The Office of the U.S. Trade Representative (“USTR”) announced today the initiation of investigations under Section 301 of the Trade Act of 1974 into Digital Services Taxes (“DSTs”) adopted or under consideration in Austria, Brazil, the Czech Republic, the European Union, India, Indonesia, Italy, Spain, Turkey, and the United Kingdom.

This is the second time the Trump Administration has invoked Section 301 to address DSTs. Last July, the Administration initiated a Section 301 investigation of France’s DST, which resulted in findings that the DST discriminates against U.S. companies, is inconsistent with prevailing principles of international tax policy, and is unusually burdensome for affected U.S. companies.¹ USTR also found that the French DST is inconsistent with prevailing tax principles on account of its retroactivity, its application to revenue rather than income, its extraterritorial application, and its purpose of penalizing particular U.S. technology companies.² USTR proposed to address the DST by imposing tariffs of up to $2.4 billion on a wide variety of French products. It ultimately delayed their imposition, however, after France agreed to suspend the collection of its DST pending negotiations at the OECD.

In announcing the new investigations, Ambassador Lighthizer asserted that “President Trump is concerned that many of our trading partners are adopting tax schemes designed to unfairly target our companies,” and that “[w]e are prepared to take all appropriate action to defend our businesses and workers against any such discrimination.”  The new investigations target existing or proposed measures in the following jurisdictions:

• Austria: In October 2019, Austria adopted a DST that applies a 5-percent tax on digital advertising services. The law went into effect on January 1, 2020. Similar to France’s DST, the law includes two revenue thresholds designed to limit its applicability to large digital companies. Specifically, in order to be subject to the DST, a firm must have both (1) annual global revenues for all services of at least € 750 million; and (2) € 25 million of in-country revenues for the covered digital advertising services.
• Brazil: Brazil is currently considering a legislative proposal to adopt a “Contribution for Intervention in the Economic Domain” for digital services companies. If adopted, the tax would apply to gross revenues that large technology companies generate from the provision of digital services.
• Czech Republic: The Czech Republic is considering a draft law that would apply a 7-percent tax on revenues from targeted advertising and digital interface activities. This proposed DST also includes two revenue thresholds designed to limit its applicability to large digital companies: the tax only applies to companies that generate (1) annual global revenues for all services of at least € 750 million; and (2) in-country revenues of CZK 50 million for covered digital services.
• The European Union: The European Commission is considering introducing a DST as part of a broader package to finance COVID-19 recovery efforts. The proposed DST is based on an earlier proposal from 2018 that was not adopted. The proposed DST would apply a 3-percent tax on revenues from targeted advertising and digital interface services. Similar to other proposed and enacted DSTs, the tax includes two revenue thresholds designed to limit its applicability to large digital companies. Specifically, in order to be subject to the European Union’s proposed DST, a firm must have both (1) annual global revenues for all services of at least € 750 million; and (2) € 50 million in EU-wide revenues for the covered digital services.
• India: In March 2020, India adopted a DST that applies a 2-percent tax on online sales of goods and services. The law went into effect on April 1, 2020. India’s DST applies only to non-resident companies and includes a revenue threshold designed to limit its applicability to large digital companies. Specifically, the tax only applies to companies with annual revenues in excess of Rs. 20 million (approximately $267,000).
• Indonesia: In March 2020, Indonesia adopted a DST as part of broader tax reform measures relating to COVID-19. The new tax on electronic transactions (referred to as “PMSE”), which is not yet in effect, applies to foreign merchants, foreign service providers, and foreign digital platforms. It requires the collection and payment of VAT on the utilization of intangible goods and/or services from outside Indonesia and payment of taxes on income arising from electronic transactions if they meet certain thresholds for gross revenue, sales, and/or number of digital media users in Indonesia. Further details regarding these thresholds and the relevant tax rates will be issued through implementing measures.
• Italy: Italy adopted a DST that applies a 3-percent tax on targeted advertising and digital interface services. The tax went into effect on January 1, 2020. Like many of the other DSTs under investigation, Italy’s DST includes two revenue thresholds designed to limit its applicability to large digital companies. Specifically, in order to be subject to the DST, a firm must have both (1) annual global revenues for all services of at least € 750 million; and (2) € 5.5 million of in-country revenues for the covered digital services.
• Spain: Spain is currently considering a draft DST that would apply a 3-percent tax on targeted advertising and digital interface services. The proposed DST includes two revenue thresholds designed to limit its applicability to large digital companies. Specifically, in order to be subject to the DST, a firm must have both (1) annual global revenues for all services of at least € 750 million; and (2) € 3 million of in-country revenues for the covered digital services.
• Turkey: Turkey adopted a DST that applies a 7.5-percent tax on revenues from targeted advertising, social media, and digital interface services, which the Turkish government may increase up to 15-percent. The law went into effect on March 1, 2020. Turkey’s DST also includes two revenue thresholds designed to limit its applicability to large digital companies. Specifically, in order to be subject to the DST, a firm must have both (1) annual global revenues from covered digital services of at least € 750 million; and (2) TL 20 million of in-country revenues for the covered digital services.
• United Kingdom: The United Kingdom is currently considering a DST proposal that would apply a 2-percent tax on revenues above £ 25 million to internet search engines, social media, and online marketplaces. The proposed DST includes two revenue thresholds designed to limit its applicability to large digital companies. Specifically, in order to be subject to the DST, a firm must have both (1) annual global revenues from covered digital services of at least £ 500 million; and (2) £ 25 million of in-country revenues for the covered digital services. If enacted, the DST would not apply retroactively and would only affect revenue earned in 2021.

Under Section 301, USTR will seek to determine whether the foregoing DSTs are unreasonable or discriminatory and burden or restrict U.S. commerce. A measure need not violate the United States’ international legal rights (e.g., under the WTO or another international trade agreement) in order to meet this test, as the Federal Register notice accompanying the announcement of the investigations notes.³ The Federal Register notice also states that the investigations will initially focus on the following concerns with respect to the DSTs: discrimination against U.S. companies; retroactivity; and possibly unreasonable tax policy, including potential divergence from norms reflected in the U.S. and international tax systems.

As the investigations proceed, USTR will gather and analyze the evidence it needs to make its determinations. USTR expects to complete the investigations within 12-18 months, as the statute requires. Interested individuals, companies, and trade associations should take note of the opportunity to offer written comments in relation to the investigations. To be assured of consideration, written comments must be submitted by July 15, 2020.

WilmerHale stands ready to assist clients in making written submissions in this process, as it did in the Section 301 investigation of France’s DST. In that investigation, written and oral testimony from members of the public figured prominently in USTR’s final report. Here, the Federal Register notice invites comments on any issue covered by the investigations, but in particular, comments with respect to:

• “Concerns with one or more of the DSTs adopted or under consideration by the jurisdictions covered in these investigations.”
• “Whether one or more of the covered DSTs is unreasonable or discriminatory.”
• “The extent to which one or more of the covered DSTs burdens or restricts U.S. commerce.”
• “Whether one or more of the covered DSTs is inconsistent with obligations under the WTO Agreement or any other international agreement.”
• “The determinations required under section 304 of the Trade Act, including what action, if any, should be taken.”

In light of uncertainties related to COVID-19, USTR is not at this time scheduling a public hearing in these investigations.

WilmerHale will continue to monitor developments regarding the Section 301 investigations, the French DST measure, and other DST measures.