On December 2, 2019, the US Trade Representative (USTR) announced that it had completed the first segment of its investigation under section 301(b)(1)(A) of the Trade Act of 1974 (the Trade Act) and concluded that France’s Digital Services Tax (DST) discriminates against US companies. USTR’s investigation began on July 10, 2019, and solicited comments on the DST’s Discrimination, retroactivity and unreasonable tax policy. A report available on USTR’s website sets out the findings of the investigation.
The DST was signed into law by President Macron on July 24, 2019 and imposes a 3 percent levy on revenues that certain companies generate from providing certain digital services to, or aimed at, persons in France. Specifically, USTR found that the DST is unusually burdensome for affected US companies, discriminating against US digital companies, such as Google, Apple, Facebook, and Amazon. USTR stated that the French DST is inconsistent with prevailing tax principles on account of its retroactivity to January 1, 2019, its application to revenue rather than income, its extraterritorial application (the DST applies to revenues unconnected to a physical presence in France), and its purpose of penalizing particular US technology companies (since smaller companies, that are more likely to be locally based, are exempt).
Discussions about the coordination of national tax policy to address the challenges of the digital economy is a priority issue for the Organisation for Economic Co-operation and Development (OECD). France adopted the DST before a consensus view on the question of digital economy taxation was reached at the OECD. The USTR’s Section 301 determination will ostensibly be used by the US government to advance US interests in the course of those negotiations at the OECD. Prior to issuing the Section 301 report, the USTR held consultations with France on November 14, 2019. Absent a political solution to the underlying dispute on tax policy, it is likely that the USTR will proceed to impose some form of remedy pursuant to Section 301.
Section 301 provides that upon determining that the acts, policies, and practices under investigation are actionable and that action is appropriate, USTR shall take all appropriate and feasible action, including the imposition of duties on the goods of the foreign country subject to the investigation and also to impose fees or restrictions on the services of the goods of the foreign country subject to the investigation, subject to the specific direction, if any, of the President, and all other appropriate and feasible action within the power of the President that the President may direct USTR to take, to obtain the elimination of that act, policy, or practice.
USTR is issuing a Federal Register notice explaining that, for the reasons set forth in the report, the French DST is unreasonable, discriminatory, and burdens US commerce. The notice solicits comments from the public on USTR’s proposed action, which includes additional duties of up to 100 percent on certain French products. The notice also seeks comment on the option of imposing fees or restrictions on French services. The list of French products subject to potential duties includes 63 tariff subheadings with an approximate trade value of $2.4 billion. The value of any US action through either duties or fees may take into account the level of harm to the US economy resulting from the DST.
A list of the products proposed by USTR for the additional duties may be found in the Annex to the Federal Register notice.
USTR requests comments with respect to any issue related to the action to be taken in this investigation. With respect to action in the form of additional duties, USTR invites comments regarding:
- The specific products to be subject to increased duties, including whether products listed in the Annex should be retained or removed, or whether products not currently on the list should be added.
- The level of the increase, if any, in the rate of duty.
- The level of the burden or restriction on the U.S. economy resulting from the DST.
- The appropriate aggregate level of trade to be covered by additional duties.
In commenting on the inclusion or removal of particular products on the list of products subject to the proposed additional duties, USTR requests that commenters address specifically whether imposing increased duties on a particular product would be practicable or effective to obtain the elimination of France’s acts, policies, and practices, and whether imposing additional duties on a particular product would cause disproportionate economic harm to U.S. interests, including small- or medium-size businesses and consumers.
With respect to action in the form of fees or restrictions on services of France, USTR seeks comments on issues such as:
- Which services would be covered by a fee or restriction.
- If a fee is imposed, the rate (flat or percentage) of the fee, and the basis upon which any fee would be applied.
- If a restriction is imposed, the form of such restriction.
- Whether imposing fees or restrictions on services of France would be practicable or effective to obtain the elimination of France’s acts, policies, and practices.
USTR is inviting public comment on these issues and will be holding a hearing. We are assisting many clients in responding to these proposed tariffs. If you would like to submit public comments and/or participate in a public hearing to be held on January 7, 2020, we would be pleased to assist.