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Nations Pursuing Digital Tax Unmoved by U.S. Trade Probe (1)

June 3, 2020, 6:56 PMUpdated: June 3, 2020, 7:35 PM

Countries facing the threat of U.S. trade sanctions over their digital services tax plans are shrugging off Washington’s displeasure for now.

The European Union, the Czech Republic, and the U.K. on Wednesday signaled their determination to proceed with their plans for such taxes, even in the face of the U.S. Trade Representative’s announcement a day earlier that it was opening what are known as Section 301 investigations, which can result in trade sanctions.

The U.S. probe also will look into the digital services tax plans of Austria, Brazil, Indonesia, Italy, Spain, and Turkey. The other countries have yet to comment publicly on the U.S. announcement.

Washington had already targeted France for a section 301 investigation, after it became the first country to fully implement such a tax in July 2019. After an August 2019 hearing, the Section 301 panel released its final report in December, which said the U.S.T.R. could impose $2.4 billion of tariffs on French goods in retaliation.

France and the U.S. decided to diffuse rising trade tensions earlier this year, agreeing that Paris would postpone collection of the tax and that Washington would hold off any possible tariff action until December. They hoped this move would give the Organization for Economic Cooperation and Development enough time to work out a more permanent global solution.

On Wednesday, French Finance Minister Bruno Le Maire criticized Washington’s action, Bloomberg News reported, saying it showed “a real contradiction” between a U.S. call for unity within the Group of Seven nations “and the possibility of new trade sanctions.”

“We won’t give up on anything on digital tax,” Le Maire said. “I’ve called on the states of the G-7 to accelerate work at the OECD to get an international solution by the end of 2020.”

India Staying the Course

India will defend its decision to widen a tax on digital services after the U.S. started a probe to determine whether the policy discriminates against American tech giants, Bloomberg News cited a person with knowledge of the matter Wednesday.

The government isn’t considering changing its stance on including e-commerce within the scope of its levy, the person said, asking not to be identified as they’re not authorized to talk with media. The broader tax was announced in Prime Minister Narendra Modi’s February budget and has already come into effect.

Growing Number of Digital Taxes

The OECD is trying to get nearly 140 countries to agree to an overhaul of how the digital economy is taxed—addressing concerns that multinationals, particularly tech giants, aren’t paying enough tax in the countries where they have users or consumers.

In addition to the countries Washington is formally investigating, others, including Kenya, and even some U.S. states, are looking toward the tech giants for revenue.

Many of these digital services taxes are based on a March 2018 proposal from the European Commission for a 3% levy on any large tech group with 750 million euros ($839 million) in global revenue and 50 million euros of digital revenues in the EU.

Imposing an EU-wide tax, however, would require the unanimous support of all EU countries, something the measure has failed to garner. Frustrated by the pace of negotiations, several E.U. countries decided to pursue such taxes unilaterally. Among them were Austria, which had proposed the tax while it held the E.U.'s rotating presidency.

Indeed, most of the countries that have proposed or adopted digital services taxes belong to the EU. Four current member states, as well as the U.K., a former member, were among those named in the section 301 report on Tuesday—alongside the 27-nation bloc itself.

The EU has vowed that it would respond to any U.S. trade sanctions with similar measures.

“In this, as in all other trade-related matters, the European Union will react as one,” a spokesman for the European Commission, the bloc’s executive, said Wednesday in a statement.

The Commission also warned that any U.S. trade probe must “comply with the international law and in particular the rules of the World Trade Organization.”

U.K. Digital Tax

The U.K. Treasury said that its DST is a “fair and proportionate tax.”

“Our digital services tax ensures that digital businesses pay tax in the U.K. that reflects the value they derive from U.K. users, and is compatible with the U.K.’s international obligations,” a Treasury spokesman said Wednesday.

The U.K.'s position is complicated by the fact that it is currently seeking to negotiate a free-trade agreement with the U.S. Several U.S. lawmakers have said that such an agreement could be subject to the U.K. dropping its digital tax.

“We have always been clear that our preference is for a global solution to the tax challenges posed by digitization, and we’ll continue to work with the U.S. and other international partners to achieve that objective,” the Treasury spokesman added.

Czech Republic Stays Firm

The Czech Republic remained defiant in the face of U.S. trade sanctions.

“Tax policy is a sovereign matter of every state,” said Alena Schillerova, the Czech finance minister. “With the introduction of the digital tax, the Czech Republic will rank among a growing number of economies that are actively addressing the imbalance between companies operating on the basis of traditional business models and companies that operate under completely new business models of the digital economy.”

The Czech digital services taxes would be “explicitly time-limited” she said, meaning it would be removed once a global solution was reached at the OECD.

“Until then, nothing has changed in the position of the Czech Republic,” she said, adding, “the Ministry of Finance has previously announced support for a lower, 5% rate, and also a shift in effective date to the beginning of 2021.”

Businesses Oppose Unilateral Action

More than 30 business groups said in a Wednesday statement that the Group of 20 should commit to a multilateral digital tax solution and refrain from unilateral measures.

The organizations represent both tech industry and wider business interests, and span from Asia to Europe to North and South America.

The statement comes ahead of a July meeting of digital economy ministers from G20 countries in Saudi Arabia.

Check out Bloomberg Tax’s country-by-country roadmaps covering direct and indirect tax developments.


—With assistance from Jan Stojaspal in Prague; Isabel Gottlieb; Shruti Srivastava in New Delhi; and Alex Morales, Alessandro Speciale and Viktoria Dendrinou.

(Adds statement from business groups at the end of the story.)

To contact the reporter on this story: Hamza Ali in London at hali@bloombergtax.com

To contact the editors responsible for this story: Meg Shreve at mshreve@bloombergtax.com; David Jolly at djolly@bloombergtax.com