Has the Supreme Court ruling in the South Dakota v. Wayfair case added impetus to the calls from the European Union, China, India and others to impose new taxes on U.S. multinationals? The e-commerce ruling in June – making out-of-state merchants liable to collect and remit sales tax – has given credibility to the global view that North American multinationals have exploited an outdated fiscal regime, ill-suited for a 21^st century digital world.

In today’s global tax system, companies are subject to income tax where they are resident – which usually means where they are incorporated and physically located. This premise was adopted in the 1920s, at the post-WWI League of Nations where rules for businesses doing trade where developed. This starting point was adopted to ensure double taxation did not arise when selling across borders.

However, the near-breathless explosion of global trade, and complexity of modern supply chains, has seriously undermined this principle. For example, foreign companies have been able to ship, import and sell to local consumers, under the cover of free trade agreements, without having to form local income tax-liable subsidiaries. This has left domestic businesses, subject to full corporate income tax, at a serious competitive disadvantage.

But the problem in the eyes of the rest of the world, who view expansionary U.S. multinationals as benefiting all too much from this loophole, has been hugely compounded by the emergence of the digital economy. This has enabled many digital giants, such as Apple, Facebook, Netflix, Google and Amazon, to sell billions in digital services to foreign consumers while legitimately avoiding local taxes. They are viewed as highly adept at locating their foreign hubs and intellectual property rights in low-tax jurisdictions, and entering into complex income and dividend cross-border flows to significantly reduce or eliminate altogether their tax bills.

For example, the EU believes on average digitalized businesses face an effective tax rate of only 9.5 percent, compared to 23.2 percent for traditional business models.

Shift to taxing where sold

For the past five years, countries around the world have been formulating proposals to eliminate this lopsided fiscal imbalance. This has included the Organization for Economic Cooperation and Development’s BEPS (Base Erosion Profit Shifting) plans, adopted in November 2016 by over 100 countries. In addition, the EU earlier this year proposed a 3 percent turnover tax on the major digital giants with little or no taxable physical presence in their countries, but selling in the billions to their consumers. The EU was careful to stress this would be on companies from within the EU too, but the targets were obviously U.S. in origin.

The uptake has been slow, largely because of U.S. foot-dragging, as it has the most to lose from any tax redistribution. In this regard, the news of the acceptance of Wayfair’s economic nexus principle has been taken as a game-changer. It is being interpreted as the U.S. belatedly accepting a destination-based taxation precedent, whereby taxes are levied where the consumer is and the value created. This would entitle overseas governments to make a fresh push to introduce new taxes on U.S. multinationals.

Will this line of fiscal argument hold? The U.S. may contend that Wayfair was relating to sales taxes, whereas foreign treasuries are seeking to impose direct, corporate income taxes on multinationals. Generally, these two taxes have very different bases. However, the Europeans can highlight that the U.S. corporate income tax regime also uses their direct rules too – using formulas like payroll, property and sales in state to determine a tax nexus. So, the U.S. attempting to argue Wayfair’s economic presence principle doesn’t apply would be inconsistent.

The U.S. may be on thin ice in attempting to protect its digital goliaths from the tax arm of Europe and others. Following the EU proposals on a turnover tax, India and Singapore have also announced plans to forge ahead with a digital tax on foreign businesses. Australia is considering similar plans.

The U.S. will obviously seek to block these reforms, but in the current incendiary atmosphere of trade tariff escalations, the rest of the world is spoiling for a fiscal fight.