Czech Republic

U.S. Section 301 investigations on digital services taxes by trading partners — USTR releases additional reports on January 14, 2021

On January 8, 2021, I reviewed in a post the release of the first three of ten reports on investigations under Section 301 of the Trade Act of 1974, as amended, on countries’ digital services taxes (DSTs). See January 8, 2021, U.S. Section 301 investigations on digital service taxes by trading partners – an update, https://currentthoughtsontrade.com/2021/01/08/u-s-section-301-investigations-on-digital-service-taxes-by-trading-partners-an-update/ (release of reports on India, Italy and Turkey). The release of the three reports was accompanied by a decision to postpone indefinitely the imposition of additional duties on France for its DST to permit a coordinated response on all eleven countries following the completion of all investigations. The Federal Register notices on the India, Italy and Turkey investigations and the postponement of imposition of duties on France for its DST were published on January 12. See 86 FR 2477-78 (Italy); 86 FR 2478-79 (India); 86 FR 249-80 (France); 86 FR 2480 (Turkey).

On January 14, USTR released three additional reports on the DSTs of Austria, Spain and the United Kingdom and released a status report on the remaining four investigations on Brazil, the Czech Republic, the European Union, and Indonesia. See USTR press release, USTR Releases Findings and Updates in DST Investigations,
01/14/2021, https://ustr.gov/about-us/policy-offices/press-office/press-releases/2021/january/ustr-releases-findings-and-updates-dst-investigations. The press release is embedded below but, similar to the earlier reports, found that “each of the DSTs discriminates against U.S. companies, is inconsistent with prevailing
principles of international taxation, and burden or restricts U.S. commerce.”

USTR-Releases-Findings-and-Updates-in-DST-Investigations-_-United-States-Trade-Representative

The press release notes that “’The taxation of companies that engage in international trade in goods and services is an important issue,’ stated U.S. Trade Representative Robert E. Lighthizer. ‘The best outcome would be for countries to come together to find a solution.’” As noted in the January 8 post, there is an ongoing process through the OECD/G20 Integrated Framework to find a solution by mid-2021.

For the four investigations where USTR has not yet published reports, USTR released a status report yesterday, reflecting the reality that the Trump Administration is in its final week and such unfinished investigations and issuance of reports will await the incoming Biden Administration. See Office of the United States Trade Representative, Section 301 Investigations, Status Update on Digital Services Tax Investigations of Brazil, the Czech Republic, the European Union, and Indonesia, https://ustr.gov/sites/default/files/files/Press/Releases/StatusUpdate301InvestigationsBEUIndCR.pdf. The twenty page status report is embedded below.

StatusUpdate301InvestigationsBEUIndCR

The status update is organized as reviewed in the opening paragraph of the update.

“In this Status Update, USTR reports on the progress of the four investigations, offers brief descriptions of the four jurisdictions’ approach to digital services taxes, and describes our preliminary, high-level concerns. In the sections that follow, we address: the procedural developments in the four investigations (Section I); a description and preliminary analysis of Brazil’s DST proposal (Section II); a description and preliminary analysis of the Czech Republic’s DST proposal (Section III); a description and preliminary analysis of the EU’s
approach to digital services taxes (Section IV); and a description and preliminary analysis of Indonesia’s DST proposal (Section V).”

There is little doubt that when the four pending investigations are completed, there will be similar findings to those in the prior seven completed investigations.

As reviewed in the January 8 post, the OECD was to hold a virtual meeting on January 14-15, 2021 in an effort to obtain public input to refine the draft documents released in October and to help resolve remaining issues. The 11th plenary meeting of the 137 participating countries of the OECD/G20 Integrated Framework will be held virtually on January 27-29.

For the incoming Biden Administration, it will be facing in the early months of the new Administration critically important negotiations on the OECD/G20 proposals as well as the need to complete the investigations on the four unfinished 301 investigations on DSTs. The outcome and interplay of both will have significant implications for global trade and for fairness in international taxation.

