United States: USTR Initiates Section 301 Investigation Into French Digital Services Tax

Ronald Oleynik is a Partner and Farid Hekmat is an Associate in Holland & Knight's Washington D.C. office

  • The Office of the U.S. Trade Representative is conducting an investigation under Section 301 of the Trade Act of 1974 with respect to the digital services tax (DST) bill recently approved by the French Parliament.
  • Under the new bill, a 3 percent DST would be applied to large multinational companies that provide certain digital services to, or aimed at French individuals, even if these companies are not domiciled in France and have no permanent establishment there.
  • The bill is expected to affect major U.S. technology companies, and U.S. Trade Representative Robert Lighthizer expressed concerns that the tax "unfairly targets the American companies."

The Office of the U.S. Trade Representative (USTR) is conducting an investigation under Section 301 of the Trade Act of 1974 with respect to the digital services tax (DST) bill recently approved by the French Parliament.1 Under the new bill, a 3 percent DST would be applied to large multinational companies that provide certain digital services to, or aimed at French individuals, even if these companies are not domiciled in France and have no permanent establishment there.2 The DST bill is expected to affect major U.S. technology companies.

On July 10, 2019, U.S. Trade Representative Robert Lighthizer expressed concerns that the tax "unfairly targets the American companies," and stated USTR would investigate the effects of this legislation and determine whether it was "discriminatory or unreasonable and burdens or restricts United States commerce" under Section 301.

Section 301 and the Focus of the Current Investigation

Section 301 has been one of the Trump Administration's principal unilateral enforcement tools since its probe of China's technology polices last year, leading to tariffs on $250 billion worth of Chinese imports. Section 301 grants USTR board authority to make determinations and impose retaliatory measures regarding acts, policies and practices of foreign countries that violate or contradict rights of the United States under any existing trade agreement or are "unjustifiable" and "unreasonable" and burden or restrict U.S. Commerce.3

USTR states that the investigation into the DST will initially focus on the following:

  • Discrimination: USTR suggests available evidence, including statements by French officials, indicates that the DST amounts to de facto discrimination against U.S. companies. Also, the revenue thresholds have the effect of subjecting U.S. companies to the DST while exempting smaller companies, particularly those that only operate in France.4
  • Retroactivity: USTR states the fact that the DST would be applied retroactively to Jan. 1, 2019, calls into question its fairness.
  • Unreasonable tax policy: USTR claims that the DST diverges from norms reflected in the U.S. and the international tax system.5

Implications of Section 301 Investigation

In the event that the investigation concludes that the DST triggers penalties under Section 301, USTR would either follow agreed-upon dispute settlement procedures or undertake unilateral measures, depending on whether the alleged violations are covered by any existing trade agreement.6 USTR's notice does not specify any breach of obligations under the World Trade Organization (WTO) Agreement or other trade agreements on France's part. Instead, the notice highlights USTR's authority to determine whether certain acts, policies and practices of a foreign country (not covered by trade agreements) are "unreasonable" and "discriminatory." This language seems to indicate that USTR will undertake unilateral measures in response to the DST.

One likely response would be punitive tariffs,7 such as those placed on China. Another option is using Section 891 of the Internal Revenue Code, which allows the U.S. to double the tax on "citizens and corporations of foreign countries engaging in discriminatory taxation of Americans."8

USTR has requested consultations with France, but it appears unlikely that France will back down on the DST. Although French Minister Bruno Le Maire stated that the French DST bill was "temporary" and would be removed if an agreement on international tax on digital services was achieved through the Organization for Economic Co-operation and Development (OECD), he also emphasized that France has the sovereign authority to decide its own tax rules.9

Apart from France, Austria, the Czech Republic, Italy, Portugal, Spain and the United Kingdom are also moving forward with digital tax legislation. In particular, the United Kingdom has published a draft bill that will introduce a 2 percent tax on the revenues of search engines, social media platforms and online marketplaces that derive value from U.K. users.10

USTR's Request for Comments

Interested persons are invited to submit written comments or oral testimony on any issue covered by the investigation. In particular, USTR invites comments with respect to 1) concerns with the French DST, 2) whether the French DST is unreasonable or discriminatory, 3) the extent to which the French DST burdens or restricts U.S. commerce, 4) whether the French DST is inconsistent with France's obligations under the WTO Agreement or any other international agreement, and 5) the determinations required under section 304, including what action, if any, should be taken.

A public hearing regarding the French DST will be held on Aug. 19, 2019. Interested persons can request to appear at the hearing or submit written comments before and after the hearing.


1. On July 11, 2019, the French Senate approved the bill, which has been passed by the French National Assembly on July 4

2. The DST applies only to companies with annual revenues from the covered services of at least 750 million euros (approximately $842 million) globally and 25 million euros (approximately $28 million) in France. The covered digital services include certain "digital interface" services (e.g., e-marketplaces for goods and services) and certain digital advertising services provided to, or aimed at French users. 84 Fed. Reg. 34042 (July 16, 2019).

3. See 19 U.S.C. §2411

4. See note 2

5. These apparent departures include extraterritoriality, taxing revenue not income, and a purpose of penalizing particular technology companies for their commercial success.

6. See19 U.S.C. §2411

7. See19 U.S.C. §2411(c)(1)

8. "US Threats Unlikely to Stop France's Digital Tax," Law360, July 16, 2019

9. "French Minister Hits Back at U.S. Over Digital Tax Investigation," Law360, July 11, 2019

10. "Introduction of the New Digital Services Tax," HM Revenue & Customs, July 11, 2019

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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