TWN Info Service on WTO and Trade Issues (Jul19/21)
15 July 2019
Third World Network

US launches probe into France's proposed digital services tax
Published in SUNS #8945 dated 12 July 2019

Geneva, 11 Jul (D. Ravi Kanth) - The United States on Wednesday launched a probe of France's planned tax on digital services under the controversial Section 301 of the US Trade Act of 1974, threatening Paris as well as other governments that the Trump administration would impose unilateral trade measures if taxes are levied on electronic transmissions in the global internet economy, trade envoys said.

[The US action under S.301 of the US Trade Act, and its threat of unilateral trade measures following its investigations, will be violative of its WTO obligations, in the light of the panel ruling and its adoption in January 2000 by the Dispute Settlement Body in the dispute against the US raised by the European Union over the US Section 301 family of the US Trade Act.

[In that ruling, adopted by the DSB, the panel, while holding prima facie that the S.301 family of laws were not compatible with the US obligations, said that the provisions of S.301 could be considered to be compliant, based on the statement of administrative actions provided to the Congress by the administration and the statements to the panel by the US that it would respect the DSU obligations in administering the powers under S.301.

[The report of the panel, adopted by the DSB and binding on the US, said: "The aggregate effect of the SAA (Statement of Administrative Action) and the US statement made to us is to provide the guarantees, both direct to other Members, and indirect to the market place, that Art. 23 is intended to secure. Through the SAA and the US statements, as we have construed them, it is now clear that under Section 304, taking account of the different elements that compose it, the USTR is precluded from making a determination of inconsistency contrary to Article 23.2(a). As a matter of international law, the effect of the US undertakings is to anticipate, or discharge, any would-be State responsibility that could have arisen had the national law under consideration in this case consisted of nothing more than the statutory language."

["It of course follows, that should the US repudiate or remove in any way these undertakings, the US would incur State responsibility since its law would be rendered inconsistent with the obligations under Art. 23." See SUNS #4580 dated 23 December 1999, SUNS #4594 and #4595 dated 27 and 28 January 2000. SUNS]

A day prior to the passing of the digital services tax by the French senate, the US Trade Representative Ambassador Robert Lighthizer said the Trump administration remains concerned about the "digital services tax (DST)" for unfairly targeting American companies.

In a statement issued by the Office of the USTR, Ambassador Lighthizer said "the French DST bill would impose a 3% tax on total annual revenues generated by some companies from providing certain digital services to, or aimed at, French users."

The USTR maintained that "the tax applies only to companies with total annual revenues from the covered services of at least EUR 750 million globally and EUR 25 million in France".

"The services covered are ones where US firms are global leaders," he said, without mentioning the names of the American companies that are going to be burdened with the proposed French tax.

In fact, the French DST is aimed at imposing a tax on all global digital companies that have a global turnover of EUR 750 million globally and EUR 25 million in France. It would apply to all internet services companies, including from China and other countries.

But the USTR argued that "the structure of the proposed new tax as well as statements by officials suggest that France is unfairly targeting the tax at certain US-based technology companies."

Therefore, "the President has directed that we investigate the effects of this legislation and determine whether it is discriminatory or unreasonable and burdens or restricts United States commerce."

Ambassador Lighthizer claimed that "Section 301 and related provisions of the Trade Act (codified as amended in 19 U.S.C. §§ 2411-2417) give the USTR broad authority to investigate and respond to a foreign country's unfair trade practices."

The "USTR will issue a Federal Register Notice providing information on how members of the public may provide their views through written submissions and a public hearing," he announced.

Regardless of the Section 301 probe against the French DST, the USTR suggested that Washington "will continue its efforts with other countries at the OECD [Paris-based Organization for Economic Cooperation and Development] to reach a multilateral agreement to address the challenges to the international tax system posed by an increasingly digitized global economy."

Surprisingly, the USTR did not mention the ongoing informal Joint Statement group's plurilateral negotiations for crafting rules in digital trade at the World Trade Organization.

The US along with the European Union, Japan, Canada, Australia, New Zealand, and Switzerland among others stated on 25 January in Davos, on the margins of the World Economic Forum meeting, that their top priority is the plurilateral WTO Digital Trade negotiations.

Subsequently, the US joined Japan in launching the "Osaka Track" to accelerate the negotiations on digital trade at the WTO.

In a proposal submitted to the WTO's Council for Trade in Services on 17 June, the US extolled "about the economic benefits of the cross-border data flows."

It maintained that "digital infrastructures such as the Internet evolved globally, but they raise challenges for domestic and international policy in a world where borders and regulatory differences among countries remain."

"Reaping the benefits of digitalization for trade will increasingly require international dialogue on approaches that ensure the interoperability of differing regulatory regimes, whether for data or other transversal issues," the US argued.

"Trade agreements recognize Parties' right to regulate, but also seek to provide certainty that such regulation is achieved in a transparent manner, is applied in a non-discriminatory way, and, that it does not unduly burden trade," the US contended.

The US said its submission is "designed to complement the ongoing negotiations for an ambitious agreement on e-commerce and digital trade."

"It is important that all WTO Members, whether or not they are participating in those negotiations, are informed about the various trade implications of cross-border data flows and policy responses to the challenges posed," the US suggested.

Against this backdrop, the latest USTR's statement that Washington "will continue its efforts with other countries at the OECD to reach a multilateral agreement to address the challenges to the international tax system posed by an increasingly digitized global economy" suggests that Washington is factoring into its calculations that there will be a permanent moratorium for not imposing customs duties on electronic transmissions.

At the last round of the Joint Statement group's meetings in Geneva last month, the US, the EU and other major participants had almost converged that the moratorium for not levying customs duties will be made permanent.

China had suggested that the current two-year moratorium at the WTO for not imposing customs duties be continued instead of a permanent moratorium, said a participant, who asked not to be quoted.

Besides, through the latest action under Section 301 against the French DST, the USTR has dropped a subtle hint that Washington will target any country that chooses to levy customs duty on electronic transmissions, said a trade envoy, who asked not to be quoted.

[Neither the US nor the other members of the Joint Statement Group have addressed the issue of how such a plurilateral agreement can find its way into the WTO rule-book, without the specific consensus at a WTO Ministerial Conference of the entire membership, nor how a plurilateral accord can bind all WTO members to a moratorium. SUNS]

At a dedicated General Council meeting convened on 17 June, India and South Africa made a strong case that the time has come for reconsidering the current moratorium for not imposing customs duties on electronic transmissions because of growing fiscal implications for developing countries.

India's trade envoy Ambassador J S Deepak had argued at the GC meeting that the magnitude of the "potential tariff revenue loss" due to the moratorium is around $10 billion for developing countries as against only $300 million for the WTO High-Income Members.

On the basis of a study conducted by the UN Conference on Trade and Development (UNCTAD), Ambassador Deepak suggested that developing countries "have the opportunity to generate 40 times more tariff revenue by imposing customs duties on ET [electronic transmissions], as compared to the developed countries, many of which have almost zero bound duties on physical imports of digitizable products."  (See SUNS #8928 dated 19 June 2019).

"We are watching how the US action will play out because France and the EU are the closest allies of Washington," said another trade envoy, who asked not to be quoted.

"It remains to be seen whether Washington will launch a trans-Atlantic trade war against Brussels because of the French DST or treat the EU with kid gloves," the trade envoy suggested.

Nevertheless, the Trump administration's unilateral trade measures in its trade policy seems to be rapidly morphing into a "private eminent domain" involving unilateral seizure of rights without any multilateral consent, the trade envoy suggested.