The International Business Transactions Blog

USTR Planning Section 301 Tariffs on Countries Using Digital Service Taxes

By BethEl Nager, Law Student Editor
& Aaron Fellmeth, Faculty Co-Editor

Digital Services Taxes (DSTs) are taxes levied on the gross income of companies providing such services as advertising, e-commerce, and user-data collection, based on the number of digital users within a country. Since 2020, at least 18 countries have proposed or adopted DSTs ranging from 1.5% to 7.5%. The United States has no such tax, and the U.S. Trade Representative (USTR) is now considering taking action under Section 301 of the Trade Act of 1974 against countries that adopt DSTs.  Section 301 gives the President, and by extension, the USTR, the power to take “all appropriate and feasible action” to terminate any foreign government policy that violates a U.S. trade treaty or disadvantages U.S. foreign commerce more generally. 

The USTR objects to DSTs because they are aimed at large technology companies providing digital services globally, and the United States is a leading exporter of such services. At the beginning of 2021, the USTR deemed some countries’ DSTs to be “unreasonable or discriminatory” and burdensome or restrictive of U.S. commerce. The targeted DSTs include those implemented in the United Kingdom, Italy, Spain, Turkey, India, and Austria, as well as those proposed in other countries. However, the imposition of retaliatory tariffs was delayed in some countries until the DSTs took effect.

When the import duties take effect, they will add a 25% punitive tariff on various niche items and could amount to almost $1 billion each year in toto. For example, imports of makeup ingredients, refrigeration units, video game units, and merry-go-rounds from the United Kingdom would be targeted; as well as anchovies, caviar, perfume, and eyeglasses from Italy; and octopus, handbags, shoes, hats, and glassware from Spain. 

From May 3-7, 2021, the USTR will host various virtual hearings on the suggested tariffs in each country. A multi-jurisdictional meeting will be held on May 3, followed by one meeting per day on individual countries. The day-long meetings will occur in the following order: the United Kingdom, Italy, Spain, and Turkey. There will not be separate meetings to discuss the proposed actions regarding DSTs in India and Austria. Instead, they will solely be discussed during the multi-jurisdictional meeting.

The major legal concern with U.S. retaliation under Section 301 is that it violates the WTO Agreements binding on the United States, as well as public assurances by previous U.S. Presidents that Section 301 would not be used contrary to the WTO Agreements. The proper procedure is to initiate negotiations under the WTO Understanding on Rules and Procedures Governing the Settlement of Disputes, and to assert a claim if negotiations fail. Donald Trump was the first U.S. President to use Section 301 and other U.S. trade laws to violate the WTO Agreements, and many are surprised to see President Biden pursuing the same lawless policy.