June 10, 2020
Section 301 Investigations: Foreign Digital Services Taxes (DSTs)
Background
Organization (WTO), strongly supported at the time by the
An international debate is occurring over the global taxing
United States, significantly reduced the use of Section 301.
rights of revenues and profits earned by multinational
corporations (MNCs) in certain “digital economy” sectors.
The United States retains the flexibility to determine
whether to seek recourse for foreign unfair trade practices
This debate is driven by concerns that these MNCs are not
in the WTO or under Section 301. The Statement of
adequately taxed and arguments that the right to tax some
Administrative Action (SAA)—which explained how U.S.
of their profits should be reallocated from the jurisdiction
agencies would implement the 1994 Uruguay Round
where the MNC claims residence to the jurisdiction where
Agreements Act (URAA or “WTO Agreements”
their customers are located.
)—states
that the USTR will invoke the dispute settlement
Some countries have imposed unilateral digital services
procedures of the WTO Dispute Settlement Understanding
taxes (DSTs) on the gross revenues earned by digital
(DSU) for investigations that involve an alleged violation of
economy MNCs. These taxes target certain MNC digital
(or the impairment of U.S. benefits under) WTO
transactions with domestic businesses or online activities
Agreements. At the same time, the SAA makes clear that
directed ultimately towards domestic users, even if the
“[n]either section 301, nor the DSU will require the” USTR
corporation does not have a physical presence in the
to do so if it “does not consider that a matter involves”
country. The Trump Administration and others contend
WTO Agreements. Such a determination appears to be
that, based on their design, many of these DSTs effectively
solely at the USTR’s discretion. However, the USTR’s
target large U.S. MNCs disproportionately to other firms. In
decision to bypass WTO dispute settlement and impose
addition, some observers argue that the proliferation of such
retaliatory measures (if any) in response to a Section 301
unilateral measures could undermine basic principles of the
investigation, may be challenged at the WTO.
current international taxation system.
France’s Digital Services Tax
Meanwhile, at the international level, more than 130
France enacted a DST formally on July 24, 2019. The DST
countries, comprising both members and non-members of
applies retroactively to digital services revenue as of
the Organisation for Economic Cooperation and
January 1, 2019, and is a 3% levy on gross revenues
Development (OECD), are negotiating policy
derived from two digital activities of which French “users”
recommendations in an attempt to develop an international
are deemed to play a major role in value creation: (1)
digital tax framework. The OECD Secretariat announced its
intermediary services, and (2) advertising services based on
intent to conclude these negotiations by the end of 2020,
users’ data. The law excludes certain services, including
although there are doubts about the feasibility of this
digital interfaces for the delivery of “digital content.” The
timeline due to the Coronavirus Disease 2019 (COVID-19)
DST applies only to companies with annual revenues from
pandemic.
the covered services of at least €750 million ($847 million)
Despite ongoing negotiations at the OECD, some countries,
globally and €25 million ($28 million) in France. Covered
particularly in Europe and Asia, have proposed, announced,
companies are required to calculate revenues attributable to
or implemented DSTs. France’s DST—by far the most
France (and, therefore, covered by the DST) using formulas
controversial—was the subject of a 2019 investigation by
specified in the law.
the U.S. Trade Representative (USTR), under Section 301
Section 301 Investigation
of the Trade Act of 1974. More recently, the USTR
In its investigation, initiated on July 10 and completed on
launched a new investigation into the implemented or
December 2, 2019, the USTR ultimately concluded that
proposed DSTs of 10 other U.S. trading partners.
France’s DST discriminates against major U.S. digital
Overview of Section 301
companies and is inconsistent with prevailing international
tax policy principles. On December 6, 2019, the USTR
Title III of the Trade Act of 1974 (Sections 301-310,
issued a preliminary list of products from France, with an
codified at 19 U.S.C. §§2411-2420), titled “Relief from
Unfair Trade Practices,”
estimated 2018 import value of $2.4 billion, on which to
is often collectively referred to as
“
impose additional tariffs of up to 100%. The agency sought
Section 301.” It grants the USTR a range of
comments on the proposed action, convened a hearing, and
responsibilities and authorities to impose trade sanctions on
accepted post-hearing rebuttal comments, after which it
foreign countries that violate U.S. trade agreements or
would be generally required to make a final determination.
engage in acts that are “unjustifiable,” “unreasonable,” or
“discriminatory” and burden U.S. commerce. Prior to 1995,
At the end of January 2020, France suspended its DST for
the United States used Section 301 to unilaterally pressure
the remainder of 2020 and agreed to continue working with
other countries to eliminate trade barriers and open their
the United States at the OECD to reach a compromise on
markets to U.S. exports. The creation of an enforceable
international digital taxation. News outlets have reported
dispute settlement mechanism in the World Trade
that Section 301 tariffs will not be imposed on U.S. imports
from France while countries work on the deal, but the
https://crsreports.congress.gov
Section 301 Investigations: Foreign Digital Services Taxes (DSTs)
USTR has not made any official announcements. There are
DSTs Under Investigation
specific timelines to take action under Section 301, but
waivers provide flexibility, especially if the USTR
Adopted
determines that substantial progress is being made, or that a
Austria. Adopted a 5% tax on revenues from online advertising
delay is necessary or desirable to obtain a satisfactory
services. It applies to companies with at least €750 mil ion ($847
mil ion) in annual global revenues for al services and €25 mil ion
solution to the issue.
