Digital Services Tax: Lessons from the Section 301 Investigation

Abstract

The UK recently enacted a digital services tax (DST) notwithstanding the strong US response to the French DST and the commencement of an investigation into the DST proposals of other countries under section 301 of the Trade Act 1974 (TA 1974). A DST is not a tax on income or capital. While falling outside of most obligations in double taxation agreements (DTAs), it will need to comply with the enacting state’s obligations under the WTO and preferential trade agreements applicable to indirect taxes, in particular, the obligation not to discriminate against like services or service suppliers. A well-designed DST should pass muster under tax and trade agreements. Addressing any possible breach of trade rules is unlikely to see an end to opposition and threats of trade sanctions. The section 301 process, dubbed “aggressive unilateralism”, should be understood as primarily a political rather than a judicial process. The statute seeks to secure an advantage for the US in international economic negotiations. History suggests some clear limits to the statute’s utility in encouraging policy changes abroad. This article assesses the French and UK DSTs in the light of the report of the United States Trade Representative (USTR) on the French DST. Appreciating these limits is important to all countries contemplating the political consequences of introducing a DST.

Keywords: digital services tax, DST, section 301 of the Trade Act 1974

JEL Classification: K34, K33