June 04, 2020

US Launches Trade Investigation into Digital Services Taxes in Multiple Countries


On June 2, 2020, the United States Trade Representative (“USTR”) announced the initiation of a Section 301 investigation into digital services taxes (“DST”). This investigation will focus on the DST practices of Austria, Brazil, the Czech Republic, the European Union ("EU"), India, Indonesia, Italy, Spain, Turkey, and the United Kingdom. USTR is seeking public comment on the investigation by July 15, 2020.

A DST is a tax on revenue generated from companies providing certain digital services to or aimed at persons in a certain jurisdiction. USTR asserts that various jurisdictions have considered or adopted DSTs over the past two years and that these DSTs are expected to target large US technology companies. For example, the EU is considering a DST as part of its COVID-19 recovery plan. The DST is based on a 2018 proposal that included a 3% tax on revenues from targeted advertising and digital interface services that would be applied to companies generating at least €750 million in global revenues and at least €50 million in EU-wide revenues from covered digital services. According to USTR Robert Lighthizer, “President Trump is concerned that many of our trading partners are adopting tax schemes designed to unfairly target our companies,” and “[w]e are prepared to take all appropriate action to defend our businesses and workers against any such discrimination.”

Section 301gives USTR broad authority to respond to a foreign country’s unfair trade practices. If USTR makes an affirmative determination of actionable conduct, it has the power to take all appropriate and reasonable action to obtain the elimination of the act, policy or practice, subject to the direction of the president, if any.

The statute includes authorization to take any actions that are within the president’s power with respect to trade in goods or services or any other area of pertinent relations with the foreign country. Depending on the findings, such measures may include allowing the United States to impose unilateral duties on foreign countries engaged in unfair trading practices. While the United States has rarely imposed unilateral trade sanctions under Section 301 since the World Trade Organization (“WTO”) was established in the 1990s, the Trump administration has shown a greater willingness to take unilateral action and currently imposes special duties on imports from China as a result of a Section 301 investigation into China’s technology transfer, intellectual property, and innovation practices.

As outlined in USTR’s notice, the DST Section 301 investigation will initially focus on:

  • Discrimination against US companies;
  • Retroactive application of the taxes; and
  • Potentially unreasonable tax policies, including divergence from norms of the US tax system such as:
    • Applying the taxes extraterritorially;
    • Taxing revenue not income; and
    • Targeting measures to penalize particular technology companies for their commercial success.

As an initial step, USTR has requested consultations with the governments of the targeted jurisdictions and is currently seeking public comment on DST concerns involving these jurisdictions. Comments might address:

  • Whether one or more of the covered DSTs is unreasonable or discriminatory.
  • The extent to which one or more of the covered DSTs burdens or restricts US commerce.
  • Whether one or more of the covered DSTs is inconsistent with obligations under the WTO Agreement or any other international agreement.
  • The determinations required under section 304 of the Trade Act—whether the act, policy, or practice under investigation is actionable and what action, if any, should be taken.

As noted above, comments are due to USTR by July 15, 2020. Due to COVID-19, USTR is not scheduling a public hearing at this time but will provide further information in a subsequent notice if a hearing is to be held in this investigation.

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