On November 19, the Office of the US Trade Representative (USTR) announced that it would terminate the actions it had taken under Section 301 of the Trade Act of 1974 with respect to digital services taxes (DSTs) adopted by Austria, France, Italy, Spain and the United Kingdom. In essence, USTR lifted the threat of retaliatory tariffs—citing a political agreement reached between the US Department of the Treasury (Treasury) and the five countries that is expected to lead to the withdrawal of each country’s DST. USTR also announced that it will monitor implementation of the political agreement in coordination with Treasury. If USTR subsequently determines that a country is not satisfactorily implementing the agreement, it will consider further action under Section 301.
Subsequently, on November 22, Treasury announced an agreement with Turkey that provides that the same terms that apply under the political agreement with Austria, France, Italy, Spain and the United Kingdom will also apply with respect to Turkey’s DST. Consequently, Turkey will withdraw its DST in the same manner as the other five countries. It appears that USTR will also terminate its proposed action with respect to Turkey’s DST, although USTR has not yet issued its notice effectuating the termination.
As WilmerHale previously reported, USTR initiated its investigation of France’s DST on July 10, 2019. USTR ultimately determined that the DST was actionable under Section 301, and it further determined to respond to the DST by imposing an additional duty of 25% on specified French products. USTR simultaneously suspended application of the additional duties, however, to permit time for bilateral and multilateral discussions in order to resolve the matter.
Similarly, USTR initiated its investigations of the Austrian, Italian, Spanish, Turkish and UK DSTs (as well as India’s DST) on June 5, 2020.1 USTR announced the conclusion of the investigations on June 2, 2021, determining in each case to impose an additional duty of 25% on a range of goods from the country in question. Again, however, USTR simultaneously suspended the increased duty for up to 180 days to provide time to complete negotiations over international taxation that were ongoing at the Organisation for Economic Co-Operation and Development (OECD) and in the G20 process. (This suspended duty is the action that USTR terminated with respect to each country on November 19, 2021.)
On October 8, 2021, Austria, France, Italy, Spain and the United Kingdom joined the United States and 130 other jurisdictions participating in the OECD negotiations in reaching a political agreement on a two-pillar solution to address tax challenges arising from the digitalization of the world economy. As part of Pillar 1, countries agreed to remove existing DSTs and to coordinate the withdrawal of these measures. On October 21, USTR and Treasury announced that Austria, France, Italy, Spain and the United Kingdom had reached an agreement with the United States on a transitional approach for each country’s DST while implementing Pillar 1. Under the terms of the agreement, the five countries are not required to withdraw their DSTs until Pillar 1 takes effect, but any DST liability that accrues during the transitional period will be creditable against future corporate income taxes due under Pillar 1. In return, the United States agreed to terminate the Section 301 actions, and it committed not to impose further actions against the five countries’ DSTs until the earlier of Pillar 1 coming into force or December 31, 2023.
In announcing the October 21 agreement, US Trade Representative Katherine Tai commended the five countries for addressing US concerns over their DSTs, and she affirmed that the United States “will continue to oppose the implementation of unilateral digital services taxes by other trading partners.” Her statement also noted that Turkey and India did not join the October 21 agreement. Turkey subsequently did so on November 22, however, as noted above. And it is possible that India will do the same, as the additional 25% duty on goods from India is scheduled to take effect on November 29, and Ambassador Tai is currently in India for discussions that reportedly include India’s DST.
USTR’s decision to lift the threat of retaliatory tariffs for the DSTs imposed by Austria, France, Italy and Spain is the latest step in the Biden Administration’s efforts to reduce trade tensions with Europe. This follows the October 31 agreements reached on steel and aluminum tariffs and the Joint US-EU Cooperative Framework on Large Civil Aircraft announced on June 15. This state of affairs may not prove durable, however, given that the EU is poised to adopt new economic policies that appear to target US firms. The EU’s proposed Digital Markets Act (DMA), for example, resembles DSTs in its use of thresholds that appear designed to capture US companies while excluding their EU competitors from coverage. In this respect, the DMA appears similarly vulnerable to trade action under Section 301.
WilmerHale will continue to monitor developments regarding these Section 301 investigations, as well as other DST measures around the world.
The June 5 investigation also included reviews of DSTs adopted or under consideration by Brazil, the Czech Republic, the European Union and Indonesia. USTR terminated
these investigations on March 31, 2021, after determining that the five jurisdictions had not adopted or implemented DSTs during the period of investigation.