Tax And Trade: DSTs And Tariffs

Starting in 2019, as the risk of unilateral enactment of digital services taxes became reality, the U.S. government began to recommend import tariffs on goods from countries that considered or enacted DSTs, justifying them on the grounds that they constitute unfair trade practices.

Tariff Rationales

U.S. law offers more than one justification for import tariffs. For example, section 232 of the Trade Expansion Act of 1962 allows the U.S. Commerce Department to investigate the effect of imports on U.S. national security (on its own or on request from an interested party). Section 232 was the basis for import tariffs on steel and aluminum starting in 2018.

Section 201 of the Trade Act of 1974 permits domestic industries to petition the U.S. International Trade Commission for relief when import quantities are sufficient to cause injury to a competing U.S. industry – finding an unfair trade practice isn’t required. Section 201 was the basis for import tariffs on solar panels and washing machines in 2018.

Section 301 of the Trade Act allows the U.S. Trade Representative (USTR) to investigate and sanction foreign countries that violate U.S. trade agreements or engage in unjustifiable, unreasonable, or discriminatory acts that burden U.S. commerce. That section was the basis for import tariffs on intermediate inputs and capital equipment from China in 2018. It’s also the basis for tariffs on imports from countries that consider or enact unilateral DSTs.

Section 301

The USTR may initiate a section 301 case on its own or in response to an industry petition. After initiating an investigation, the USTR requests consultation with the targeted foreign governments, then determines if the conduct is an unfair trade practice. To remedy an unfair practice, the USTR can impose duties or other import restrictions, withdraw or suspend trade agreement concessions, or enter into an agreement with the foreign government to eliminate the conduct or compensate the United States with trade benefits.


The USTR’s use of section 301 was reduced after the WTO introduced a dispute settlement mechanism in 1995, although the United States may still seek recourse for unfair trade practices through that section. The USTR has initiated 130 cases since the enactment of section 301 in 1974, 35 of which have been initiated since 1995. During the Trump administration, the USTR initiated six new investigations, two of which investigated the consideration or enactment of a DST.


The USTR initiated a section 301 investigation against France in July 2019 in response to its enactment of a 3 percent DST on gross revenues derived from digital activities when French users create value or from intermediary services and advertising services. The tax applied only to companies with annual revenues from the covered services of at least €750 million ($909 million) globally and €25 million ($30 million) in France.

In its investigation, the USTR concluded that France’s DST discriminated against U.S. companies. In response, France suspended its DST in January 2020 and worked with the United States through the OECD to reach a compromise. However, faced with a statutory deadline, the USTR announced in July 2020 that it would impose tariffs of 25 percent on about $1.3 billion worth of imports, or about 2.2 percent of all U.S. imports from France in 2019. It also said it would delay implementation for 180 days (until January 6, 2021) to allow more time for resolution.

France announced in October 2020 that it would begin collecting its DST in December, but the USTR didn’t respond by shortening the tariff suspension. In fact, in January 2021 the USTR indefinitely suspended the section 301 tariffs scheduled to go into effect that month so it could coordinate a response to additional DST investigations pending against 10 countries: seven for enacting DSTs and three for considering them.

In June 2020 the USTR initiated section 301 investigations on DSTs adopted by Austria, India, Indonesia, Italy, Spain, Turkey, and the United Kingdom and the next month initiated investigations on DSTs considered by Brazil, the Czech Republic, and the EU. Those DSTs had varying global revenue thresholds, in-country revenue thresholds, and digital services subject to tax.

In January 2021 the USTR released its findings and notices of determination for the investigations of Austria, India, Italy, Spain, Turkey, and the United Kingdom. As in the France investigation, the USTR found that the DSTs discriminated against U.S. digital companies and burdened or restricted U.S. commerce. 

In late March 2021, the USTR terminated its section 301 investigations of Brazil, the Czech Republic, the EU, and Indonesia because they hadn’t adopted or implemented their DSTs. It also proposed action on the remaining six countries in the form of additional 25 percent tariffs on about $2.1 billion of imports from them. Those tariffs were suspended in early June to provide additional time for multilateral negotiations. 

Enter the OECD. In July it released a statement on its proposed two-pillar solution to address the digital economy. 

In October the U.S. Treasury released a joint statement with Austria, France, Italy, Spain, and the United Kingdom describing its compromise on addressing unilateral DSTs before pillar 1 came into effect. That compromise involves an overlapping transitional approach for unilateral DSTs, the implementation of pillar 1, and the termination of U.S. trade actions. The USTR terminated its section 301 investigations of those five countries in November and announced the same agreement with Turkey and India shortly thereafter.

Use of trade policy to discourage or affect tax policy exemplifies the trend toward tax and trade becoming inextricable. The OECD’s pillars may become the tax equivalent of long-standing global trade agreements.

The Tycoon Herald