A brewing fight about which country has the right to tax some ofthe world's most profitable companies, including Facebook Inc. andAlphabet Inc.'s Google, could devolve into a multi-front tradewar, regardless of whether President Donald Trump is still in theWhite House.

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Even if a Democrat wins the presidency in November, he or shemay be tempted to continue the Trump administration's policy ofusing trade sanctions to retaliate against new taxes on U.S. techcompanies.

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A tit-for-tat trade war is already building with France,where a 3 percent tax on large tech companies went into effect atthe start of 2019. The U.S. responded with the threat of tariffs on $2.4 billion worth ofFrench cheese, sparkling wine, and makeup, prompting the EuropeanUnion to consider tariffs on U.S. goods.

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All sides have agreed to a tax ceasefire until the end of theyear, to see whether a broader global agreement can be worked outat the Organization for Economic Cooperation and Development(OECD).

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"Democrats have been as opposed to the digital services taxes asRepublicans," said Brian Jenn, a former Treasury official duringthe Obama and Trump administrations. "While very few Democrats area fan of tariffs, it looks like the tariff approach at least boughta temporary victory in the case of France."

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The U.S., along with more than 130 countries, is currentlynegotiating at the OECD about a new international tax system thatwould redefine which countries can tax which corporate profits. Arevamped global tax code could apply not just to tech companies,but also to other multinational firms that have customers incountries where they don't currently record profits.

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Worst-Case Scenario

Negotiators need to reach an agreement this year, before severalcountries—including France, Canada, and Italy—plan to move forwardwith their own taxes on tech giants.

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A retaliatory tariff fight with the U.K could begin even sooner.That country's version of the tax is set to go into effect inApril, and U.S. officials have suggested responding with tariffs oncar exports.

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That could be the worst-case scenario for companies, such asAmazon.com Inc., that could end up paying taxes to severalcountries on the same income. And they have reason to worry—it'sfar from certain that there will be a deal this year.

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"I'm very skeptical that the U.S. will agree to this proposal bythe end of this year—or ever," said Gary Hufbauer, a senior fellowat the Peterson Institute for International Economics. "It'll be along period of friction until we get a true settlement."

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One of the main challenges of the ongoing talks is to reach aconsensus by December that is sufficiently robust to halt theproliferation and imposition of digital services taxes, said ManalCorwin, the principal in charge of international tax policy ataccounting firm KPMG.

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Without enough of a deal to keep the parties at the negotiatingtable, U.S. companies could face taxes from the approximately dozencountries that have proposed the idea, causing either a Republicanor a Democratic administration to fend off levies on income thatthe U.S. views as within its right to tax.

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"There aren't a lot of other tools in the toolbox to addressunilateral taxes in a meaningful way," said Jenn, who has alsoserved as a U.S. delegate to the OECD and is now a partner at lawfirm McDermott Will & Emery.

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Seeking Consensus

A progressive candidate like Senator Bernie Sanders, with ahistory of opposing free-trade measures, could be inclined to usetrade sanctions as a way to fight back, said Jeff VanderWolk, aformer OECD official who is now a partner at law firm Squire PattonBoggs. Former Vice President Joe Biden, who has traditionallysupported trade agreements, may be less inclined to take thatapproach, he said.

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The negotiations are centered around two main points:establishing a global minimum tax so that companies can't avoidtaxes entirely, as well as reallocating taxing rights, meaning somecountries with many customers or users of a digital service couldtax some of the profits even if the company doesn't have businessoperations there.

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U.S. Treasury Secretary Steven Mnuchin said after a G-20 FinanceMinisters meeting in Saudi Arabia that there's "pretty muchconsensus" about the minimum tax. The point of contention isreallocating taxing rights, which the U.S. wants to be optional forcompanies.

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The OECD estimates that its approach—revamping taxing rights anda minimum levy—would result in countries collecting $100 billionmore a year in tax revenue.

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Such an agreement could end up hampering the proposals from someDemocratic presidential candidates to raise taxes on corporations.If other countries have the right to tax some of the profits fromcompanies like Google and Facebook, the U.S. won't get a cut ofthat money. That could mean the government would need to findrevenue from other sources to fund policy priorities.

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The OECD plan "is structured so that those companies would paymore tax abroad, regardless of U.S. tax policy," said Daniel Bunn,vice president of global projects at the Tax Foundation. "Thepotential U.S. tax take from highly profitable companies based inthe U.S. would shrink, whether we have a policy of higher taxes onbusinesses or not."

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It's still not clear how the United States would fare under theglobal approach. The U.S. would lose the right to tax some profitsfrom highly profitable technology and pharmaceuticals companies,but could gain some of that back from foreign companies that havelots of U.S. customers, including French luxury brand conglomerateLVMH Moet Hennessy Louis Vuitton SE or German carmakerMercedes-Benz AG.

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Facebook CEO Mark Zuckerberg said this month that he approves ofthe OECD efforts, even though it would increase his company'soverall tax bill, because it would create a "stable and reliablesystem going forward."

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The OECD digital tax talks have created strange bedfellows. InCongress, the response has been unusually bipartisan, with keyRepublicans and Democrats both supporting the administration'sefforts to come up with a global deal. And the Trump administrationis coming to the defense of Amazon and Facebook, two companies thepresident frequently criticizes.

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There's skepticism, however, that Congress would actually beable to pass the legislation required to implement any deal reachedat the OECD. Lawmakers have been publicly supportive ofparticipating in the negotiations, but they might not ultimatelylike the outcome, said Sam Maruca, a former IRS official who hasrepresented the U.S. at the OECD.

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"The U.S. is paying lip service to the process. Treasury isconvinced that they're not going to be able to get it throughCongress," Maruca, now a partner at law firm Covington &Burling, said. "When push comes to shove, there's likely to be alot of gnashing of teeth."

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