There was a time when a multilateral approach to address concerns over profit-shifting tax avoidance and transfer pricing strategies employed by multinational corporations (MNCs) seemed possible. These days, a multilateral solution that includes the United States seems particularly unlikely. Unfortunately, in the absence of a more coordinated response to the issues posed by MNCs and the tax challenges of the digital age, the major tax disputes are expected to play out in the arena of international trade.
As background, the international community – including the U.S. – has long agreed that the evasive tactics of MNCs under the current international tax regime pose significant and distinct problems in a global, digital economy. By 2013, international agreement on the need to address those problems prompted the Organization for Economic Development (OECD) to establish a multilateral Base Erosion and Profit Shifting project (BEPS). The BEPS first introduced a process by which the OECD would review and address the various policies that were allowing MNCs to take advantage of and undermine the current tax framework. An ongoing, unfinished item of the BEPS is addressing the particular challenges of taxation of the digital economy. Since 2015 the OECD has hosted public consultations and negotiations with BEPS member countries on those challenges. As mandated by the G20 in 2018, the OECD is set to announce the product of their work on the issue by fall of this year, i.e., a proposal for a unified approach to confront the tax challenges.
Notwithstanding the ongoing multilateral negotiations undertaken by the OECD, a growing number of countries have taken matters into their own hands by unilaterally passing or preparing to pass legislation allowing for the taxing of certain digital services within that country. France was the first to take action and in the summer of 2019 imposed what is known as a “Digital Services Tax” (DST). Generally, a DST is a tax on selected gross revenue streams of large digital companies. All DSTs have domestic and global revenue thresholds and any company not meeting the threshold requirements is not subject to the tax. For example, the French DST is levied against certain services at a rate of 3 percent and will apply to all companies (regardless of where they are incorporated) with worldwide revenues from taxable digital services exceeding €750 million per year and more than €25 million of the annual revenue is generated in France..
France’s passage of their DST in July 2019 generated considerable controversy in the U.S. because certain provisions in the DST, including the global and domestic revenue thresholds, were interpreted by the Trump Administration as discriminatory to U.S. commerce and a target of U.S.-based digital giants including Google, Apple, Facebook and Amazon. In response, the USTR opened a Section 301 investigation into the discriminatory nature of France’s DST and in December 2019, released the investigation report finding the DST discriminatory. Thus, the Trump administration issued a list of $2.4 billion worth of French goods that would be subject to retaliatory tariffs unless France repealed the DST. France did not repeal the DST but it was able to strike a deal with the U.S. where the U.S. would hold off on the tariffs if France agreed to postpone collecting down payments of the DST for one year while OECD talks were ongoing. In coming to the truce, both countries cited the importance of broader negotiations happening within the OECD and the delay of the potential tariff war was more or less conditioned upon the U.S. commitment to those negotiations as well as to the multilateral international agreement on digital taxation resulting therefrom.
However, on June 16, 2020, Treasury Secretary Steven Mnuchin withdrew the U.S. from OECD negotiations related to a multilateral agreement on digital services taxation and U.S. Trade Representative Lighthizer affirmed the U.S. intention to pull out of the negotiations. The announcement of U.S. withdrawal comes in response to a long-standing deadlock in those negotiations over whether a multilateral reform of the international tax structure would single out U.S. tech companies or apply more broadly to reach more cross-border actors. What result the U.S. pulling out of OECD negotiations has on the truce reached earlier this year between France and U.S. remains unclear. Any incentive France had in postponing collection of DST down payments from U.S. companies may be lost now that the U.S. has abandoned the broader reform efforts that undergirded that truce. Should France begin to collect the DST down payments, it is likely only a matter of time until the U.S. retaliates with the implementation of the previously paused 301 tariffs.
Furthermore, as mentioned above, France is just one of a growing number of countries that have responded unilaterally to the challenges of digital services taxation. Quite a few countries as well as the EU imposed or are preparing to impose DSTs similar to the French DST or slight variations thereof. Predictably then, earlier this month, the USTR launched Section 301 investigations into the discriminatory nature of the DSTs of 10 jurisdictions, including the UK, Spain, Italy, Turkey, and Austria.
Given that many of the DSTs now under 301 investigation largely mimic the structure and substance of the French DST, it is fair to anticipate that the USTR will issue an affirmative finding of discrimination at the conclusion of the investigations. If the U.S. is serious in its withdrawal from OECD negotiations, it is also fair to anticipate that the affirmative findings in those investigations will result in a slew of products from the relevant jurisdictions being subject to increased duty. In any event, the threat of an all out DST-301 trade war is certainly taking form.