Section 301 Investigations: Foreign Digital Services Taxes (DSTs)
Updated March 1, 2021
Section 301 Investigations: Foreign Digital Services Taxes (DSTs)
Background
time by the United States, significantly reduced the use of
An international debate is occurring over the global taxing
Section 301. While the United States retains the flexibility
rights of revenues and profits earned by multinational
to seek recourse for foreign unfair trade practices in the
corporations (MNCs) in certain “digital economy” sectors.
WTO or under Section 301, a determination to bypass
This debate is driven by concerns that these MNCs are not
WTO dispute settlement and impose retaliatory measures
adequately taxed, and some governments argue that the
(if any) in response to a Section 301 investigation may be
right to tax some of the MNC profits should be reallocated
challenged at the WTO.
from the jurisdiction where the MNC claims residence to
France’s Digital Services Tax
the jurisdiction where the MNC’s customers are located.
France enacted a DST formally on July 24, 2019. The DST
Some countries have imposed unilateral digital services
applies a 3% levy on gross revenues derived from two
taxes (DSTs) on the gross revenues earned by digital
digital activities of which French “users” are deemed to
economy MNCs. These taxes target certain MNC digital
play a major role in value creation: (1) intermediary
transactions with domestic businesses or online activities
services, and (2) advertising services based on users’ data.
directed ultimately towards domestic users, even if the
The law excludes certain services, including digital
corporation does not have a physical presence in the
interfaces for the delivery of “digital content.” The DST
country. Some Members of Congress and others contend
applies only to companies with annual revenues from the
that, based on their design, many of these DSTs
covered services of at least €750 million ($909 million)
disproportionately target large U.S. MNCs. In addition,
globally and €25 million ($30 million) in France. Covered
some observers argue that the proliferation of such
companies are required to calculate revenues attributable to
unilateral measures could undermine basic principles of the
France (and, therefore, covered by the DST) using formulas
current international taxation system.
specified in the law.
The United States and more than 130 countries, comprising
Section 301 Investigation of French DST
both members and nonmembers of the Organisation for
In its investigation, initiated in July and completed in
Economic Cooperation and Development (OECD), are
December 2019, the USTR concluded that France’s DST
negotiating policy recommendations in an attempt to update
discriminates against major U.S. digital companies and is
the global tax system and develop an international digital
inconsistent with prevailing international tax policy
tax framework. The OECD Secretariat originally
principles. The findings of the investigation and the
announced its intent to conclude these negotiations by the
prospect of U.S. retaliation reportedly prompted France in
end of 2020. However, due to the Coronavirus Disease
January 2020 to suspend its DST for the remainder of 2020
2019 (COVID-19) pandemic and critical policy differences
and continue working with the United States at the OECD
among countries, the organization is now aiming to reach a
to reach a compromise on international digital taxation.
deal by mid-2021.
The USTR faced a July 10, 2020 statutory deadline to make
Despite ongoing negotiations at the OECD, some countries,
a determination on what action—if any— to take as part of
particularly in Europe and Asia, have proposed, announced,
the Section 301 investigation; it ultimately determined that
or implemented DSTs. France’s DST—by far the most
the United States should take retaliatory action in the form
controversial—was the subject of a 2019 investigation by
of additional duties. In July 2020, the agency announced
the U.S. Trade Representative (USTR), under Section 301
that it would impose additional tariffs of 25% on about $1.3
of the Trade Act of 1974. In June 2020, the USTR launched
billion worth of imports, or about 2.2% of all U.S. goods
new investigations into the implemented or proposed DSTs
imports from France in 2019 (see text box). At the same
of 10 other U.S. trading partners.
time, the USTR also announced that it would delay the
Overview of Section 301
implementation for 180 days (until January 6, 2021) to
allow more time for bilateral and multilateral discussions
Title III of the Trade Act of 1974 (Sections 301-310,
that could lead to a satisfactory resolution of this matter.
codified at 19 U.S.C. §§2411-2420), titled “Relief from
Unfair Trade Practices,” is often collectively referred to as
Proposed Section 301 Tariffs
“Section 301.” It grants the USTR a range of
The list of imports on which the USTR determined to impose tariffs
responsibilities and authorities to impose trade sanctions on
is narrower than that originally proposed in December 2019, which
foreign countries that violate U.S. trade agreements or
had an annual import value of approximately $2.4 billion, covered
engage in acts that are “unjustifiable,” “unreasonable,” or
dairy products, soaps, cosmetics, sparkling wine, handbags, and
“discriminatory” and burden U.S. commerce. Prior to 1995,
porcelain, and contemplated possible fees or restrictions on
the United States used Section 301 to unilaterally pressure
services of France. The final list is limited to certain cosmetics,
other countries to eliminate trade barriers and open their
soaps, and leather goods. According to the USTR, in determining
the level of trade affected by the action, the agency considered the
markets to U.S. exports. The creation of an enforceable
dispute settlement mechanism in the World Trade
Organization (WTO) in 1995, strongly supported at the
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Section 301 Investigations: Foreign Digital Services Taxes (DSTs)
value of digital transactions covered by France’s DST and the
impose such measures, affected parties could pursue WTO
amount of taxes that France assesses on U.S. companies.
dispute settlement or retaliate by targeting U.S. exports.
