By Julie Martin, MNE Tax
Digital services taxes enacted in Austria, Spain, and the UK discriminate against US companies within the meaning of Section 301 of the US Trade Act of 1974, the Office of the US Trade Representative announced January 14.
Moreover, pending USTR investigations into digital service taxes enacted or proposed in Brazil, the Czech Republic, and Indonesia reveal significant concerns about those taxes, the USTR said in an accompanying status update. The USTR also said that even though the EU has not yet set out its approach to an EU-wide digital services tax, based on a 2018 EU proposal and official statements, the USTR is concerned that an EU-wide tax might also discriminatory.
The USTR’s conclusions follow similar, earlier decisions finding that digital services taxes enacted or proposed in India, Italy, Turkey, and France are discriminatory.
In all of these cases, the USTR has not yet recommend retaliatory trade action; the USTR said will recommend a coordinated response once it has completed all its investigations.
Since June 2, 2020, the USTR has been investigating whether digital services taxes enacted by several nations discriminate against US companies and warrant retaliation. In each case where it has reached a conclusion, the USTR has found the tax to be discriminatory.
A common design feature of digital services taxes is that they are imposed only on the very largest companies – those with significant worldwide revenue and significant revenue earned within the country imposing the tax. According to the US, these kinds of revenue thresholds discriminate against US companies in favor of domestic companies because the US is home to the largest companies. For example, the Austrian tax will not apply to any Austrian companies but hits US-headquartered companies. Out of the 60 companies subject to the Spanish tax, only two are Spanish companies while 34 are headquartered in the US, the USTR notes.
In addition to raising needed revenue, digital services taxes are being used by countries as a bargaining chip in ongoing negotiations to revise the corporate income tax rules applied to multinationals.
Since 2013, OECD and G20 countries have been attempting to agree to a coordinated change to the international tax system that would subject digital multinational firms to more corporate income tax in the countries where their customers are located. All countries seem to agree that the international tax system is outdated because taxation is based on whether a company is physically present in a country – a characteristic absent for firms that operate on the internet. There is also widespread agreement that large US-headquartered digital MNEs like Amazon, Facebook, and Uber escape corporate taxation abroad.
Despite these agreements, countries are so far unable to agree to an alternative. In the meantime, many countries moved forward with these new digital services taxes, promising to remove them once global agreement is reached on a new international tax system.
Julie Martin
Julie Martin is the founder of MNE Tax. She edits the publication and regularly contributes articles on new developments in cross-border business taxation.
Julie has worked as a tax journalist and editor for more than 13 years. Prior to that, she worked as an in-house tax attorney in New York. She also holds an LLM in taxation from New York University School of Law.
Julie can be reached at [email protected].
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