ITIF Applauds USTR Tariff Probe Over Unilateral Digital Tax Measures

June 2, 2020

WASHINGTON—Following an announcement Tuesday that the United States Trade Representative (USTR) will initiate a Section 301 investigation on several countries and regions unilaterally implementing digital services taxes (DSTs)—including Austria, Brazil, Czech Republic, the European Union, India, Indonesia, Italy, Spain, Turkey, and the United Kingdom—the Information Technology and Innovation Foundation (ITIF) issued the following statement from ITIF Senior Fellow Joe Kennedy:

The growing number of countries that are unilaterally enacting digital sales taxes are chipping away one of the cornerstones of global commerce. These digital sales tax laws are flawed in at least three critical ways:

First, they are unilateral measures that violate the spirit, if not the letter, of the international tax system and existing tax treaties. By taxing revenues instead of profits, digital sales taxes can impose crippling costs on firms with growing sales but few profits. These laws come even as the OECD is in the midst of negotiating amendments to international tax laws to cover digital commerce. These negotiations are scheduled to produce an agreement by October and should be given a chance to succeed.

Second, foreign digital sales taxes are narrowly written to apply to only the largest Internet companies, most of which are American. They largely spare domestic companies in the countries that implement them, even those engaged in the same activities. The laws also make several other false distinctions. For example, they would tax the sales of an Internet platform that sells products from more than one vendor, but not those from a site that only carries one brand. Similarly, they tax revenues from selling ads viewed by users, but not subscription revenue. Countries justify digital sales taxes by claiming that most of the value behind large Internet companies is created by domestic users. But in fact, it is the software and business models that distinguish successful companies, mostly in the United States, from their rivals. 

Finally, because they effectively discriminate against foreign companies, digital sales taxes clearly violate existing trade agreements. The U.S. government needs to protect American companies from foreign unilateral revenue grabs. The Section 301 process calls for mutual negotiations to try to resolve the dispute before using trade sanctions. We hope that these negotiations and progress at the OECD result in an international agreement that integrates the issues posed by digitalization into the framework that has worked for over a century.

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