The Office of the US Trade Representative (USTR) today announced that it has initiated an investigation into digital services taxes proposed or adopted in Austria, Brazil, the Czech Republic, the European Union, India, Indonesia, Italy, Spain, Turkey, and the UK. The USTR is concerned that the digital services tax regimes in these countries may target US-based technology companies and may be actionable under section 301 of the Trade Act of 1974. If so actionable, the USTR will determine what type of retaliation the US should take. Today’s action follows the USTR’s December 2019 decision that France’s digital services tax was discriminatory and proposing retaliatory tariffs on French luxury goods of up to 100 percent.
The USTR said that in assessing the 10 tax schemes, it will focus on whether the taxes discriminate against US companies, retroactivity, and unreasonable tax policy. With respect to unreasonable tax policy, the USTR noted that digital service taxes may diverge from norms reflected in the US and international tax systems by being extraterritorial, taxing revenue not income, and penalizing tech companies for commercial success.
The OECD is working with over 130 countries to reach an agreement by year-end on an update to the international tax rules that would increase the amount of taxes paid by digital firms; however, countries are having a difficult time reaching an agreement in large part because the US changed its position on a compromise approach late into the negotiation. It is expected that if an international agreement is reached in the OECD-led process, most if not all countries that have adopted digital services taxes will repeal their taxes and replace them with the agreed-to approach.
CA Vishal Mehta
Partner PBS SOlutions