New U.S. Trade Representative Reports Highlight Digital Services Taxes as a Key International Controversy in 2021

On January 14, 2020, the United States Trade Representative (USTR) issued three reports on digital services taxes (DSTs) proposed in the UK, Spain, and Austria (available here). As with USTR’s earlier reports on DSTs in France, Italy, India, and Turkey, the latest reports conclude that relevant DSTs are unreasonable, discriminatory, and burdensome on U.S. commerce.

Key findings of the latest reports:

• The structure and operation of DSTs in the UK, Spain, and Austria discriminate against U.S. digital companies.
• They are unreasonable because they are inconsistent with principles of international taxation, including due to application to revenue rather than income and extraterritoriality.
• They burden or restrict U.S. commerce.

Under Section 301 of the Trade Act of 1974, following these reports, USTR has to determine appropriate action for a U.S. response. An earlier report on the DST in France resulted in a decision to impose additional tariffs on goods from France, although these additional tariffs have been suspended pending completion of the other ongoing USTR investigations on other countries’ DSTs. Decisions on appropriate action in response to the latest reports will be an early test of the intentions of the incoming Biden administration on international trade, engagement with traditional allies in Europe, and multilateral rulemaking.

As we highlighted in our Sidley Update when the USTR investigations were initiated, DSTs adopted or proposed in 10 jurisdictions are the focus of U.S. scrutiny. USTR has now issued six reports. DSTs in the remaining jurisdictions (Brazil, the Czech Republic, the European Union, and Indonesia) are not yet in force. USTR issued a status report, expressing its preliminary concerns over certain discriminatory and unreasonable aspects of the DSTs under consideration or development in these jurisdictions. USTR indicated that its investigations would continue.

These developments highlight that issues surrounding digital service taxes will be a key international controversy in 2021.

The issue has been developing for some time. 2020 witnessed three key developments. First, there was a proliferation of unilateral DSTs in various jurisdictions, particularly in Europe. Second, the U.S. responded by initiating investigations; the latest reports are a result of that process. Third, there was a major setback to multilateral negotiations aimed at resolving tax challenges arising from the digitalization of the economy.

2021 brings us to a juncture that could take policy in one of several directions:

• The unilateral, uncoordinated, and possibly discriminatory manner in which some countries are pursuing or planning DSTs may prompt new USTR investigations and potentially disputes within the World Trade Organization.
• The existing and expected USTR reports may result in the adoption of unilateral remedial actions to protect U.S. companies, such as the imposition of tariffs or other restrictions on imports from offending countries.
• At the multilateral level, the Organization for Economic Cooperation and Development (OECD)/G20 Base Erosion and Profit Shifting Inclusive Framework just held public consultations on the current negotiating package, especially on issues where countries currently disagree. The aim is to conclude negotiations within the OECD framework by mid-2021. U.S. engagement will be key to the success of the negotiations.

These developments have the potential to affect a wide range of companies active in the digital economy, which are vulnerable to unilateral DSTs. Such stakeholders would benefit, in particular, from the reduction of unreasonable and discriminatory aspects of such taxes in certain jurisdictions. At the same time, resolution of the emerging international tensions will be crucial for industries vulnerable to retaliatory measures. All affected stakeholders will ultimately need to comply with measures imposed by governments on international trade, including digital trade. Nevertheless, stakeholders may be able to influence the direction of the international developments by actively engaging in the relevant consultations.