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June 10, 2020
Section 301 Investigations: Foreign Digital Services Taxes (DSTs)
Backgrou~d
An international debate is occurring over the global taxing
rights of revenues and profits earnedby multinational
corporations (MNCs) in certain digital economy sectors.
This debate is driven by concerns that theseMNCs are not
adequately taxed and arguments that the right to taxsome
of theirprofits should be reallocated fromthe jurisdiction
where the MNCclainis residence to the juris diction where
their customers are located.
Some countries have impo s ed unilateral digital services
taxes (DSTs) on the gross revenues earnedby digital
economy MNCs. These taxes target certain MNC digital
trans actions 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 oftheseDSTs effectively
target large U.S. MNCs disproportionately to other firms. In
addition, some observers argue that the proliferation of such
unilateral measures could undermine basic principles of the
current international taxation system
Meanwhile, at the international level, more than 130
countries, comprising both members and non-members of
the Organis ation for Economic Cooperation and
Development (OECD), are negotiating policy
recommendations in an attempt to develop an international
digital tax framework. The OECD Secretariat 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.
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 subjectof a 2019 investigation by
the U.S. Trade Representative (USTR), under Section 301
of the Trade Actof 1974. More recently, theUSTR
launched a new investigation into the implemented or
proposed DSTs of 10 other U.S. trading partners.
Ov-e rvkew af sec t io n 3 u,
Title Ill 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 arange 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 andburden U.S. commerce. Prior to 1995,
the United States used Section301 to unilaterally pressure
other countries to eliminate tradebarriers and opentheir
markets to U.S. exports. The creation of an enforceable
dispute settlement mechanismin 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 seekrecourse for foreign unfair trade practices
in the WTO or under Section 301. The Statementof
Administrative Action (SAA)-which explained how U.S.
agencies would implement the 1994 Uruguay Round
Agreements Act (URAA or WTO Agreements)-states
that the USTRwill 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 considerthat a matter involves
WTO Agreements. Such a determination appears to be
solely at the USTR's dis cretion. 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 theWTO.
-ae, sD,,,g - ,Se e ... .-, Ta
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 fromtwo digital activities ofwhich French users
are deemed to play a major role in value creation: (1)
intermediary services, and (2) advertising services basedon
users'data. The lawexcludes certain services, including
digital interfaces forthe delivery ofdigital content. The
DST applies only to companies with annualrevenues from
the covered services o fat least C750 million ($847 million)
globally and C25 million ($28 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.
In its investigation, initiated on July 10 and completed on
December 2, 2019, the USTR ultimately concluded that
France's DST discriminates againstmajorU.S. digital
companies and is inconsistent with prevailing international
taxpolicy principles. On December 6,2019, the USTR
is sued a preliminary list of products fromFrance, with an
estimated 2018 import value of $2.4 billion, on which to
impose additionaltariffs of up to 100%. The agency sought
comments on the proposed action, convened a hearing, and
accepted post-hearing rebuttal comments, after which it
would be generally required to make a finaldetermination.
At the end of January 2020, France suspendedits DST for
the remainderof 2020 and agreedto continueworking with
the United States at the OECD to reach a compromise on
international digital taxation. News outlets have reported
that Section 301 tariffs will not be imposedon U.S. imports
from France while countries work on the deal, butthe
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