New USTR Investigation Shines Spotlight on Business Impact of Foreign Digital Services Taxes

What are DSTs?

Most DSTs tax revenues earned by companies providing certain digital services, such as targeted advertising, to users in the taxing jurisdiction. Recently, some countries have gone further, targeting revenues earned from other services, content (or intangible assets) and even goods delivered via e-commerce. For example, Indonesia imposes a tax on Indonesian consumers’ use of offshore intangible assets and services, such as the use or right to use images and/or sound recordings. India’s DST is broader still, extending to online sales of services and goods. The USTR investigation comes against the backdrop of a rapidly evolving proliferation of DSTs, with some countries accelerating adoption of these new taxes in order to counter the negative fiscal impact of the COVID 19 pandemic.

What is the focus and objective of the investigation?

The investigations are an attempt to pressure U.S. trading partners to repeal or halt implementation of their unilateral DSTs, while negotiations continue between countries to agree on rules on a multilateral basis for reform of the international tax framework. USTR investigations will focus on whether the DSTs discriminate against U.S. companies, apply taxes retroactively, or constitute “unreasonable tax policy” (in the sense that they diverge from norms reflected in the U.S. and international tax systems). USTR seeks comments from interested companies on these issues.

Comments could also address whether the DSTs are consistent with World Trade Organization (WTO) rules. The proposed DSTs that contemplate taxes on e-commerce arguably violate an agreed WTO moratorium on such measures. Moreover, DSTs that discriminate against digital supply as a means of delivery, exempt domestic suppliers from the tax burden faced by foreign suppliers, or that confer unreasonable compliance burdens on foreign suppliers, may run afoul of obligations under the WTO’s General Agreement on Trade in Services.

What remedial action can USTR take?

A Section 301 investigation may result in the adoption of remedial actions to protect U.S. companies, such as the imposition of tariffs or other restrictions on imports from offending countries. For example, the Trump Administration has used Section 301 to impose tariffs on over US$300 billion in Chinese imports to date. Alternatively, Section 301 investigations may result in the conclusion of an agreement with the offending countries to withdraw the DSTs. Last year, USTR initiated a similar investigation into France’s DST, concluding that the French DST discriminated against U.S. companies and contradicted prevailing international tax principles. USTR began a process to impose US$2.4 billion in tariffs on French imports. However, the United States and France agreed to delay collection of the French DST and any U.S. tariffs until the end of 2020, to give countries participating in multilateral talks at the Organization for Economic Cooperation and Development additional time to agree on an international framework for taxation of digital services.