($28 mil ion) in in-country revenues for covered services.
New Section 301 Investigation
India. Adopted a 2% tax that only applies to nonresident
companies, and covers online sales of goods and services to, or
On June 2, 2020, the USTR launched a new Section 301
aimed at, persons in India. The tax applies to companies with
investigation into the DSTs adopted or under consideration
annual revenues in excess of approximately INR 20 mil ion
by Austria, Brazil, the Czech Republic, the European
($265,000).
Union, India, Indonesia, Italy, Spain, Turkey, and the
Indonesia. Adopted a 10% value-added tax on digital products
United Kingdom (see textbox). The USTR also requested
and services provided by non-resident companies with a
consultations with the governments of these jurisdictions.
“significant economic presence” in the Indonesian market,
including music and video streaming services, applications, and
As part of the investigation, the agency may seek to address
digital games. It wil be effective July 1, 2020.
several issues, including:
Italy. Adopted a 3% tax on revenues from targeted advertising
Are the taxes discriminatory and do they burden or
and digital interface services. The tax applies to companies
restrict U.S. commerce? Are these jurisdictions unfairly
generating at least €750 mil ion ($847 mil ion) in global revenues
for al services and €5.5 mil ion ($6 mil ion) in in-country
targeting the taxes at certain U.S. firms?
revenues for covered services.
What are the implications of applying the taxes
Turkey. Adopted a 7.5% tax on revenues from targeted
retroactively? Some taxes are (or will be) applied
advertising, social media, and digital interface services. The tax
retroactively, raising administrative and legal questions
applies to companies generating €750 mil ion ($847 mil ion) in
as to how firms will be able to calculate their potential
global revenues from covered digital services and TRY 20 mil ion
liabilities.
($3 mil ion) in in-country revenues from covered digital services.
The Turkish President has authority to increase the tax rate up
Is the tax policy “unreasonable”? The USTR has
to 15%.
indicated that these DSTs appears to diverge from
Under Consideration
norms reflected in U.S. and international tax systems,
particularly because of their extraterritorial scope and
Brazil. Considering a 1% to 5% tax (to be levied progressively)
on revenues from targeted advertising and digital interface
their taxing of revenue instead of income.
services. It would apply to companies generating at least BRL 3
Are the DSTs inconsistent with international
bil ion in annual global revenues and at least BRL 100 mil ion ($21
commitments and obligations under the WTO or other
mil ion) in in-country revenues for covered digital services.
agreements?
Czech Republic. Considering a 7% tax on revenues from
targeted advertising and digital interface services. It would apply
Does the WTO General Agreement on Trade in Services
to companies generating €750 mil ion ($847 mil ion) in annual
(GATS) cover digital trade? If so, the USTR may
global revenues for al services and CZK 50 mil ion ($2 mil ion)
invoke the dispute settlement procedures of the WTO
in in-country revenues for covered services.
DSU.
European Union. Considering a DST as part of the financing
package for its proposed COVID-19 recovery plan. It is based on
Outlook
a 2018 DST proposal that: (1) included a 3% tax on revenues
from targeted advertising and digital interface services, and (2)
If an agreement is not reached at the OECD in the near
would have applied only to companies generating at least €750
term, and the USTR determines that the DST of any
mil ion ($847 mil ion) in global revenues from covered digital
countries under investigation is unreasonable or
services and at least €50 mil ion ($56 mil ion) in EU-wide
discriminatory and burdens or restricts U.S. commerce, the
revenues for covered services.
USTR could seek to negotiate and enter into a binding
Spain. Considering a 3% tax on revenues from targeted
agreement that commits these trading partners to eliminate
advertising and digital interface services that would apply to
the tax policy or that provides compensation to the United
companies generating at least €750 mil ion (847 mil ion) in global
States. Absent mutual resolution, some analysts have
revenues for al services and €3 mil ion ($3 mil ion) in in-country
revenues for covered services.
indicated that the most likely scenario would be the
imposition of tariffs and the escalation of tensions in U.S.
United Kingdom. Considering a DST proposal as part of its
economic relations with these trading partners. Should the
Finance Bil 2020. It would be a 2% tax on revenues above £25
mil ion to internet search engines, social media, and online
United States impose retaliatory trade measures, the
marketplaces. The tax would apply to companies generating at
affected parties could pursue WTO dispute settlement or
least £500 mil ion ($640 mil ion) in global revenues from covered
retaliate by targeting U.S. exports.
digital services and £25 mil ion ($32 mil ion) in in-country
revenues from covered services.
CRS Resources
Source: Adapted from Of ice of the USTR, 85 FR 34709 (June 6, 2020).
CRS In Focus IF11346, Section 301 of the Trade Act of
1974, by Andres B. Schwarzenberg.
Andres B. Schwarzenberg, Analyst in International Trade
CRS Report R45532, Digital Services Taxes (DSTs):
and Finance
Policy and Economic Analysis, by Sean Lowry.
CRS In Focus IF10770, Digital Trade, by Rachel F.
IF11564
Fefer.
https://crsreports.congress.gov
Section 301 Investigations: Foreign Digital Services Taxes (DSTs)
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