The Office of the U.S. Trade Representative announced on June 2 that it’s launching investigations into digital services taxes adopted or being considered by the European Union and a number of individual countries. A USTR press release says the investigations are actionable under Section 301 of the 1974 Trade Act, the same section used by the U.S. to impose tariffs on China during the ongoing trade war.
The Organisation for Economic Co-operation and Development and G20 countries have for years been trying to develop an equitable way to tax the digital economy. In 2014, they finalized 15 BEPS Actions, the first of which specifically addresses the tax challenges of the digital economy. Last year, the OECD grouped proposals into two “pillars” that seek to overcome these challenges.
Despite these efforts, the OECD and its partners have not achieved consensus on digital taxation, in particular on how to tax the tech sector. As a result, a number of countries have unilaterally implemented or are considering adopting tax rules governing the online economy.
Some of these rules are referred to as digital services taxes, or DSTs. France was the first major economy to implement a DST. It was passed last July and was made effective retroactive to 1 January 2019. It targets large tech companies and is known informally in France as the “GAFA tax,” an acronym for Google, Amazon, Facebook and Apple.
The French DST imposed a 3 percent tax on revenues to companies with annual worldwide revenues of 750 million euros and revenues in France of more than 25 million euros. While French authorities put forward that the DST doesn’t necessarily target U.S. companies, U.S. companies and U.S. government authorities disagreed. Last summer, U.S. President Trump threatened tariffs on French exports, including wine, in response to the DST. France agreed to postpone the implementation of the tax until at least through 2020.
Other countries around the globe, however, have proceeded to implement their own DSTs. For example, the UK and Italy enacted DST regimes at 2 percent and 3 percent respectively. The UK government regards the country’s new tax as a short-term measure pending more comprehensive global tax changes, confirming that its DST will be dis-applied “once an appropriate international solution is in place.”
The OECD was supposed to release a framework for digital taxation by the end of this year, though the coronavirus pandemic has slowed progress. Pascal Saint-Amans, Director of the OECD’s Centre for Tax Policy and Administration, recently cautioned that some elements of the development process may be delayed.
The USTR office investigation
U.S. Trade Representative Robert Lighthizer’s office will conduct investigations into the DST regimes now effective in or under consideration by Austria, Brazil, the Czech Republic, the European Union, India, Indonesia, Italy, Spain, Turkey and the United Kingdom. Lighthizer’s office is also seeking related public comments until July 15.
The eight-page Federal Register notice, released the same day as the press statement, provides concise summaries of the DSTs in question. The summaries provide a glimpse of how tax laws are evolving, and not always in the same ways. All of the DSTs, for example, apply taxes to companies based on their global and in-country revenue thresholds. Rates and thresholds, however, can vary considerably by jurisdiction.
For example, the Czech Republic is considering a DST that would apply a 7 percent tax on revenues from targeted advertising and digital interface services from companies with 750 million euros in worldwide annual revenues and CZK 50 million in in-country revenues. India, by contrast, rolled out its DST on 1 April 2020. Its rate is 2 percent, which applies to the online sales of goods and services to persons in India by non-resident companies with annual revenues of more than approximately US$267,000, a very low threshold relative to the Czech Republic (and most other DSTs).
Despite variations, however, U.S. authorities are uniformly displeased with the DSTs. Lighthizer is quoted in the June 2 press release as saying, “President Trump is concerned that many of our trading partners are adopting tax schemes designed to unfairly target our companies. … We are prepared to take all appropriate action to defend our businesses and workers against any such discrimination.”
The investigations will initially examine whether the DSTs in question do in fact discriminate against U.S. companies. They’ll also examine the DSTs’ retroactivity and whether they are reasonable tax policies within the context of the U.S. and international tax systems. The USTR will also consider extraterritoriality, taxing revenue as opposed to income, and whether certain technology companies are being taxed on the basis of their commercial success.
Section 301 of the 1974 Trade Act is somewhat vague as to what constitutes “unreasonable or discriminatory” foreign tax policies. The Federal Register notice indicates that an “act, policy, or practice is unreasonable if … [it], while not necessarily in violation of, or inconsistent with, the international legal rights of the United States, is otherwise unfair and inequitable.”
In other words, it’s up to the USTR to decide if a given DST is unreasonable or discriminatory and burdens or restricts U.S. commerce. If Lighthizer determines that it is, the Federal Register notice explains, then Lighthizer “must determine what action to take.”
What multinationals should consider
The Financial Times reports that the USTR’s recent announcement has bipartisan support in the U.S. A joint statement from Republican Senator Chuck Grassley and Democratic Senator Ron Wyden said the new digital services taxes “unfairly target and discriminate against U.S. companies.”
Needless to say, U.S.-based tech companies agree. The U.S. corporates’ argument is summed up in a May 27 CNBC op-ed article by Clete Willems, who writes: “Digital tax policies have always posed a threat to the U.S. economy and tax base, but this threat is exacerbated by the coronavirus. Increasing taxes on our companies will make our own economic recovery more difficult, and looting our tax base will make an already troubling fiscal situation worse.”
There is, then, a strong chance Lighthizer’s investigations will deem some or all of the DSTs unreasonable or discriminatory. The actions he and President Trump may take as a result will almost certainly include tariffs, presumably tailored to each country, such as imposing wine tariffs on France or car tariffs on the UK. The Wall Street Journal reports that Trump’s administration is already preparing tariffs.
The U.S. has argued that countries should forgo unilateral implementation of DSTs and wait for agreement on an OECD framework for digital taxation. The U.S. has also indicated it could support certain DSTs if they were voluntary for U.S. companies.
Given dwindling tax revenues due to the pandemic, it is unlikely countries that have implemented or are considering digital services taxes will simply wilt in the face of U.S. tariffs. Reuters quotes France’s Finance Minister Bruno Le Maire as saying, “We will give no ground on digital tax. I call on all G7 states to step up work at the OECD to reach an international solution by the end of 2020.” Reuters adds that France will begin taxing big tech companies whether or not an OECD framework is agreed to. The European Commission has also indicated it will resume talks if no OECD agreement is reached by the end of the year.
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