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US’s latest response on digital and the OECD discussions

US’s latest response on digital and the OECD discussion

The US opens new Section 301 investigations into various Digital Services Taxes and withdraws from the current OECD Pillar one discussions.

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matthew-herrington

Partner, International Tax

KPMG in the UK

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Over the past few weeks, the US showed its clear stance that unilateral Digital Services Taxes (DST) aimed at US multinationals will never be acceptable to the US by initiating new Section 301 investigations into various DST adopted or proposed in 10 countries, including the UK. At the OECD level, the US also indicated that it will not agree to the proposed Pillar one changes as currently envisaged and decided to withdraw temporarily from the OECD Pillar one discussions, whilst it did indicate a hope that Pillar one can be picked up later in the year and that agreement can still be reached by year-end.

New Section 301 investigations

New Section 301 investigations were launched on 2 June 2020 into the DST adopted or proposed in Austria, Brazil, the Czech Republic, the European Union, India, Indonesia, Italy, Spain, Turkey as well as the UK on the grounds that such DST:

  • “discriminate against US companies”;
  • “are retroactive in nature”; and
  • “constitute possible unreasonable tax policy by diverging from norms reflected in the US and international tax systems (i.e. extraterritoriality, taxing revenue not income and [having] a purpose of penalising particular technology companies for their commercial success)”.

The investigations allow the Office of the United States Trade Representative (USTR) to investigate and respond to a foreign country’s action which may be viewed as unfair or discriminatory and negatively affects US commerce. If the USTR determines the DST to be discriminatory, it will review and take appropriate action. The deadline for public comment is 15 July 2020.

This is not the first US investigation into a DST. In December 2019, the USTR found the French DST is unreasonable, discriminatory and burdensome on the US economy. This resulted in the US considering the imposition of significant tariffs on French imports. Nevertheless, the US agreed to delay tariff imposition after France agreed to suspend further collections of its DST pending OECD negotiations.

US’ latest response to Pillar one and Pillar two

On 12 June 2020, the US Treasury Secretary sent a letter to the Finance Ministers of France, Italy, Spain, and the UK informing them that the US considers the ongoing OECD Pillar one work to have reached an impasse.

Within the letter, the US stated they would not agree to the proposed Pillar one changes as currently envisaged and called for the ongoing Pillar one discussions to be suspended for now. In the meantime, the letter encourages the other countries involved in the ongoing OECD Pillar one discussions to recognise that more time is needed to have a sensible debate that generates a multilateral solution.

The letter also indicates that Pillar two remains on track, and Secretary Mnuchin states that the US hopes to see an agreement reached on that workstream before the end of 2020.

The letter goes on to emphasise that the US is ready to take retaliatory action against unilateral DSTs like those in France, Italy, Spain, and the UK. As mentioned above, the US and France have reached an agreement to delay tariff imposition provided that French DST collection is suspended pending OECD negotiations. However, the US withdrawal from the Pillar one discussions raises the prospect of the US-French accord now falling away.

OECD’s Response

The OECD responded to the US letter and confirmed that all countries should continue to participate and negotiate in order to reach a global solution by the end of the year. The OECD emphasised that if a ’multilateral solution’ is not reached, countries will continue to pursue unilateral approaches. As a result, this will significantly increase the risk of tax disputes as well as intensify trade tension between jurisdictions.

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