Updates in the Section 301 Actions Regarding Digital Service Taxes

Jun. 15, 2021

As we predicted, the issue of global tax and multinational enterprises in the digital economy has become a major conversation in trade because the U.S. response to unilateral efforts to address the issue—in the form of Digital Service Taxes (DSTs)—has been a slew of Section 301 actions.

Earlier this month, USTR Katherine Tai announced the conclusion of those Section 301 investigations of DSTs adopted by Austria, India, Italy, Spain, Turkey, and the United Kingdom, which determined that the DSTs discriminate against U.S. digital companies, are inconsistent with principles of international taxation, and burden U.S. companies and recommended a 25% retaliatory tariff on upwards of $2 billion worth of goods from those countries. The tariffs would be assessed on $887 million worth of British goods, $386 million worth of Italian goods, $310 million worth of Turkish goods, $119 million worth of Indian goods, $324 million worth of Spanish goods, and $65 million worth of Austrian goods.

In the same announcement, however, USTR Tai suspended the tariffs for up to 180 days while the negotiations on international taxation in the global arena continue. If this sounds familiar, it is because it was the exact same dance the U.S. did in respect to the French DST and the related 301 retaliatory tariffs, which as of January 2021, have been indefinitely suspended.

There is no real contention that the longstanding tax rules fall short when it comes to the issue of multinational enterprises (MNEs) and the digital economy. The debate has gone to how to amend the tax rules to address the issue fairly and effectively. Many countries have lost hope in international negotiations and a multilateral solution and moved unilaterally on the issue, passing DSTs.

DSTs are mechanisms by which a country can tax MNEs that realize economic benefit from people within that country despite the MNE not having the traditional nexus required before a country can impose a tax. Generally, an MNE has to have a fixed place of business or other permanent establishment in a country before the MNE can be taxed in that jurisdiction. DSTs operate under the theory that those companies, despite the absence of local brick and mortar, are experiencing real economic gains from a country’s customers and thus should pay taxes. The digital taxes are assessed on a company’s gross revenue as opposed to net profits and they do not come into play unless a company meets a high revenue threshold. The high revenue thresholds of the DSTs largely inform the US position that these taxes have unfairly discriminated against US companies as well as the fact that they are gross-revenue based as such a basis is inconsistent with principles of international tax laws.

The Administration has expressed the desire to reach a solution at the international level sometime this summer. This is likely an ambitious goal. The more cooperative approach that the U.S. has taken under the Biden Administration (as evinced by the tariff suspensions) may aid and expedite the process of reaching resolution.

If you have any questions concerning the Section 301 actions related to DSTs or trade remedies generally, please contact an attorney at Barnes, Richardson & Colburn, LLP.