On 18 June 2020 European officials announced that an EU-wide digital services tax (DST) will be introduced if the US’s recent withdrawal from global tax negotiations stops international agreement.
The US’s withdrawal follows the United States Trade Representative’s (USTR) initiation of Section 301 investigations into DSTs adopted or proposed in the EU and nine countries. Section 301 of the Trade Act of 1974 is the main statutory authority under which the US imposes trade sanctions. Conduct actionable includes practices that are unreasonable or discriminatory and which adversely affect US commerce.
For more detail, here is an extract from the USTR’s notice:
“The US Trade Representative is initiating investigations with respect to Digital Services Taxes (DSTs) adopted or under consideration by Austria, Brazil, the Czech Republic, the European Union, India, Indonesia, Italy, Spain, Turkey, and the United Kingdom…The investigation initially will focus on the following concerns with DSTs: discrimination against US companies; retroactivity; and possibly unreasonable tax policy. With respect to tax policy, the DSTs may diverge from norms reflected in the US 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.”
The investigation may be intended to compel delay or even retraction of DSTs. The USTR concluded in 2019 that the French DST discriminated against US digital companies, such as Google, Apple, Facebook, and Amazon. France has since postponed the introduction of DST until 2021 after the US threatened tariffs in retaliation.
Taxing the digital world
DSTs aim to capture revenue generated in the digital world by large foreign companies. Although technology enables active participation in foreign economies without physical presence, jurisdiction to tax requires physical presence under the current framework. Common features of DSTs include high revenue thresholds and narrow scope to ensure that only very big businesses operating in select sectors face the tax.
DST is hotly debated, though commentators on both sides agree that DST is one of the most fascinating and surprising global tax developments in recent years. Critics argue that the tax discriminates against certain countries and sectors, operates as a distortionary import tariff, violates state aid rules, results in double taxation, and will in turn be shifted to consumers. Those in favour argue that the tax is justified because digital platforms are undertaxed, current rules fail to recognize users’ role in generating income for digital companies, and that DST operates as a tax on location-specific rent.
Governments were previously expected to agree by July 2020 on a global solution to be implemented by the end of this year. Due to the COVID-19 pandemic, the agreement deadline has been extended to October 2020, but the year-end implementation deadline currently remains in place. It’s highly likely that the US’s withdrawal from global tax negotiations has now jeopardized this timeline.