GAFA tax, wine and a WTO dispute - something one needs to watch for?

I have been wanting to know more about the Digital Services Tax imposed in France last year. Are these taxes WTO consistent? Will there be a WTO dispute on this subject with more countries considering it, notwithstanding the Appellate Body crisis in the WTO.

(Damien Meyer, AFP)

It created quite a stir between the US and Europe. More commonly known as the G(oogle)A(pple)F(caebook)A(mazon) tax, it raised the issue of whether there is a discrimination against US tech giants by this tax. News of the tax are here and here. News of a possible mutually found solution are also found here.

The issue was covered by the IELP blog here.

In 2019, France proposed a 3% tax on revenue generated by certain companies from certain digital services. The two houses of the French Parliament passed the Bill on July 4th. (a coincidence?). Two categories of digital services— “digital interface” services and “targeted advertising” services were covered under this new tax.

The Special 301 Investigation report under the Trade Act 1974 on the tax found the following:

The evidence collected in this investigation indicates that: 

(1) The French DST is intended to, and by its structure and operation does, discriminate against U.S. digital companies;
(2) The French DST’s retroactive application is unusual and inconsistent with prevailing tax principles and renders the tax particularly burdensome for covered U.S. companies;
(3) The French DST’s application to revenue rather than income contravenes prevailing tax principles and imposes significant burdens on covered U.S. companies;
(4) The French DST’s application to revenues unconnected to a physical presence in France contravenes prevailing international tax principles and is particularly burdensome for covered U.S. companies; and
(5) The French DST’s application to a small group of digital companies contravenes international tax principles counseling against targeting the digital economy for special, unfavorable tax treatment. 

As far as the next steps goes, the Report concluded:

A range of tools may be appropriate to address these serious matters, including intensive bilateral engagement, WTO dispute settlement, or “imposing duties, fees, or other import restrictions on the goods or services of [France].” 

In a press release the USTR after the conclusion of this investigation called the tax a form of protectionism:

USTR’s decision today sends a clear signal that the United States will take action against digital tax regimes that discriminate or otherwise impose undue burdens on U.S. companies,” Ambassador Robert Lighthizer said. “Indeed, USTR is exploring whether to open Section 301 investigations into the digital services taxes of Austria, Italy, and Turkey. The USTR is focused on countering the growing protectionism of EU member states, which unfairly targets U.S. companies, whether through digital services taxes or other efforts that target leading U.S. digital services companies.”  

Pursuant to the Report, there was a public hearing on the French measure.What I found interesting was the diverse set of stakeholders that attended the public hearing to air their views on the French tax. It included not only tech companies that were obviously affected but also wine retailers!

Now, what does wine got to do with the French digital services tax? The US intended to impose higher tariffs on wine imports from France as as a retaliatory measure for the tax. This obviously hits wine imports into the US as they become costlier.

Peter Weygandt, the president of Weygandt-Metzler Importing, Limited, one of the witnesses in the public hearing  owned a company that imported wines from Europe for more than 33 years. In his testimony he said:

The stark reality of these tariffs is that they will end the importation of wines from the tariff countries. It's a very real possibility that many importers, distributors, and restaurants will need to terminate dedicated employees in the very near future with the possibility of ceasing their business' operations entirely. I ask the commission to rescind the current tariff and not consider a 100 percent DST tariff. Thank you very much again.

The submissions of the wine retailers signified the other side to retaliatory tariffs. There are winners and losers in a trade war. WHile the intent is to impose a tariff on French imports to protect US tech industries against a seemingly unjust, discriminatory tax, its impact will also be felt on US businesses in other sector that depend on French imports, like wines, for their survival. The trade off between different local business interests is what makes international economic law so fascinating and complex at the same time.

On the WTO front, is the tax discriminatory because it is a de facto discrimination against US companies?

Andrew Mitchell, Tania Voon and Jared Hepburn, in an article titled "Taxing Tech:Risks of an Australian Digital Services Tax under International Economic Law" have indicated the risks of an Australian digital tax breaching Australia's obligations under the GATS as well as investment treaties.It also indicated that the US could retaliate with tariffs on Australian exports to the US.

For now, the digital tax seems to have gone off the radar. However, with the increasing possibility of more countries adopting it in stressful economic times, international economic law is set to see a fresh bout of engagement on theory and practice of domestic measures impacting the principles of international norms.