Below are the reports on Austria, Spain and the United Kingdom and the notices sent to the Federal Register on each of the three investigations.

AustriaDSTSection301Report

AustriaDSTFRN

SpainDSTSection301Report

SpainDSTFRN

UKDSTSection301Report

UKDSTFRN

U.S. Section 301 investigations on digital service taxes by trading partners — an update

For all countries the question of tax base erosion and profit shifting during a period of tremendous growth in e-commerce has been important as countries struggle to secure funding sources in a rapidly changing global marketplace. Concerns about tax revenue sources has grown during the COVID-19 pandemic as e-commerce has surged and may countries tax revenues have shrunk which stimulus outlays have soured.

For a number of years the OECD and the G20 have been working with many other countries in what is called an integrated framework to examine how international taxation needs to change to reflect the changed economic environment. The U.S. unhappiness with many trading partners on the question of digital service taxes is the early adoption of taxes on digital services before the completion of international negotiations and, in particular, taxes which appear to the U.S. to discriminate against U.S. companies who often are major global players in e-commerce and digital services.

In a post from early June, I reviewed the actions of the United States in response to actions by trading partners to introduce digital services taxes (DST), including a first investigation under section 301 of the Trade Act of 1974, as amended (“section 301”) on France on their DST and the initiation of investigations under section 301 on nine other countries and the European Union. While USTR had identified additional tariffs of 100% on a variety of French products, the imposition of duties was postponed until January 6, 2021 to give negotiators time to reach an agreement within the OECD. See June 3, 2020:  Digital Services Taxes – New U.S. Section 301 Investigations on Nine Countries and the European Union, https://currentthoughtsontrade.com/2020/06/03/digital-services-taxes-new-u-s-section-301-investigations-on-nine-countries-and-the-european-union/.

Earlier this week, USTR issued three reports on three countries from the 2020 investigations — on India, Italy and Turkey. Parts of the USTR press release are copied below and, similar to the report on France, found the DSTs of the three countries were discriminatory to U.S. companies, contrary to international tax principles and burden or restrict U.S. commerce. See USTR press release, USTR Releases Findings in DST Investigations,
01/06/2021, https://ustr.gov/about-us/policy-offices/press-office/press-releases/2021/january/ustr-releases-findings-dst-investigations.

“Washington, DC – The U.S. Trade Representative has issued findings in Section 301 investigations of Digital Service Taxes (DSTs) adopted by India, Italy, and Turkey, concluding that each of the DSTs discriminates against U.S. companies, is inconsistent with prevailing principles of international taxation, and burden or restricts U.S. commerce.

“The findings on each of the DSTs are supported by comprehensive reports, which are being published today on USTR’s website.

“USTR is not taking any specific actions in connection with the findings at this time but will continue to evaluate all available options.

“The Section 301 investigations of the DSTs adopted by India, Italy, and Turkey were initiated in June 2020, along with investigations of DSTs adopted or under consideration by Austria, Brazil, the Czech Republic, the European Union, Indonesia, Spain, and the United Kingdom. USTR expects to announce the progress or completion of additional DST investigations in the near future.”

Similarly, on January 7, 2021, USTR announced that it was postponing introduction of tariffs on French products that were due to kick in on January 6 to provide the agency with the ability to coordinate its actions based on the results of the other ongoing investigations. See USTR press release, Suspension of Tariff Action in France Digital Services Tax Investigation, 01/07/2021, https://ustr.gov/about-us/policy-offices/press-office/press-releases/2021/january/suspension-tariff-action-france-digital-services-tax-investigation. The press release is copied below.

“Washington, DC – The U.S. Trade Representative has determined to suspend the tariff action in the Section 301 investigation of France’s Digital Services Tax (DST). The additional tariffs on certain products of France were announced in July 2020, and were scheduled to go into effect on January 6, 2021. The U.S. Trade Representative has decided to suspend the tariffs in light of the ongoing investigation of similar DSTs adopted or under consideration in ten other jurisdictions. Those investigations have significantly progressed, but have not yet reached a determination on possible trade actions. A suspension of the tariff action in the France DST investigation will promote a coordinated response in all of the ongoing DST investigations.

