The Office of the U.S. Trade Representative (USTR) is challenging France’s Digital Services Tax, which would impose a 3 percent tax on revenues earned from online activities such as advertising, as an unfair trade barrier. Earlier this year, USTR wrote: The U.S. opposes proposals that single out digital services for tax purposes. In addition, to the extent these proposals apply almost exclusively to U.S. companies, they raise further concerns of a discriminatory effect on U.S. suppliers participating in EU markets.”
According to the Peterson Institute’s Gary Hufbauer, “... the tax is discriminatory on its face, flatly contradicting France's obligation to ensure national treatment of foreign digital firms under the World Trade Organization (WTO) General Agreement on Trade in Services (GATS).”
As NTU President Pete Sepp observed earlier this year, “These are attempts by politicians to wring money out of companies that have brought benefits to their own constituents while claiming the only harm will fall to the companies themselves.” NTU Senior Fellow Mattie Duppler added this in response to Treasury Secretary Steven Mnuchin’s comments earlier this year discouraging an arbitrary digital tax: “NTU applauds Secretary Mnuchin's efforts to stop this foreign government overreach and we urge him to continue to support free enterprise by opposing efforts by foreign authorities to unfairly tax outside of their borders."
The most effective U.S. response to this digital tax scheme would be to challenge it at the WTO. In contrast to the U.S. record of success challenging trade barriers at the WTO, unilateral U.S. tariffs have often failed to achieve their stated goals. The United States can also reiterate the challenges these discriminatory taxes pose to the creation of U.S.-EU free trade agreement.
As NTU has pointed out in the past, the President also reserves the right to invoke Section 891 of the U.S. Tax Code, which permits him to double the tax rate on the income earned domestically by any individual or corporation of a foreign country that unfairly targets our citizens or businesses with “discriminatory or extraterritorial taxation.” Such an approach would allow for targeted pressure to be applied to the discriminating country, and send a message to other countries that contemplate similar tax schemes that they cannot do so without consequences. The administration should focus on these tools that will allow the U.S. to narrowly tailor its response while sparing American consumers and businesses from additional taxes and barriers that limit trade.