On July 10, 2019, the US Trade Representative (USTR) initiated an investigation under Section 301 of the Trade Act of 1974 (Trade Act) with respect to France’s new Digital Services Tax (DST) Act (LOI n° 2019-759 du 24 juillet 2019), which French President Emmanuel Macron signed into law on July 24, 2019. The investigation is to determine whether the DST is discriminatory or unreasonable against US taxpayers and burdens or restricts US commerce, which could support the imposition of sanctions by the US, such as tariffs. In connection with the Section 301 investigation, on August 19, 2019, the USTR conducted a public hearing where representatives of affected US companies testified as to the impact of the DST on US taxpayers and commerce. Any decision on action coming out of the Section 301 investigation may be delayed, however, as US President Donald Trump and French President Macron reportedly reached an agreement that would allow affected companies to recover any French tax paid under the DST in excess of the tax that would be payable under any multilateral solution that is adopted under the auspices of the Organization for Economic Cooperation and Development (OECD).
This alert summarizes:
- the DST and comments provided to the USTR, opposing the DST;
- concerns expressed by the Section 301 panel during the hearing; and
- recent US-French diplomatic developments.
DST Overview and Other Digital Tax Initiatives
The DST, which was enacted on July 24, 2019, and is retroactively applicable to January 1, 2019, is imposed on companies whose respective groups have revenue of at least 750 million Euros globally and 25 million Euros in France from certain covered digital activities, including digital advertising and facilitating digital marketplace platforms. The DST is levied on annual gross revenues at a 3% rate with respect to the covered services provided to or aimed at French individuals. The DST is deductible against France’s taxable income for corporate income tax purposes.
The DST typically focuses principally on the location of the user (i.e., the recipient or the target of the covered digital services). Under the DST, the location of a user is generally deemed to be in France when:
- the user uses a France IP address;
- the user of an account has opened that account while in France;
- the advertisement has been placed on an interface as a result of data collected from a user located in France; or
- the data sales have been generated through the consultation of digital interfaces by a user located in France.
See Eversheds Sutherland International’s
article for additional background on the DST.
Similar measures are being considered by other European countries such as Austria, Italy, the U.K., Poland, and the Czech Republic. At the same time, the OECD is engaging in a project that aims to develop a multilateral, global consensus regarding similar digital tax matters that are at the core of the DST.
US government officials, including members of Congress and the Treasury Department, have asserted that the DST unfairly targets US multinationals given DST’s minimum thresholds for taxation. The fact that the covered digital activities do not include all forms of digital commerce or services compounds this issue. France has acknowledged that the DST will apply to roughly 30 companies, most of which are US-based tech firms, while the rest are mainly Chinese, German, Spanish, and British companies.
The US government consistently has opposed unilateral measures targeting the digital economy, such as the DST, in favor of coordinated multilateral action in line with the efforts being conducted by the OECD’s Inclusive Framework.
Section 301 Hearing
Generally, Section 301 of the Trade Act is the principal statutory authority under which the US, through the Office of the President and assisted by the USTR, may impose trade sanctions (often in the form of tariffs) on foreign countries that either violate trade agreements or engage in other unfair trade practices. Panel members for various US departments conducted the Section 301 hearing, which was conducted as part of the overall investigation to determine whether the DST is discriminatory or unreasonable with respect to US taxpayers and burdens or restricts US commerce.
The hearing involved testimony of industry representatives, including published comments. Copies of the published comments of the speakers can be found
here, and the transcription of the hearing can be found
here.
Comments were uniformly opposed to the DST, noting among other things, that the DST:
- unfairly targets US multinationals;
- could lead to double taxation and could create a cascading effect if other countries were to implement a similar tax;
- violates income tax treaty practice and income tax principles (e.g., the DST taxes revenues, rather than profits);
- creates additional compliance and audit costs, particularly with respect to gathering the relevant information needed to calculate the DST on a retroactive basis; and
- could cause companies to pass additional costs on to consumers.
Witnesses stressed that the OECD was the proper forum to address this matter on a multilateral rather than a unilateral basis and that only a unified action could help create stability and predictability in the international tax world.
Questions from the panel were focused principally on obtaining details with respect to how the DST discriminates against US companies. The panel expressed interest in obtaining information regarding how the DST targets US multinationals, the DST’s impact on smaller third-party sellers, and the nationalities and details with respect to the companies that are included in and excluded from the DST. The panel was also particularly interested in the costs and difficulty for US companies to comply with the DST.
Next Steps in the Investigation and Recent Diplomatic Developments
The USTR is considering comments and testimony to determine if the DST violates the Trade Act. All comments and post-hearing submissions regarding this investigation were due on or before Monday, August 26, 2019. If the USTR finds that the DST is actionable under Section 301, the USTR may decide to impose trade sanctions, such as tariffs, on France.
To this end, it had been suggested that President Trump was considering imposing a tariff on French wine in response to the DST. However, it was reported that the US reached an agreement with France on the application of the DST during the G-7 meeting in France. Under the reported terms of the deal, France will (i) withdraw the DST as soon as the OECD’s Inclusive Framework reaches a multilateral agreement on how to reform the international tax rules in light of the digitalization of the economy, and (ii) repay companies the difference between the DST and whatever tax comes from a planned mechanism being drawn up by the OECD.
| Eversheds Sutherland Observation: The reported agreement does not address concerns raised by companies at the Section 301 hearing with respect to compliance with and the administrability of the DST. Moreover, the potential agreement does not address the difficulty of obtaining information retroactively. It also puts significant pressure on finding a multilateral solution as part of the OECD Inclusive Framework. France would be incentivized not to support a multilateral solution that results in taxes that are lower than those currently imposed under the DST. And, it may incentivize other jurisdictions to enact their own digital taxes, subject only to an agreement to adjust to reflect any future multilateral solution agreed by the OECD. Representatives from the US have not addressed the specifics of the deal or its implications on the Section 301 investigation. |
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