“The suspension of the France DST tariffs is set out in a notice sent for publication in the Federal Register.”

The three notices on the India, Italy and Turkey investigations were sent to the Federal Register on January 6 and will appear in the Federal Register next week. The same is true on the postponement of tariffs on France which was forwarded yesterday to the Federal Register and which should appear next week as well.

The three USTR reports released on January 6 and the four notices sent to the Federal Register by USTR on January 6 or 7 are embedded below.

Report-on-Indias-Digital-Services-Tax

Report-on-Italys-Digital-Services-Tax

Report-on-Turkeys-Digital-Services-Tax

IndiaDSTFRNJLB

ItalyDSTFRNJLB

TurkeyDSTFRNJLB

FRN-France-DST-Modification-2021.01.07

The OECD/G20 Integrated Framework talks

The OECD/G20 Integrated Framework negotiations on arriving at tax policies for an increasingly digitalized global economy have been ongoing for a number of years and include 137 countries.

The OECD/G20 Integrated Framework project released a series of reports on policy issues and approaches to address international taxation in the age of digitalisation in early October to address base erosion profit shifting (“BEPS”) and have moved the target date for completion from the end of 2020 to mid-2021. The reports released attempt to address at least some of the U.S. concerns. The OECD has sought public comments, received more than 270 comments and is holding a virtual meeting on January 14-15 in an effort to obtain public input to refine the draft documents and help resolve remaining issues. The 11th plenary meeting of the 137 participating countries of the OECD/G20 Integrated Framework will be held virtually on January 27-29.

A series of documents released in October that permit a better understanding of the complexities involved in seeking a way forward are listed next. For non-tax readers, the “Top 10 Frequently Asked Questions” is a good primer on the issues and challenges. See OECD/G20 Inclusive Framework on BEPS, Addressing the Tax Challenges Arising from the Digitalisation of the Economy, HIGHLIGHTS, October 2020, https://www.oecd.org/tax/beps/brochure-addressing-the-tax-challenges-arising-from-the-digitalisation-of-the-economy-october-2020.pdf; OECD/G20 Base Erosion and Profit Shifting Project, Tax Challenges Arising
from Digitalisation – Report on Pillar One Blueprint, October 2020, https://www.oecd.org/tax/beps/tax-challenges-arising-from-digitalisation-report-on-pillar-one-blueprint-beba0634-en.htm; OECD/G20 Base Erosion and Profit Shifting Project, Tax Challenges Arising from Digitalisation – Report on Pillar Two Blueprint, October 2020, https://www.oecd.org/tax/beps/tax-challenges-arising-from-digitalisation-report-on-pillar-two-blueprint-abb4c3d1-en.htm; OECD/G20 Inclusive Framework on BEPS, PUBLIC CONSULTATION DOCUMENT, Reports on the Pillar One and Pillar Two Blueprints, 12 October 2020 – 14 December 2020, https://www.oecd.org/tax/beps/public-consultation-document-reports-on-pillar-one-and-pillar-two-blueprints-october-2020.pdf; OECD/G20 Base Erosion and Profit Shifting Project, Tax Challenges Arising from Digitalisation – Economic Impact Assessment, October 2020, https://www.oecd.org/tax/beps/tax-challenges-arising-from-digitalisation-economic-impact-assessment-0e3cc2d4-en.htm; OECD, Tax Issues Arising from Digitalisation, Top 10 Frequently Asked Questions, October 2020, https://www.oecd.org/tax/beps/top-10-frequently-asked-questions-tax-challenges-digitalisation.pdf; Public consultation meeting on the Reports on the Pillar One and Pillar Two Blueprints (Date 14-15 January 2021), https://www.oecd.org/tax/beps/public-consultation-meeting-reports-on-the-pillar-one-and-pillar-two-blueprints.htm; 11th meeting of the OECD/G20 Inclusive Framework on BEPS (Date 27-28 January 2021 (Inclusive Framework plenary); 29 January 2021 (Tax and Development briefings)), https://www.oecd.org/tax/beps/oecd-g20-inclusive-framework-on-beps-meeting-january-2021.htm.

