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Updated August 31, 2020
Section 301 Investigations: Foreign Digital Services Taxes (DSTs)
Ba ckgrou nd
An international debate is occurring over the global taxing
rights of revenues and profits earned by multinational
corporations (MNCs) in certain digital economy sectors.
This debate is driven by concerns that these MNCs are not
adequately taxed, and some governments argue that the
right to tax some of the INC profits should be reallocated
from the jurisdiction where the MNC claims residence to
the jurisdiction where the MNC's customers are located.
Some countries have imposed unilateral digital services
taxes (DSTs) on the gross revenues earned by digital
economy MNCs. These taxes target certain MNC digital
transactions with domestic businesses or online activities
directed ultimately towards domestic users, even if the
corporation does not have a physical presence in the
country. The Trump Administration and others contend
that, based on their design, many of these DSTs
disproportionately target large U.S. MNCs. In addition,
some observers argue that the proliferation of such
unilateral measures could undermine basic principles of the
current international taxation system.
The United States and more than 130 countries, comprising
both members and nonmembers of the Organisation for
Economic Cooperation and Development (OECD), are
negotiating policy recommendations in an attempt to update
the global tax system and develop an international digital
tax framework. The OECD Secretariat originally
announced its intent to conclude these negotiations by the
end of 2020, although there are doubts about the feasibility
of this timeline due to the Coronavirus Disease 2019
(COVID-19) pandemic and critical policy differences
among countries.
Despite ongoing negotiations at the OECD, some countries,
particularly in Europe and Asia, have proposed, announced,
or implemented DSTs. France's DST by far the most
controversial-was the subject of a 2019 investigation by
the U.S. Trade Representative (USTR), under Section 301
of the Trade Act of 1974. More recently, the USTR
launched a new investigation into the implemented or
proposed DSTs of 10 other U.S. trading partners.
Overview of Scti 30
Title III of the Trade Act of 1974 (Sections 301-310,
codified at 19 U.S.C. §§2411-2420), titled Relief from
Unfair Trade Practices, is often collectively referred to as
Section 301. It grants the USTR a range of
responsibilities and authorities to impose trade sanctions on
foreign countries that violate U.S. trade agreements or
engage in acts that are unjustifiable, unreasonable, or
discriminatory and burden U.S. commerce. Prior to 1995,
the United States used Section 301 to unilaterally pressure
other countries to eliminate trade barriers and open their
markets to U.S. exports. The creation of an enforceable
dispute settlement mechanism in the World Trade
Organization (WTO), strongly supported at the time by the
United States, significantly reduced the use of Section 301.
The United States retains the flexibility to determine
whether to seek recourse for foreign unfair trade practices
in the WTO or under Section 301. The Statement of
Administrative Action (SAA)-which explained how U.S.
agencies would implement the 1994 Uruguay Round
Agreements Act (URAA or WTO Agreements)-states
that the USTR will invoke the dispute settlement
procedures of the WTO Dispute Settlement Understanding
(DSU) for investigations that involve an alleged violation of
(or the impairment of U.S. benefits under) WTO
Agreements. At the same time, the SAA makes clear that
[n]either section 301, nor the DSU will require the USTR
to do so if it does not consider that a matter involves
WTO Agreements. Such a determination appears to be
solely at the USTR's discretion. However, the USTR's
decision to bypass WTO dispute settlement and impose
retaliatory measures (if any) in response to a Section 301
investigation may be challenged at the WTO.
Fraunce',s Digital Servi'kces Ta,-x
France enacted a DST formally on July 24, 2019. The DST
applies retroactively to digital services revenue as of
January 1, 2019, and is a 3% levy on gross revenues
derived from two digital activities of which French users
are deemed to play a major role in value creation: (1)
intermediary services, and (2) advertising services based on
users' data. The law excludes certain services, including
digital interfaces for the delivery of digital content. The
DST applies only to companies with annual revenues from
the covered services of at least £750 million ($888 million)
globally and £25 million ($30 million) in France. Covered
companies are required to calculate revenues attributable to
France (and, therefore, covered by the DST) using formulas
specified in the law.
S'ecto 30 netgaktion of French DST
In its investigation, initiated on July 10 and completed on
December 2, 2019, the USTR concluded that France's DST
discriminates against major U.S. digital companies and is
inconsistent with prevailing international tax policy
principles. While France suspended its DST earlier this year
for the remainder of 2020, and it agreed to continue
working with the United States at the OECD to reach a
compromise on international digital taxation, the USTR
ultimately determined to take retaliatory action in the form
of additional duties. On July 10, 2020, the agency
announced that it would impose additional tariffs of 25% on
approximately $1.3 billion worth of imports, or about 2.2%
of all U.S. goods imports from the France in 2019. The
USTR faced a July 10 statutory deadline to make a
determination on what action to take but stated that it will
delay the implementation for up to 180 days (that is, up to
January 6, 2021). USTR's announcement confirms that it is
suspending the action to allow more time for bilateral and
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