Alexa, Will A Digital Tax Restrict U.S. Commerce?

Kelley Drye & Warren LLP

On July 10, U.S. Trade Representative Robert Lighthizer announced that his office will investigate under Section 301 of the Trade Act of 1974 (“Section 301”) whether France’s new digital tax law unfairly targets American businesses and restricts American commerce.  Section 301 affords the USTR broad authority to investigate and respond to unfair trade practices of foreign countries.  The law was most recently used by the Trump Administration to address Chinese unfair trade practices such as forced technology transfers and inadequate protection of intellectual property.   The USTR’s investigation into France’s digital tax will focus on concerns such as discrimination, retroactivity, and unreasonable tax policy.  The USTR will accept comments and hold a public hearing on August 19 on the topic.

On July 11, France’s Senate approved a 3% tax on companies with annual worldwide digital revenue of at least €750 million, of which at least €25 million is earned in France.  France’s National Assembly passed the bill on July 4 and President Macron is expected to sign the proposed rule into law in the next two weeks.  The tax will be retroactively applied and will impact companies such as Facebook, Google, and Amazon.

Last week, the U.K. Government published an update to its plans to impose a 2% tax on companies that provide social media platforms, search engines, or online marketplaces to British users beginning in 2020.  The planned tax is expected to be discussed in the ongoing trade negotiations between the U.S. and U.K.

The Governments of France and the U.K. face political pressure from the United States ahead of the Group of Seven (“G7”) ministers meeting because of the new tax law and draft legislation.  While the United States announced that it will continue to work towards a multilateral agreement on international tax in a digital economy through the Organization for Economic Cooperation and Development (“OECD”), the process at the OECD will likely take at least 18 months to conclude.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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