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France Could be Tariff Target as U.S. Launches 301 Probe of Digital Services Tax

Friday, July 12, 2019
Sandler, Travis & Rosenberg Trade Report

Demonstrating again its willingness to use trade threats to address a wide range of issues, the Trump administration announced July 10 a new Section 301 investigation into a French digital services tax. This investigation, which could take up to 12 months, could result in tariffs or other restrictions on imports from France if the two sides are not able to reach a settlement. Other European Union member countries are also reportedly considering DSTs after efforts to impose one across the entire EU failed earlier this year.

According to press sources, both chambers of the French legislature have approved legislation to impose a three percent tax on total annual revenues generated by some companies from providing certain digital interface services (e.g., e-marketplaces for goods and services) and Internet advertising services to, or aimed at, French users. The Office of the U.S. Trade Representative states that the services covered are ones where U.S. firms are global leaders and that the structure of the proposed tax suggests that France is unfairly targeting certain U.S.-based technology companies. France has said it will eliminate the DST once Organisation for Economic Cooperation and Development members reach an agreement to update cross-border tax rules to reflect digital trade, press reports state, which could take until late 2020.

In its new investigation USTR will determine whether the French DST is actionable under Section 301 and, if so, what action to take. USTR states that the investigation will initially focus on concerns that the DST will discriminate against U.S. companies, will be retroactive to Jan. 1, 2019, and appears to diverge from norms reflected in the international tax system with respect to extraterritoriality, the taxation of revenue instead of income, and the apparent penalization of particular technology companies for their commercial success.

USTR is seeking public input on these and other issues, including the extent to which the DST burdens or restricts U.S. commerce, whether the tax is inconsistent with France’s obligations under the World Trade Organization Agreement or any other international agreement, and what action (if any) should be taken. To facilitate such input USTR will hold a hearing Aug. 19, accept written comments through Aug. 12, and accept post-hearing submissions through Aug. 26.

For more information, please contact Nicole Bivens Collinson at (202) 730-4956 or Kristen Smith at (202) 730-4965.

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