Digital Trade, Taxes and Tariffs … or Not?

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Highlights

  • Unilateral steps in a growing number of countries to raise tax revenue from digital services have raised global alarm in recent years, but they have particularly heightened concerns in the United States due to the overwhelming perception that these unilateral digital services taxes (DSTs) unfairly target and discriminate against large U.S. technology companies.
  • The Trump Administration launched Section 301 investigations into DSTs in Austria, Brazil, the Czech Republic, the European Union, France, India, Indonesia, Italy, Spain, Turkey and the United Kingdom, concluding most before the end of President Donald Trump's term and determining that the taxes are unreasonable, discriminatory, and burden or restrict U.S. commerce.
  • The Trump Administration left the decision on what action to take in response to the unilateral DSTs to the Biden Administration, with former U.S. Trade Representative Robert Lighthizer stating, "The best outcome would be for countries to come together to find a solution."1

Unilateral steps in a growing number of countries to raise tax revenue from digital services have raised global alarm in recent years, but they have particularly heightened concerns in the United States due to the overwhelming perception that these unilateral digital services taxes (DSTs) unfairly target and discriminate against large U.S. technology companies.

Investigations and Results

In July 2019, the U.S. Trade Representative (USTR) launched an investigation under Section 302(b)(1)(A) of the Trade Act of 1974 (the Act) into a DST implemented by the French government. Under Section 301 of the Act, USTR sought to examine whether the French DST was actionable under the law – specifically, whether it was unreasonable or discriminatory, and whether it burdens or restricts U.S. commerce.

USTR concluded in December 2019 that the French DST was unreasonable or discriminatory, and that it burdens and restricts U.S. commerce. The investigation established that the DST unjustifiably targets and discriminates against major U.S. technology companies, and USTR proposed a 100 percent tariff on $2.4 billion worth of French goods in retaliation. In January 2020, President Donald Trump and French President Emmanuel Macron announced a détente, leading to a pause on the DST and the tariffs so the two countries could focus on global talks at the Organization for Economic Cooperation and Development (OECD) on digital taxation and minimum corporate taxation.

In June 2020, USTR launched investigations into DSTs adopted or under consideration by Austria, Brazil, the Czech Republic, the European Union, India, Indonesia, Italy, Spain, Turkey and the United Kingdom. One month later, after consideration of public comments and in accordance with Sections 301(b) and (c) of the Act, USTR determined that the appropriate response to the French tax would be to impose a 25 percent tariff on approximately $1.3 billion of French products. However, to allow additional time for bilateral and multilateral negotiations on a solution, and in accordance with Section 305(a) of the Act, USTR delayed implementation of the action for up to 180 days, until Jan. 6, 2021.

On Jan. 6, the Trump Administration released its findings in Section 301 investigations of DSTs adopted by India, Italy and Turkey, concluding that each "discriminates against U.S. companies, is inconsistent with prevailing principles of international taxation, and burden or restricts U.S. commerce." The administration also announced it would not be taking any immediate actions in connection with the findings but would continue to evaluate all available options.

The next day, the Trump Administration announced a suspension of previously planned Section 301 tariffs on French goods. This delay came as a surprise given the initial delay in July 2020 and the fact that the French Government began collecting on its DST in December. The administration opted for the suspension, however, in light of the nine other Section 301 investigations into similar DSTs, in order to "promote a coordinated response in all of the ongoing DST investigations."

On Jan. 14, the Trump Administration issued reports on its investigations into the DSTs imposed by Austria, Spain, and the United Kingdom, concluding once again that each "discriminates against U.S. companies, is inconsistent with prevailing principles of international taxation, and burden or restricts U.S. commerce." The administration also released a status update on the investigations into proposed DSTs in Brazil, the Czech Republic, the European Union and Indonesia, citing preliminary concerns similar to those cited in previous reports.

Next Steps

Meanwhile, efforts have continued at the OECD to negotiate a multilateral solution on digital taxation that would prevent the proliferation of unilateral DSTs, and OECD member countries are awaiting the participation of the new U.S. administration. It will now be up to the Biden Administration to chart the appropriate U.S. course of action.

Janet Yellen, President Joe Biden's nominee for Treasury Secretary, said in her Jan. 19 confirmation hearing before the Senate Finance Committee that she looks forward to "actively working with other countries through the OECD negotiations," but indicated in a response to questions for the record that she would work with USTR to "determine our best alternative course of action" if a multilateral negotiation fails. The Trump Administration enjoyed rare bipartisan support in Congress for imposing retaliatory tariffs in response to unilateral DSTs, and such bipartisan support will likely endure if the OECD negotiations do not bear fruit.

Notes

1 USTR Releases Findings and Updates in DST Investigations, Jan. 14, 2021.

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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