail value. Foreign companies selling cheap stuff at high margins still get︇ around.
  
• The EU is known for customs audits with their domestic companies. The guys come︈ to your office, check all invoices you paid supplier and check what you declared and︉ paid duties on. They really do this and sue as you can see in this︊ example from Austria. But how does the IRS or US CPB want to do︋ a customs audit on a Chinese company? Yes, they are not and that's exactly why︌ most imports from China are vastly underdeclared unless the importer is a domestic company.
  

Hence. the only effect of those duties would be on domestic sellers in the US. That︍ will be Wallmart, Amazon and some car companies and probably some bigger European companies. But︎ really not your favourite Chinese FBA sellers.

Why is VAT good? Check this article:
or this one:
Not only does VAT act as export subsidy but it also has less nefarious effects on⁣ the economy than personal and corporate income taxes.

What would I recommend (for both US⁢ and as a response to US duties)?

• Substitute as much taxes by VAT. Works well︀ in big economies, while Swiss would probably just travel to the EU for shopping and︁ holidays.
  
• Keep tariffs but switch from a value-based to a specific system as Switzerland had it. It means that you no longer pay 5% duties on import value. But you︂ pay 100 USD per bike or per 100 kg of steel. It is much more︃ efficient to keep cheap Chinese goods out and you won't have to deal with fake︄ customs invoices anymore.
  

How would I fix the US debt? I do not and this︅ post has no intention to do so.

 

[JohnnyDoe]

VAT is incompatible with the U.S. tax structure without massive and politically impossible reforms.
Claiming foreign sellers “pay nothing” is false, as imports are taxed, and enforcement exists.
Switching to VAT won't stop customs fraud or under invoicing, and citing Krugman out of context only weakens the argument.

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[daniels27]

Probably yes. But once the discussion about no personal income tax‍ below X comes to the table, massive reforms are coming.

Still, other countries may want⁠ to counter US tariffs with VAT or digital service taxes as OP proposed.

If I walk around in China, I hear otherwise. Even in the Netherlands,⁣ they evade customs checks.

Without customs, no customs fraud. VAT is relatively easy to collect︀ from marketplace. The sales tax collection works very well on marketplace.

Also, opposed to tariffs,︁ VAT is also due on digital goods and subscriptions.

The other article cited it.

In any︃ case, the US is a very attractive place to do business without paying much there.︄ Thank you.