The Office of the U.S. Trade Representative ("USTR") announced on July 10 the initiation of an investigation under Section 301 of the Trade Act of 1974 into France's digital services tax ("DST"). The French Senate subsequently passed the DST on July 11, and French President Emmanuel Macron is expected to sign the measure into law in the coming days.
This is the second Section 301 action initiated by the Trump Administration.1 Prior to taking this action, the Administration had in recent weeks indicated heightened concerns with the French measure, including in a June 19 House Ways and Means Committee hearing in which U.S. Trade Representative Robert Lighthizer said, "I think we ought to take action against the digital tax if someone puts that in place." Now there is a path for the United States to impose tariffs or other measures, after an investigation, to push back against the DST.
In announcing the investigation, Ambassador Lighthizer explained that the United States is "very concerned" that the DST "unfairly targets American companies." Under the DST, which was proposed by French Finance Minister Bruno Le Maire on March 9, France would impose a 3-percent tax on revenues derived from two narrow categories of digital activities that are dominated by U.S. firms: (1) Digital platforms: the making available to users of a multi-sided digital interface that allows users to find other users and to interact with them, and that may also facilitate the provision of goods or services directly between users; and (2) Digital advertising: services offered to advertisers (or their intermediaries) that permit the placement of targeted advertising on a digital interface. The tax would apply retroactively, beginning January 1.
Like a similar, European Union-wide measure that was considered but not pursued earlier this year, the French DST includes two revenue thresholds that are designed to limit the measure's applicability to what Minister Le Maire has characterized as the "digital giants." Specifically, in order to be subject to the DST, a firm must engage in the specified activities and have both (1) at least €750 million in global gross revenues from those activities; and (2) at least €25 million in gross revenues from the activities in France. According to Minister Le Maire, approximately 30 companies will meet these criteria. Most of these companies are American.
Under Section 301, USTR will seek to determine whether the DST is unreasonable or discriminatory and burdens or restricts 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, according to a statement by USTR in a Federal Register notice that accompanied the announcement of the investigation. The notice states that the investigation will initially focus on the following concerns with respect to the DST:
- "Discrimination: Available evidence, including statements by French officials, indicates that the DST will amount to de facto discrimination against U.S. companies. For example, the revenue thresholds have the effect of subjecting to the DST larger companies – which, in the covered sectors, tend to be U.S. companies – while exempting smaller companies, particularly those that operate only in France."
- "Retroactivity: The DST would be a substantively new tax that applies retroactively to January 1, 2019. This feature calls into question the fairness of the DST. Further, since the tax is retroactive, companies covered by the DST may not track the data necessary to calculate their potential liability back to the beginning of 2019."
- "Unreasonable tax policy: The DST appears to diverge from norms reflected in the U.S. tax system and the international tax system in several respects. These apparent departures include: extraterritoriality; taxing revenue not income; and a purpose of penalizing particular technology companies for their commercial success."
As the investigation proceeds, USTR will gather and analyze evidence to make its determination within a 12-18 month period, as required by statute. Interested individuals, companies, and trade associations should take note of the opportunity to offer written or oral comments in relation to the investigation (USTR will offer procedures to ensure the protection of business confidential information in written submissions). The key dates are as follows:
- August 12, 2019: Deadline for filing requests to appear at the public hearing
- August 19, 2019: Deadline for written comments
- August 19, 2019: Public hearing
- August 26, 2019: Deadline for filing post-hearing submissions
WilmerHale stands ready to assist clients in making written and oral submissions in this process, as the firm has done for numerous clients in relation to the Section 301 investigation of China. In that investigation, written and oral testimony from members of the public figured prominently in USTR's final report on China's practices. Here, the Federal Register notice invites comments on any issue covered by the investigation, but in particular, comments with respect to:
- "Concerns with the French digital services tax, as set out in the joint committee bill or as subsequently modified or adopted by the Government of France, including the specific concerns identified above"
- "Whether the French DST is unreasonable or discriminatory"
- "The extent to which the French DST burdens or restricts U.S. commerce"
- "Whether the French DST is inconsistent with France's 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"
Minister Le Maire responded to the U.S. announcement by asserting that "France is a sovereign country, its decisions on tax matters are sovereign and will continue to be sovereign." Minister Le Maire also rejected the use of Section 301 by the United States against France, stating that "[b]etween allies, we can and should solve our disputes not by threats but through other ways." Separately, Minister Le Maire reiterated that France would withdraw the DST once members of the Organization for Economic Cooperation and Development ("OECD") reach a "credible agreement" on a multilateral approach to digital taxes, a process in which the United States has participated and has pledged to continue to participate. The OECD members are operating under a work program to develop a multilateral approach by the end of 2020.
Time will tell how other nations that are considering their own DST measures respond to the U.S. announcement. On July 11 – the day after the U.S. initiated the Section 301 investigation and the same day the French Senate passed the French measure – the UK government announced a new 2-percent DST measure targeting companies with global digital services revenues exceeding £500 million or UK revenues exceeding £25 million. Unlike the French measure, the UK measure would not apply retroactively, but would rather apply to revenue earned after April 1, 2020. A number of other countries are considering a DST, including New Zealand, Austria, the Czech Republic, India, and Spain.
WilmerHale will continue to monitor developments regarding the Section 301 investigation, the French DST measure, and other DST measures.
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