Trade correspondent L.C. reports:
US Trade Representative (USTR) Robert Lighthizer announced on July 10th that it is initiating a Section 301 investigation focused on the new French Digital Services Tax (DST). The tax is expected to hit major US technology companies hard. The investigation will determine if the tax is an unfair trade barrier and if so, how the US should respond – presumably with tariffs on French goods.
The tax was approved by the French Senate on July 11th, after passing the National Assembly on July 4th. It addresses an issue long raised by the Europeans – that the large tech companies doing most of their business online avoid paying taxes in the high-tax countries where they earn money — by locating their headquarters in low-tax countries. Paris estimates that its DST will earn well over $500 million this year and more in the future.
While it is not clear how this situation will evolve, the French, like the rest of the EU, say they agree with Washington that the best way forward would be to have a global DST negotiated through the Organisation for Economic Co-operation and Development (OECD), but in the meantime they will impose a national tax. Some other countries are also contemplating imposing their own DST. The issue is expected to come up when G7 finance ministers meet in Chantilly, France on July 17th-18th. The Council on Foreign Relations describes the Group of Seven (G7) as “an informal bloc of industrialized democracies—Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States—that meets annually to discuss issues such as global economic governance, international security, and energy policy. “
According to the July 10th USTR announcement, “The French DST bill would impose a 3% tax on total annual revenues generated by some companies from providing certain digital services to, or aimed at, French users [including ad revenues]. The tax applies only to companies with total annual revenues from the covered services of at least €750 million globally and €25 million in France. The services covered are ones where US firms are global leaders. The structure of the proposed new tax as well as statements by officials suggest that France is unfairly targeting the tax at certain US-based technology companies.”
The tax will be retroactive to the beginning of this year, based on sales – not profits – made by online companies within France. The size of the companies to which the tax applies has been set so large that it appears to be deliberately aimed at catching the US giants. According to the French government, the DST will hit about 30 companies. Most are from the US though some affected companies are from China, Germany, Spain, the UK – and one is French.
Taxes on revenues are highly irregular.
Lighthizer’s statement accompanying the announcement said, “The US is very concerned that the digital services tax… unfairly targets American companies.” Therefore, “The President has directed that we investigate the effects of this legislation and determine whether it is discriminatory or unreasonable and burdens or restricts US commerce.”
The USTR added that “The US will continue its efforts with other countries at the OECD to reach a multilateral agreement to address the challenges to the international tax system posed by an increasingly digitized global economy.” The EU, France, and other countries upset with the current regime for taxing online services all agree, at least in their public statements, that they hope to see an international deal under OECD auspices, in which case they would revoke any national tax they might have imposed in the meantime.
As the USTR explained, “Section 301 and related provisions of the Trade Act give the USTR broad authority to investigate and respond to a foreign country’s unfair trade practices.” The investigation will include an opportunity for submission of comments and a public hearing that has been set for August 19th.
Section 301 is the trade law provision that is being used to impose tariffs on a broad swath of imports from China. It has been found to be consistent with World Trade Organization (WTO) rules, but only if an investigation leads to the initiation of a WTO case against the foreign practice found to be discriminatory — not if it leads, as in the China case, to unilateral tariffs. In this new case, the US government would clearly want to act more quickly to retaliate than it could if it waits for WTO authorization.
The invocation of Section 301 to investigate the French DST was applauded by major portions of the US private sector and by members of Congress. The prospect of a digital tax has been a focus of concern for some time. Companies likely to be ensnared are those that provide functions such as search engines, social media, online stores and online services, thus hitting Google, Facebook eBay, Amazon, Uber, and perhaps a few others. According to the US Internet Association, 64% of all US services exports are digital products. The US runs a services trade surplus.
Bipartisan agreement
Sens. Chuck Grassley (R-IA) and Ron Wyden (D-OR), the chairman and top Democrats on the Senate Finance Committee, released a joint statement saying, “The digital services tax that France and other European countries are pursuing is clearly protectionist and unfairly targets American companies…. We have urged the administration to consider all available tools to address this discriminatory action and applaud the USTR for launching an investigation.” The statement said that other countries should abandon unilateral taxes and “focus their energies on the multilateral process that is underway at the OECD.” The two senators had written to USTR in June suggesting the US could penalize France by doubling tariffs on its exports, and Treasury has reportedly told them it will consider doing so and intends to discourage other countries from copying the French tax.
The US-based Information Technology & Innovation Foundation (ITI) argues that, “France’s move to enact a unilateral, national digital tax opens the door to a fragmented, inefficient global tax system that would reduce business certainty and impede innovation, job creation, and economic growth worldwide…. [P]roceeding unilaterally would complicate economic relationships around the world and lead to undesirable measures to address France’s action.”
Since a proliferation of differing taxes imposed by individual countries would be the worst case for the US tech giants, Washington has encouraged efforts by the OECD to negotiate a cooperative agreement on a tax that would be consistent across countries. There was even a bipartisan push in Congress earlier this year urging the Administration to oppose the proliferation of differing national digital tax systems “designed to discriminate against US-based multinational companies” and instead work with other governments in Europe and elsewhere “to support a multilateral approach through the OECD that ensures a fair tax structure for US companies globally.”
While it had appeared that the Europeans would agree to work through the OECD, earlier this year, France has unilaterally gone ahead in imposing its own DST even while claiming to support the OECD effort.
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