To understand some of the concerns of U.S. businesses or business groups with actions of particular trading partners, a review of several comments to the OECD/G20 may be useful. I embed below comments from the American Chamber of Commerce Ireland, Amazon and the Business Roundtable. The Amcham Ireland paper comments on non-discrimination, multilateralism, administrability and certainty, avoiding double taxation, durability, efficiency, scope, safe harbour, segmentation and the interaction with the US’s Global intangible low-taxed income (GILTI). Amazon explores issues in the two pillar blueprints dealing with segmentation, sourcing, user location/IP address, business-to-business sales, reasonable steps/evidence requirements, double tax relief, dispute prevention and resolution, marketing and distribution safe harbour, GILTI Co-existence, framework for implementation, double-tax relief, application of STTR, and additional areas for simplification. The Business Roundtable (BR) has an overview section in which they “affirm certain principles of international income taxation” as being critical to a strong and growing global economy. One of the principles is that taxation should be of net business profits, not gross revenue. BR also provides seven comments on specific aspects of Pillar One and/or Two which are similar to concerns raised by the other U.S. interests. Comment 4 states “An agreement on Pillar One must include repeal of existing unilateral measures and a commitment to refrain from imposing any new unilateral measures aimed at profit reallocation or the digital economy.” It is the unilateral actions of trading partners that are perceived to discriminate against U.S. companies, often base tax on revenue versus profit and deviate from other established international taxation principles that is causing concern in the U.S. business community and resulting in U.S. investigations under Section 301 of the Trade Act of 1974, as amended.

American-Chamber-of-Commerce-Ireland

Amazon

Business-Roundtable-BRT

Conclusion

With the Trump Administration in its last twelve days, it is unknown if USTR will be able to complete the remaining seven 301 investigations on Austria, Brazil, the Czech Republic, the European Union, Indonesia, Spain, and the United Kingdom to accompany the three reports released on the 6th of January dealing with India, Italy, and Turkey and the earlier report and proposed action on France. My guess is that this will be a primary focus of USTR in the next week and a half so that a full set of reports is available and possibly a recommendation for action on all eleven reports. Whether the remaining investigations are completed by January 20 or not, the Biden Administration will be confronted with the ongoing OECD/G20 process with a target completion in the front half of 2021 and a host of governments implementing DSTs unilaterally ahead of any agreement among the Integrated Framework members. Action under 301 is an option should trading partners pursue approaches to DSTs that in fact discriminate against U.S. companies or deviate from what the OECD/G20 process is likely to generate as a final package.

Digital Services Taxes – New U.S. Section 301 Investigations on Nine Countries and the European Union

In 2019, the United States initiated a section 301 investigation on France’s digital services tax (“DST”), made a finding that France’s DST “is unreasonable or discriminatory and burdens or restricts U.S. Commerce.”  84 Fed. Reg. 66956 (Dec. 6, 2019).  Additional duties of up to 100% were proposed on French goods valued at $2.4 billion.  France agreed to hold up application of its tax until the end of 2020 and the U.S. agreed to hold up tariffs to give the Organization for Economic Cooperation and Development time to conclude discussions on a possible agreed international tax structure for digital services.

On June 2, 2020, the U.S. Trade Representative announced the initiation of 301 investigations on nine countries and the European Union who have either implemented DSTs or who have such DSTs under development.  https://ustr.gov/about-us/policy-offices/press-office/press-releases/2020/june/ustr-initiates-section-301-investigations-digital-services-taxes.  The countries who are subject to the investigations include Austria, Brazil, the Czech Republic, the European Union, India, Indonesia, Italy, Spain, Turkey, and the United Kingdom.  The notice of initiation of the investigations will appear in the Federal Register on June 5, 2020 but was posted on the USTR website on June 2.  https://ustr.gov/sites/default/files/assets/frn/FRN.pdf.

