Digital Tax Update: U.S. Legislators React to Unilateral Digital Tax Proposals

Read Transfer Pricing Times – April 2019 

On April 10, 2019, the French National Assembly passed the Digital Services Tax (“DST”) proposal announced by its Finance Minister, Bruno Le Marie. The DST proposal must still be passed by France’s Senate but if ratified will be retroactively implemented to January 1, 2019. The impetus behind France’s proposed DST regime is to provide the French government with taxing rights over companies that do not have a physical presence in France but still derive profits from French citizens. The proposed DST would apply to multinational enterprises with global revenue in excess of 750 million Euros and which generate revenue in excess of 25 million Euros from digital services provided to French citizens. Qualifying companies would be subject to a 3 percent tax on their annual French revenue. The digital services captured by the DST regime encompass the sale of digital advertising and user data as well as digital marketplaces that allow users to purchase and sell goods and services to one another virtually. The French government estimates that the DST would raise approximately 500 million Euros per year.

The United Kingdom has proposed similar DST legislation that would levy a 2 percent tax on certain digital revenue. Italy, Spain and Austria are also considering implementing their own unilateral DST measures.
  
The U.S. government has raised concerns regarding other countries’ unilateral approach to implementing their own DST proposals. In their current form, the proposed DST regimes in Europe would disproportionately affect U.S. companies and subject them to double taxation. Current DST proposals levy corporate taxes on revenues instead of profits which would likely result in scenarios where profits are effectively taxed twice. The U.S. government also claims that the DST would violate existing tax treaties by taxing companies that don’t have nexus in those foreign countries. The U.S. government has urged France and its other trade partners to wait for OECD guidance on the DST instead of unilaterally implementing their own versions. Members of the U.S. House Ways and Means Committee have even recommended the U.S. government treat unilateral approaches to the DST as trade barriers to U.S. companies. Such a move could make way for the U.S. government to retaliate by raising their own trade barriers on foreign companies.
 
In response to the criticism from the U.S. government, Finance Minister Le Maire has reiterated that France’s proposed DST is a temporary solution to taxation on the digital economy and that it intends to withdraw its version of the DST once a multilateral consensus is reached by the OECD and its members. The European Commission has supported its members including France in implementing unilateral versions of the DST to incentivize the OECD to expedite its efforts in providing guidance to its members.
 
To learn more about recent DST developments at the OECD, see Duff & Phelps’ Transfer Pricing Times article on OECD DST efforts from the edition published on March 6, 2019. The OECD has received public comments on multilateral DST proposals. These public comments will inform the OECD’s next presentation on June 8, 2019 to the finance ministers of the G-20. Ultimately, the OECD is planning to release its final report on taxation of the digital economy to the G20 by 2020.

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