Updated December 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 some governments argue that the
Administrative Action (SAA)—which explained how U.S.
right to tax some of the MNC profits should be reallocated
agencies would implement the 1994 Uruguay Round
from the jurisdiction where the MNC claims residence to
Agreements Act (URAA or “WTO Agreements”)—states
the jurisdiction where the MNC’s customers are located.
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
solely at the USTR’s discretion. However, the USTR’s
disproportionately target large U.S. MNCs. In addition,
decision to bypass WTO dispute settlement and impose
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
The United States and more than 130 countries, comprising
France enacted a DST formally on July 24, 2019. The DST
both members and nonmembers of the Organisation for
applies a 3% levy on gross revenues derived from two
Economic Cooperation and Development (OECD), are
digital activities of which French “users” are deemed to
negotiating policy recommendations in an attempt to update
play a major role in value creation: (1) intermediary
the global tax system and develop an international digital
services, and (2) advertising services based on users’ data.
tax framework. The OECD Secretariat originally
The law excludes certain services, including digital
announced its intent to conclude these negotiations by the
interfaces for the delivery of “digital content.” The DST
end of 2020. However, due to the Coronavirus Disease
applies only to companies with annual revenues from the
2019 (COVID-19) pandemic and critical policy differences
covered services of at least €750 million ($888 million)
among countries, the organization is aiming to reach a deal
globally and €25 million ($30 million) in France. Covered
by mid-2021.
companies are required to calculate revenues attributable to
Despite ongoing negotiations at the OECD, some countries,
France (and, therefore, covered by the DST) using formulas
particularly in Europe and Asia, have proposed, announced,
specified in the law.
or implemented DSTs. France’s DST—by far the most
Section 301 Investigation of French DST
controversial—was the subject of a 2019 investigation by
In its investigation, initiated on July 10 and completed on
the U.S. Trade Representative (USTR), under Section 301
December 2, 2019, the USTR concluded that France’s DST
of the Trade Act of 1974. More recently, the USTR
discriminates against major U.S. digital companies and is
launched a new investigation into the implemented or
inconsistent with prevailing international tax policy
proposed DSTs of 10 other U.S. trading partners.
principles. While France had suspended its DST in January
Overview of Section 301
for the remainder of 2020 and agreed to continue working
with the United States at the OECD to reach a compromise
Title III of the Trade Act of 1974 (Sections 301-310,
on international digital taxation, the USTR ultimately
codified at 19 U.S.C. §§2411-2420), titled “Relief from
Unfair Trade Practices,”
determined to take retaliatory action in the form of
is often collectively referred to as
“
additional duties. On July 10, 2020, the agency announced
Section 301.” It grants the USTR a range of
that it would impose additional tariffs of 25% on
responsibilities and authorities to impose trade sanctions on
approximately $1.3 billion worth of imports, or about 2.2%
foreign countries that violate U.S. trade agreements or
engage in acts that are “
of all U.S. goods imports from the France in 2019. The
unjustifiable,” “unreasonable,” or
“
USTR faced a July 10 statutory deadline to make a
discriminatory” and burden U.S. commerce. Prior to 1995,
determination on what action to take but stated that it was
the United States used Section 301 to unilaterally pressure
delaying the implementation for up to 180 days (that is, up
other countries to eliminate trade barriers and open their
to January 6, 2021). The USTR’s announcement confirms
markets to U.S. exports. The creation of an enforceable
that it was suspending the action to allow more time for
dispute settlement mechanism in the World Trade
bilateral and multilateral discussions that could lead to a
https://crsreports.congress.gov
Section 301 Investigations: Foreign Digital Services Taxes (DSTs)
satisfactory resolution of this matter. However, in October,
DSTs Under Investigation
France announced that it would begin collecting its DST in
December 2020. It remains to be seen if the USTR will
Adopted
modify the action or shorten the 180-day suspension.
Austria. Adopted a 5% tax on revenues from online advertising
services. It applies to companies with at least €750 mil ion ($847
The list of imports on which the USTR determined to
mil ion) in annual global revenues for al services and €25 mil ion
impose tariffs is narrower than that originally proposed in
($28 mil ion) in in-country revenues for covered services.
December 2019, which had an annual import value of
India. Adopted a 2% tax that only applies to nonresident
approximately $2.4 billion, covered dairy products, soaps,
companies, and covers online sales of goods and services to, or
cosmetics, sparkling wine, handbags, and porcelain, and
aimed at, persons in India. The tax applies to companies with
contemplated possible fees or restrictions on services of
annual revenues in excess of approximately INR 20 mil ion
($265,000).