Because of the COVID-19 situation, written comments are being accepted but it is unclear if there will be a public hearing.  Written comments are due by July 15, 2020.  The Federal Register notice pre-publication is embedded below.

USTR FR notice 301 investigation on digital services

The focus of the investigation will be on the following aspects of DSTs:

“The investigation initially will focus on the following concerns with DSTs: discrimination against U.S. companies; retroactivity; and possibly unreasonable tax policy. With respect to tax policy, the DSTs may diverge from norms reflected in the U.S. tax system and the international tax system in several respects. These departures may include: extraterritoriality; taxing revenue not income; and a purpose of penalizing particular technology companies for their commercial success.”  Page 5.

Based on the prior investigation into the French DST, there is little doubt that all of the programs will be found to violate Section 301 of the Trade Act of 1974, as amended, in some respect.

For example, in the French case, the USTR made five findings relevant to some or all of the current investigations:

‘First, the evidence collected in this investigation indicates that the French DST is
intended to, and by its structure and operation does, discriminate against U.S. digital companies.”

“Second, the evidence collected in this investigation indicates that the French DST’s
retroactive application is unusual and inconsistent with prevailing tax principles and renders the tax particularly burdensome for covered U.S. companies, which will also affect their customers, including U.S. small businesses and consumers.”

“Third, the evidence collected in this investigation indicates that the French DST’s
application to gross revenue rather than income contravenes prevailing tax principles and imposes significant additional burdens on covered U.S. companies.”

“Fourth, the evidence collected in this investigation indicates that the French DST’s
application to revenues unconnected to a presence in France contravenes prevailing international tax principles and is particularly burdensome for covered U.S. companies.”

“Fifth, the evidence collected in this investigation indicates that the French DST’s
application to a small group of digital companies contravenes international tax principles counseling against targeting the digital economy for special, unfavorable tax treatment.”

USTR, Section 301 Investigation, Report on France’s Digital Services Tax, Dec. 2, 2019, pages 1, 3, 4, 5.  https://ustr.gov/sites/default/files/Report_On_France%27s_Digital_Services_Tax.pdf.

The EU and the EU-member states covered have DSTs similar to France’s (without retroactivity) with some DSTs already in effect.  Other countries’ systems appear to be similar as well with many countries already applying their DST.  https://ustr.gov/sites/default/files/assets/frn/FRN.pdf.

The full USTR report on France’s DST is embedded below.

Report_On_France’s_Digital_Services_Tax

Where taxes are already in place, action by USTR will be likely even ahead of the end of the year absent agreement with the trading partner to postpone collection.  The start of investigations at this time will enable the U.S. to complete the investigation this summer or early fall, take public comments on possible tariffs to be added if no resolution with individual countries or the EU is possible.  More specifically, the U.S. will have handled domestic legal requirements to act if other DSTs go into effect without an OECD agreement or where the tax imposed is not consistent with the OECD terms.  As stated in the USTR press release yesterday, “’President Trump is concerned that many of our trading partners are adopting tax schemes designed to unfairly target our companies,’ said USTR Robert Lighthizer. ‘We are prepared to take all appropriate action to defend our businesses and workers against any such discrimination.’”  https://ustr.gov/about-us/policy-offices/press-office/press-releases/2020/june/ustr-initiates-section-301-investigations-digital-services-taxes.

Conclusion

The OECD efforts to develop an agreed model for taxing digital services are supposed to conclude this year.  The U.S. and its leading digital services companies have been very concerned about the efforts of trading partners to impose taxes that will effectively apply only or disproportionately to them.

At the same time, the COVID-19 pandemic has added pressure on governments to find new sources of revenue, and digital services are an inviting target.

Expect this to be a very important issue in the second half of 2020.  Failure to find an acceptable solution to the United States will result in a significant escalation of trade tensions both with the EU and with many other countries going forward.