Digital Services Tax Findings Possible in January

Dec. 31, 2020

One of the major pending trade actions at the United States Trade Representative’s office is the Section 301 investigations into digital services taxes (DST) of ten jurisdictions. The investigations commenced in June 2020. 85 Fed. Reg. 34709 (Jun. 5, 2020). We first covered the rise in unilateral DSTs and the Section 301 investigations here. The jurisdictions subject to investigation under the June 2020 action include Austria, Brazil, Czechia, the European Union, India, Indonesia, Italy, Spain, Turkey, and the United Kingdom. Note that there is also a 301 action against the French DST, which has been the subject of considerable controversy and which we recently provided an update on here.

DSTs are taxes on revenue of companies generated by providing certain digital services to users in those jurisdictions. Section 301 gives the USTR broad authority to investigate and respond to a foreign country’s action which may be unfair or discriminatory and negatively affect U.S. Commerce. The DST investigations were undertaken by the USTR as the Trump Administration expressed concern that the DSTs are designed to unfairly target U.S. companies.

The ongoing investigations concentrate on several aspects of the DSTs adopted or under consideration by the various countries. Principally the investigations are focused on discrimination against U.S. companies, retroactivity, and possibly unreasonable tax policy. According to the original Federal Register notice, the USTR considers the DSTs divergent from norms reflected in the U.S. tax and international tax systems because the DSTs operate extraterritorially, tax revenues not income, and have the alleged purpose of penalizing particular technology companies for their commercial success.

In December, Inside U.S. Trade  reported that the release of the investigations’ findings could be among the final trade measures made by the Trump administration. Where, like here, the case does not involve trade agreements, the USTR has 12 months to issue a final determination as to whether conduct that is at issue in a 301 case is unfair. However the USTR is not obligated to use the entire twelve months allotted. Upon initiation of a Section 301 investigation, the USTR must request consultations with the governments that are subject to the investigation. After conducting consultations, the USTR may make the determination as to whether the conduct in question is unfair. According to various sources, some consultations in the DST investigations have taken place but not all ten governments have been consulted.

In the event the USTR makes an affirmative finding of unfair practices, it may respond by imposing import restrictions, withdrawing or suspending trade deal concessions, or entering into a binding agreement with a country to stop the conduct in question or compensate the U.S. with trade benefits. Any retaliatory action determined necessary by the USTR under Section 301 must be implemented within 30 days. It remains to be seen what will result from the DST investigations under the June 2020 action. However, many of the DSTs subject to investigation are modelled after the French DST that went into effect summer of 2019. In December 2019, USTR announced that the French DST was discriminatory and inconsistent with international tax principles. The USTR then issued a wave of retaliatory tariffs of 25 issued retaliatory tariffs against $1.3 billion worth of U.S. imports from France. Those tariffs are set to take effect by January 6, 2021. 85 Fed. Reg. 43292 (Jul. 16, 2020). Thus, if France is any indication of what will result from the open DST investigations under the June 2020 action, importers from the subject ten jurisdictions can expect a wave of retaliatory tariffs on certain products imported from the U.S.

If you have any questions about Section 301, or imports that may be subject to an action by the USTR, please contact any professional at Barnes, Richardson & Colburn, LLP.