Having initiated the investigations, the USTR must now determine whether the DSTs are actionable under Section 301, and if so, the USTR must determine what action to take.

On June 5, 2020, by means of an initiation notice published in the Federal Register, the Office of the U.S. Trade Representative (USTR) commenced investigations relating to digital services taxes (DSTs) adopted or under consideration by Austria, Brazil, the Czech Republic, the European Union, India, Indonesia, Italy, Spain, Turkey and the United Kingdom, pursuant to Section 301 of the Trade Act of 1974, as amended. As stated in the initiation notice, and as discussed below, the deadline for submission of comments to the USTR relating to these new Section 301 investigations is July 15, 2020.

Background on the New Section 301 Investigations

In the initiation notice, the USTR states that, over the past two years, the jurisdictions that are the subject of the new Section 301 investigations have either “taken under consideration or adopted taxes on revenues that certain companies generate from providing certain digital services to, or aimed at, users in those jurisdictions.” Specifically, the USTR describes the DSTs that have been adopted or are being considered by the subject jurisdictions as follows:

Austria

On January 1, 2020, a new law entered into force that applies a 5 percent tax to revenues from online advertising services. The tax only applies to companies with at least €750 million in annual global revenues for all services and €25 million in in-country revenues for covered digital services.

Brazil

Brazil is considering a legislative proposal entitled Contribution for Intervention in the Economic Domain (CIDE). If adopted, CIDE would apply to the gross revenue derived from digital services provided by large technology companies.

Czech Republic

The Czech Parliament is considering a draft law that would apply a 7 percent DST to revenues from targeted advertising and digital interface services. The tax would apply only to companies generating €750 million in annual global revenues for all services and CZK 50 million in in-country revenues for covered digital services.

European Union

The European Commission (EC) is considering a DST as part of the financing package for its proposed COVID-19 recovery plan. The current proposal is based on a 2018 DST proposal that was not adopted by the EC. The previous proposal included a 3 percent tax on revenues from targeted advertising and digital interface services and would have applied only to companies generating at least €750 million in global revenues from covered digital services and at least €50 million in EU-wide revenues for covered digital services.

India

On April 1, 2020, a new law entered into effect that imposes a 2 percent DST. The tax only applies to nonresident companies and covers online sales of goods and services to, or aimed at, persons in India. The tax applies only to companies with annual revenues in excess of approximately Rs. 20 million (approximately U.S. $267,000).

Indonesia

In early 2020, Indonesia adopted an electronic transaction tax that targets cross-border, digital transactions. Further implementing measures are required before the new tax can go into effect.

Italy

A new law that imposes a 3 percent tax on revenues from targeted advertising and digital interface services entered into effect on January 1, 2020. The new DST applies only to companies generating at least €750 million in global revenues for all services and €5.5 million in in-country revenues for covered digital services.

Spain

A draft DST measure that would apply a 3 percent tax to revenues from targeted advertising and digital interface services is being considered by Spain. If implemented, the tax would apply only to companies generating at least €750 million in global revenues for all services and €3 million in in-country revenues for covered digital services.

Turkey

On March 1, 2020, a new law entered into effect that applies a 7.5 percent tax to revenues from targeted advertising, social media and digital interface services. The tax applies only to companies generating €750 million in global revenues from covered digital services and TL20 million in in-country revenues from covered digital services. The Turkish president has the authority to increase the tax rate up to 15 percent.

United Kingdom

The United Kingdom is considering a DST proposal as part of its Finance Bill 2020. The measure would apply a 2 percent tax on revenues above £25 million to internet search engines, social media and online marketplaces. If implemented, the tax would apply only to companies generating at least £500 million in global revenues from covered digital services and £25 million in in-country revenues from covered digital services. The bill is currently in the final stages of adoption by Parliament, and if passed, tax payments would be due in 2021.

Initiation of the New Section 301 Investigations and Opportunity to Comment

As stated in the initiation notice, “Available evidence suggests that the DSTs are expected to target large, U.S.-based tech companies.” Concerned by this fact, the USTR consulted with appropriate advisory committees and the agencies on the Section 301 committee. Based on such consultations, the USTR has initiated the new Section 301 investigations, and pursuant to statute, the USTR has requested formal consultations with the governments of the subject jurisdictions.

Having initiated the investigations, the USTR must now determine whether the DSTs are actionable under Section 301, and if so, the USTR must determine what action to take. Initially, the investigations will focus on the following concerns with the DSTs: discrimination against U.S. companies; their retroactivity; and possibly unreasonable tax policy. 

The USTR has stated that it will accept written comments that are submitted by July 15, 2020. Although the comments may be submitted on any issue covered by the investigations, the USTR is specifically interested in receiving comments on the following issues: whether one or more of the DSTs is unreasonable or discriminatory; the extent to which one or more of the covered DSTs burdens or restricts U.S. commerce; and whether one or more of the DSTs is inconsistent with obligations under the WTO or any other international agreement. Persons submitting comments are also asked to provide recommended actions that should be taken to remedy any Section 301 violations found to exist by reason of the DSTs. Submissions must be made via the federal eRulemaking Portal. 

About Duane Morris

Attorneys in the firm’s International Group have considerable experience in assisting clients on Section 301 matters. This experience includes preparing and filing comments with the USTR.

For More Information

If you would like further information about any issues described in this Alert, please contact Brian S. Goldstein, Geoffrey M. Goodale, Hope P. Krebs, any of the attorneys in our International Group or the attorney in the firm with whom you are regularly in contact.

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