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US Withdrawal From International Tax Talks Pulls Numerous Trading Partners Closer to New Tariffs

Lighthizer testified that tariffs will be imposed if trading partners enforce digital service taxes.

The Organisation for Economic Co-operation and Development’s (OECD) Inclusive Framework aims to reach an agreement on a multilateral taxation framework for the digitized economy by the end of 2020. This was always an ambitious timeline.

In his testimony to the House Ways & Means Committee on June 17, US Trade Representative Robert Lighthizer confirmed that the US has withdrawn its participation from the OECD’s digital tax talks.

“What we need is a standard tax that takes away the tax planning that a lot of these people go into and is uniform across countries and treats every business fairly,” Lighthizer said. “And I think there is some … momentum to do that. But the United States will put in place, I believe it's up to the President, tariffs against these countries if they move forward unilaterally discriminating against American companies.”

The United States’ withdrawal from the negotiations is a step towards new tariffs on imports from countries that apply their own DST. Applying Section 301, the US has already found France’s 3% DST to be inconsistent with international tax rules and discriminatory against large US tech firms. France suspended application of its DST shortly after the US finding in return for a US pledge not to impose tariffs on $2.4 billion of French origin goods.

Ten trading partners, including the European Union, are subject to new Section 301 investigation on DSTs

The Administration has again resorted to Section 301 the Trade Act of 1974 to investigate DSTs under consideration by ten US trading partners. The legal test under Section 301 is whether the DSTs discriminate against, or burden or restrict the commerce of the United States.

USTR initiated its new DST Section 301 investigation on June 2, 2020. The investigation must be completed within a year, but will likely wrap-up sooner, as several DSTs are already in place and taxes may be levied against US firms. The President has broad authority to retaliate by imposing tariffs, fees, or other import restrictions under Section 301, and the recent frequent use of that authority against China and others has shown that the Trump Administration is not reluctant to act.

Stakeholders Have Opportunity to Comment on New Investigation

Stakeholders and interested members of the public may submit comments in writing to the USTR by July 15 addressing the issue in the investigation, in particular:

  • whether the DSTs are unreasonable or discriminatory;
  • the extent to which the DSTs burden or restrict US commerce;
  • whether the DSTs are consistent with obligations under the WTO Agreement or any other international agreement;
  • recommended actions, if any, that USTR should take in the event of an affirmative finding.

While the USTR has made clear that new tariffs are on the table, agreements could be reached to avoid such escalation. Now that the US has withdrawn from the international talks, it will likely seek to halt the DSTs one jurisdiction at a time through the imposition of tariffs, if and until the US rejoins the multilateral negotiation.

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