On July 10, the Office of the U.S. Trade Representative (“USTR”) announced that it had opened an investigation directed at the Government of France under Section 301 of the Trade Act of 1974.  The announcement came as the French Senate considered a new digital services tax (“DST”)—enacted a day later—imposing a 3% revenue tax on companies providing certain online services directed at French customers that earn annual revenues of at least €25 million in France and at least €750 million worldwide.

USTR identified several issues to be addressed in the Section 301 investigation.  USTR raised concerns about the DST’s apparently disparate impact on U.S.-based tech companies.  Given the DST’s revenue thresholds and the fact that U.S. companies generally have been industry leaders in online services, the DST will likely apply disproportionately to U.S. companies like Google, Amazon, and Facebook, while smaller French competitors would be excluded.  USTR has already described this effect as “de facto discrimination against U.S. companies,” a conclusion that—if ultimately confirmed by the investigation’s findings—could support a trade action against France under subsection 301(b).

USTR also raised concerns with several substantive characteristics of the DST, including its retroactive application to all revenues earned since January 1, 2019; its extraterritorial application; and its “taxing [of] revenue not income.”  In USTR’s view, some of these characteristics may impermissibly “diverge from norms reflected in the U.S. tax system and the international tax system.”

If USTR’s investigation does result in trade action against France (such as tariffs), it could portend escalating trade tensions with one of the U.S.’s largest trade partners.  During 2018, trade between the U.S. and France exceeded $89 billion, and trade between the two countries was up nearly 18% in the first quarter of 2019 as compared to the first quarter of 2018.

The Section 301 investigation could also foreshadow similar disputes with other major trade partners, including the United Kingdom, that are considering digital services taxes.  However, unlike some other recent USTR actions, this new Section 301 investigation has received support from congressional leaders in both parties.

USTR has called for public comments and testimony regarding its investigation of the DST.  Key dates for parties who wish to participate in the notice-and-comment process include:

• August 12, 2019: Deadline to file requests to participate in the in-person hearing and to submit written copies of oral testimony.
• August 19, 2019: Deadline to file written comments.
• August 19, 2019: In-person public hearing in Washington, DC.
• August 26, 2019: Deadline for filing post-hearing submissions.