Because progress at the OECD has been relatively slow,
DSTs Under Investigation
and the deadline to reach an agreement had been pushed
Adopted
back to mid-2021, France announced in October 2020 that
Austria. Adopted a 5% tax on revenues from online advertising
it would begin collecting its DST in December 2020. In
services. It applies to companies with at least €750 million ($909
response, the USTR did not modify or shorten the
million) in annual global revenues for all services and €25 million
suspension announced in July 2020. More recently, in
($30 million) in in-country revenues for covered services.
January 2021, the agency suspended indefinitely the
India. Adopted a 2% tax that only applies to nonresident
additional Section 301 tariffs that were scheduled to go into
companies, and covers online sales of goods and services to, or
aimed at, persons in India. The tax applies to companies with
effect that month in order to promote a coordinated
annual revenues in excess of approximately INR 20 million
response in all of the other DST investigations (see below).
($274,000).
Additional DST Investigations
Indonesia. Adopted a 10% value-added tax on digital products
In June 2020, the USTR launched new Section 301
and services provided by nonresident companies with a
investigations into the DSTs adopted or under consideration
“significant economic presence” in the Indonesian market,
including music and video streaming services and applications.
by Austria, Brazil, the Czech Republic, the European Union
(EU), India, Indonesia, Italy, Spain, Turkey, and the United
Italy. Adopted a 3% tax on revenues from targeted advertising
and digital interface services. The tax applies to companies
Kingdom (UK) (see text box). The USTR also requested
generating at least €750 million ($909 million) in global revenues
consultations with the governments of these jurisdictions.
for all services and €5.5 million ($6.7 million) in in-country
Recent Findings
revenues for covered services.
In January 2021, the USTR issued findings in its
Spain. Adopted a 3% tax on revenues from targeted advertising
investigations of DSTs adopted by Austria, India, Italy,
and digital interface services that would apply to companies
generating at least €750 million ($909 million) in global revenues
Spain, Turkey, and the UK. It concluded that each of the
for all services and €3 million ($3.6 million) in in-country
DSTs—by their structure and operation—(1) discriminates
revenues for covered services.
against U.S. digital companies, (2) is inconsistent with the
Turkey. Adopted a 7.5% tax on revenues from targeted
principles of international taxation (including, in some
advertising, social media, and digital interface services. The tax
cases, due to their application to revenue rather than
applies to companies generating €750 million ($909 million) in
income, extraterritorial application, and failure to provide
global revenues from covered digital services and TRY 20 million
tax certainty), and (3) burden or restricts U.S. commerce.
($2.9 million) in in-country revenues from covered digital
The USTR indicated at the time that it was not taking any
services. The Turkish President has unilateral authority to
specific actions in connection with the findings, but that it
increase the tax rate up to 15%.
would continue to evaluate all available options and address
United Kingdom. Adopted a 2% tax that applies to companies
the matter in subsequent Section 301 proceedings.
with “digital services revenues” exceeding £500 million ($696
million) and “UK digital services revenues” exceeding £25 million
Ongoing Investigations
($35 million).
The Section 301 investigations of DST-related issues in
Under Consideration
Brazil, the Czech Republic, the EU, and Indonesia, are
Brazil. Considering a 1% to 5% tax (to be levied progressively)
ongoing. As part of the investigations, the agency is seeking
on revenues from targeted advertising and digital interface
to address several issues, including:
services. It would apply to companies generating more than BRL
Are the taxes discriminatory and do they burden or
3 billion ($560 million) in annual global gross revenues and more
than BRL 100 million ($19 million) in in-country revenues for
restrict U.S. commerce? Are these jurisdictions unfairly
covered digital services.
targeting the taxes at certain U.S. firms?
Czech Republic. Considering a 7% tax on revenues from
Is the tax policy “unreasonable”? The USTR has
targeted advertising and digital interface services. It would apply
indicated that these DSTs appear to diverge from norms
to companies generating €750 million ($847 million) in annual
reflected in U.S. and international tax systems,
global revenues for all services and CZK 100 million ($4.7
particularly because of their extraterritorial scope and
million) in in-country revenues for covered services.
their taxing of revenue instead of income.
European Union. Discussing a potential DST based on a 2018
proposal that: (1) included a 3% tax on revenues from targeted
Are the DSTs inconsistent with international
advertising and digital interface services, and (2) would have
commitments under the WTO or other agreements?
applied only to companies generating at least €750 million ($909
Outlook
million) in global revenues from covered digital services and at
least €50 million ($61 million) in EU-wide revenues for covered
If an agreement is not reached at the OECD in the near
services. (The 2018 proposal, which is the subject of the Section
term, and the USTR determines that action in connection
301 investigation, may form the basis for renewed efforts to
with the findings of the investigations is appropriate, the
enact an EU-wide DST in the absence of an OECD agreement).
USTR could seek to negotiate and enter into a binding
Source: CRS with information from Office of the USTR and news reports.
agreement that commits these trading partners to eliminate
Note: U.S. dol ar amounts are approximate due to exchange rate fluctuations.
the tax policy or that provides compensation to the United
States. The agency could also invoke the dispute settlement
procedures of the WTO if the USTR determined that WTO
Andres B. Schwarzenberg, Analyst in International Trade
agreements covered digital trade. Absent mutual resolution,
and Finance
it is unclear if the Biden Administration would impose
IF11564
tariffs or other trade restrictions. Should the United States
https://crsreports.congress.gov
Section 301 Investigations: Foreign Digital Services Taxes (DSTs)
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https://crsreports.congress.gov | IF11564 · VERSION 7 · UPDATED