Panel

The “Tax & Trade Wars” panel took place on February 3, 2020 at the campus of Georgetown University Law Center. The panel was composed of Itai Grinberg, Professor of Law at Georgetown Law; Jennifer Hillman, Senior Fellow at Georgetown Law and the Council on Foreign Relations; Amy Roberti, Director of US Federal Government Relations & Global Tax Policy at Procter & Gamble; Rod Hunter, Partner at Baker McKenzie; and Christian Schleithoff, Head of Financial Division at the Embassy of the Federal Republic of Germany.

Background on Digital Services Taxes

Digital services taxes (DST) are taxes on online services, such as providing a medium where humans interact with computers (digital interface service) and displaying advertisements based on audience’s preferences (targeted advertising).

On July 24, 2019, the President of France, Emmanuel Macron, signed a bill involving DST into law. The French DST imposes a three percent levy on certain digital services provided by companies whose revenues from the taxable services exceed certain thresholds. The United States Trade Representative (USTR) initiated an investigation into the French DST under Section 301 of the Trade Act of 1974. The report concluded that the French DST “discriminates against U.S. companies and is inconsistent with prevailing principles of tax policy.”

France is not the only country that has DST. Many other European countries, such as Italy, Austria, the United Kingdom, and Germany, have, or propose to have DST. Although, the basis and rate of DST varies among the different countries.

Panel Discussion

Speaking from a German perspective, Mr. Schleithoff stated that digital companies do not assume a fair share of tax burden under the current international tax system and a minimum DST on digital companies will cure the problem of profit shifting.

The Organisation for Economic Co-operation and Development (OECD) is leading a multilateral negotiation to promote an international agreement on DST by 2020. An international agreement on DST is desirable, because a unilaterally imposed DST can trigger a chain of retaliation that harms economies and international relations. For instance the “U.S. threat[ened] to impose 100% tariffs on a raft of French products, including Champagne, cheese and handbags” over the French DST.

However, there are obstacles to landing an international convention. First is addressing the kinds of taxes that should be levied on cross-border digital services. The French DST is based on gross revenue, which deviates from the current international tax principle that corporate income, not corporate gross revenue, is an appropriate basis for taxation. As Professor Grinberg elaborated, a three percent tax rate on gross revenue can have an impact of twenty-five percent tax rate on net income. This is a huge tax burden on even large multinational corporations, especially those with a low profit-margin. Multilateral negotiations need to be carried out to select the appropriate basis and rate for DST.

Second, there are difficulties in making DST comply with international trade principles. Professor Hillman mentioned that it is hard to categorize digital services because many cross-border services also include goods components. Nevertheless, there is the requirement of national treatment that states WTO members “must not accord discriminatory treatment among imports and ‘like’ domestic products.” The USTR alleged that the French DST discriminates against US companies both facially and in fact because the law-making process deliberately targets U.S. companies, in particular Google, Apple, Facebook, and Amazon, and the revenue thresholds and services targeted focus the French DST on US-based companies. Moreover, Professor Hillman indicated that DST is probably also subject to the governance of international treaties on subsidies because tax rebates and tax credits can be governmental subsidies. “Under French law, DST payments will be deductible expenses against the French corporate income tax. This […] can lessen a company’s DST liability by up to about a third.” The deduction can be regarded as a subsidy to French companies that are more likely than foreign companies to pay significant income taxes in France.

There are many other concerns about the feasibility of an international agreement on DST. For example, how can a DST based on an international convention be enforced? And, while the World Trade Organization (WTO) appellate body is dormant, how should a DST dispute be resolved? The current negotiation process at OECD is promising, but enthusiasts should bear in mind the obstacles to an international convention on DST.