France. The final list is limited to certain cosmetics, soaps,
and leather goods. According to the USTR, in determining
Indonesia. Adopted a 10% value-added tax on digital products
and services provided by nonresident companies with a
the level of trade affected by the action, the agency
“significant economic presence” in the Indonesian market,
considered the value of digital transactions covered by
including music and video streaming services, applications, and
France’s DST and the amount of taxes that would be
digital games.
assessed by France on U.S. companies.
Italy. Adopted a 3% tax on revenues from targeted advertising
New Section 301 Investigation
and digital interface services. The tax applies to companies
generating at least €750 mil ion ($847 mil ion) in global revenues
On June 2, 2020, the USTR launched a new Section 301
for al services and €5.5 mil ion ($6 mil ion) in in-country
investigation into the DSTs adopted or under consideration
revenues for covered services.
by Austria, Brazil, the Czech Republic, the European
Spain. Adopted a 3% tax on revenues from targeted advertising
Union, India, Indonesia, Italy, Spain, Turkey, and the
and digital interface services that would apply to companies
United Kingdom (see textbox). The USTR also requested
generating at least €750 mil ion ($847 mil ion) in global revenues
consultations with the governments of these jurisdictions.
for al services and €3 mil ion ($3 mil ion) in in-country revenues
for covered services. The DST wil go into effect in January 2021.
As part of the ongoing investigation, the agency may seek
Turkey. Adopted a 7.5% tax on revenues from targeted
to address several issues, including
advertising, social media, and digital interface services. The tax
Are the taxes discriminatory and do they burden or
applies to companies generating €750 mil ion ($847 mil ion) in
restrict U.S. commerce? Are these jurisdictions unfairly
global revenues from covered digital services and TRY 20 mil ion
targeting the taxes at certain U.S. firms?
($3 mil ion) in in-country revenues from covered digital services.
The Turkish President has authority to increase the tax rate up
What are the implications of applying the taxes
to 15%.
retroactively? Some taxes are (or will be) applied
United Kingdom. Adopted a 2% tax on revenues above £25
retroactively, raising administrative and legal questions
mil ion to internet search engines, social media, and online
as to how firms will be able to calculate their potential
marketplaces. The tax would apply to companies generating at
liabilities.
least £500 mil ion ($640 mil ion) in global revenues from covered
Is the tax policy “unreasonable”? The USTR has
digital services and £25 mil ion ($32 mil ion) in in-country
revenues from covered services.
indicated that these DSTs appear to diverge from norms
reflected in U.S. and international tax systems,
Under Consideration
particularly because of their extraterritorial scope and
Brazil. Considering a 1% to 5% tax (to be levied progressively)
their taxing of revenue instead of income.
on revenues from targeted advertising and digital interface
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
Does the WTO General Agreement on Trade in Services
targeted advertising and digital interface services. It would apply
(GATS) cover digital trade? If so, the USTR may invoke
to companies generating €750 mil ion ($847 mil ion) in annual
the dispute settlement procedures of the WTO DSU.
global revenues for al services and CZK 50 mil ion ($2 mil ion)
in in-country revenues for covered services.
Outlook
European Union. Considering a DST as part of the financing
If an agreement is not reached at the OECD in the near
package for its proposed COVID-19 recovery plan. It would be
term, and the USTR determines that the DST of any
based on a 2018 DST proposal that: (1) included a 3% tax on
countries under investigation is unreasonable or
revenues from targeted advertising and digital interface services,
discriminatory and actually burdens or restricts U.S.
and (2) would have applied only to companies generating at least
€750 mil ion ($847 mil ion) in global revenues from covered
commerce, the USTR could seek to negotiate and enter into
digital services and at least €50 mil ion ($56 mil ion) in EU-wide
a binding agreement that commits these trading partners to
revenues for covered services.
eliminate the tax policy or that provides compensation to
Source: Adapted from Office of the USTR, 85 FR 34709 (June 5, 2020).
the United States. Absent mutual resolution, some analysts
Note: Amounts stated in U.S. dollars are approximate due to exchange rate
foresee the most likely scenario as imposition of tariffs and
fluctuations.
escalation of tensions in U.S. economic relations with these
trading partners. Should the United States impose
retaliatory trade measures, the affected parties could pursue
Andres B. Schwarzenberg, Analyst in International Trade
WTO dispute settlement or retaliate by targeting U.S.
and Finance
exports.
IF11564
https://crsreports.congress.gov
Section 301 Investigations: Foreign Digital Services Taxes (DSTs)
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https://crsreports.congress.gov | IF11564 · VERSION 5 · UPDATED