Vulcan Insight

EU-US digital tax dispute heats up, but stops short of escalation

8 January 2021

Following last year’s very public dispute between the outgoing Trump administration and France over the latter’s plan to impose a digital service tax, the US Trade Representative this week announced a decision on their investigation of similar plans by Italy and suspended planned duties on France.

In a statement published Wednesday, the Office of the US Trade Representative announced that it had determined that Italy’s digital services tax (DST) is “unreasonable or discriminatory and burdens or restricts” the freedom of business of US enterprises. As such, it determined that, should Italy begin collecting its DST, the administration could impose retaliatory tariffs on the import of Italian goods under Section 301 of the US Trade Act. While reaching the conclusion, the USTR has, so far, not taken “any specific actions in connection with the findings at this time but will continue to evaluate all available options.”

With this determination, Italy is the second EU country against which the US threatens tariffs over plans to tax the activities of digital giants. Meanwhile, similar USTR investigations are still ongoing with respect to adopted or proposed digital services taxes by the European Union, Austria, the Czech Republic and Spain, ranging from duty rates of 3% to 7%.

The investigations come as the Trump administration pulled out of international, OECD-level talks on a global agreement on how to fairly and appropriately tax global digital companies. US opposition to the plans stems from its largely bi-partisan belief that the countries’ DST plans are unfairly targeted towards US digital companies, thus discriminating against them. A further underlying accusation is that the third countries, especially those in Europe, are seeking to use the tax code to reign-in large successful US companies, while unfairly building national (or European) alternatives.

Meanwhile, the USTR’s decision not to immediately proceed on imposing unilateral retaliatory tariffs on Italy for “unfair trade practices” comes as the USTR Robert Lighthizer announced Thursday night that he would not be advancing his office’s plans to slap tariffs worth $1.3 billion on French luxury goods initially announced in July 2020. According to an official statement, the French tariffs were suspended to “promote a coordinated response in all of the ongoing DST investigations” currently ongoing with regard to the EU and EU Member States.

Following an initial suspension of the tariffs for a period of 180 days to allow room for the OECD-led negotiations, which have since failed, the USTR has now issued a formal notice with the Federal Register suspending the duties indefinitely.

In December, France had begun collecting its duties estimated at about €400 million for 2021. France and the European Commission had pledged to forcefully respond should the US tariffs come into force. While the USTR’s indefinite suspension of the tariffs, and a potentially escalating trade transatlantic war, provides some respite to French and EU businesses in the midst of the COVID-19 pandemic, it also leaves a complicated and politically toxic matter for President-elect Joe Biden’s attempt to restore closer relations with the EU and the EU27 in the months following his 20 January inauguration.