Introduction

United States Trade Representative (USTR) Katherine Tai is soliciting comments and has scheduled hearings regarding the potential imposition of Section 301 tariffs of up to 25% in response to the Digital Services Tax (DST) adopted by Austria, India, Italy, Spain, Turkey and the United Kingdom.

When President Biden tapped Tai as USTR she inherited ongoing tariffs and half-finished investigations undertaken by her predecessor under the Trump administration. Now that Tai has been confirmed and officially assumed office, there have been some early developments to take ownership of both the ongoing investigations regarding DSTs and the EU Airbus dispute. As emphasised in her 'day one' message to USTR staff, these developments are consistent with Tai's goal of rebuilding US alliances while continuing to address the challenges posed by China and other countries.

One step closer to tariffs in DST investigations

Under Trump, the USTR initiated a number of investigations into DST that have been adopted or are being considered by 11 US trading partners based on a concern that DSTs discriminate against large US-based technology companies. In December 2019 a USTR investigation determined that the French DST was actionable under Section 301 because it intended to discriminate against and burdened US technology companies, operated retroactively and contravened prevailing tax principles. In July 2020 the USTR announced 25% retaliatory duties on certain French cosmetics and handbags with an annual trade value of $1.3 billion but has continued to suspend implementation.

Shortly before leaving office in January 2021, the Trump administration determined that similar DSTs in six additional countries (ie, Austria, Spain, the United Kingdom, India, Italy and Turkey) were likewise discriminatory, unreasonable and burdensome or restrictive to US commerce, but declined to consider action. For four other jurisdictions subject to DST investigations (ie, Brazil, the Czech Republic, the European Union and Indonesia), the USTR also released a status update detailing the continuing investigations and engagement on DST issues.

These vague announcements confirmed that the US response to the imposition of DSTs would be an issue for the Biden administration. Sure enough, shortly after assuming office, Tai announced the USTR's next steps in the DST investigations. Couched as a move to preserve procedural options, the USTR is proceeding with a notice and comment process in the investigations against six countries (ie, Austria, India, Italy, Spain, Turkey and the United Kingdom). The investigations against the remaining four jurisdictions (ie, Brazil, the Czech Republic, the European Union and Indonesia) which have not implemented DSTs, have officially been terminated.

Although Tai has noted that the US "remains committed to reaching an international consensus through the OECD process", the six ongoing investigations will move forward in the meantime to ensure the possibility of action, including the imposition of tariffs, if necessary. To this end, the USTR has released a preliminary list of products for each country that may be subject to additional tariffs of up to 25% if no consensus is reached, including:

  • Austrian apparel and textiles, ceramics, electronics, kitchenware and pianos;
  • Indian jewellery, wood products, textiles and seafood;
  • Italian apparel, accessories, footwear, handbags, perfumes, optical products and seafood;
  • Spanish apparel, accessories and footwear, handbags, glassware and seafood;
  • Turkish carpets, linens, tiles and jewellery; and
  • UK apparel, footwear, cosmetics and furniture.

The USTR is accepting written comments on the investigations and will hold virtual hearings on the proposed action.

The timeline for the virtual hearings and for the submission of written comments is set out below. In addition to country-specific comments and hearings, the USTR has created a docket for multi-jurisdictional submissions and a separate multi-jurisdictional virtual hearing for parties that wish to address issues common to two or more countries.

21 April 2021

 

Submission of requests to appear at a hearing and proposed testimony

30 April 2021

 

Submission of written comments

3 May 2021

 

Multi-jurisdictional virtual hearing on proposed actions

4 May 2021 at 9:30am

 

Virtual hearing on UK DST proposed action

6 May 2021 at 9:30am

 

Virtual hearing on Spain DST proposed action

5 May 2021 at 9:30am

 

Virtual hearing on Italy DST proposed action

7 May 2021 at 9:30am

 

Virtual hearing on Turkey DST proposed action

10 May 2021 at 9:30am

 

Virtual hearing on India DST proposed action

10 May 2021

 

Submission of multi-jurisdictional hearing rebuttal comments

11 May 2021 at 9:30am

 

Virtual hearing on Austria DST proposed action

11 May 2021

 

Submission of UK DST hearing rebuttal comments

12 May 2021

 

Submission of Italy DST hearing rebuttal comments

13 May 2021

 

Submission of Spain DST hearing rebuttal comments

14 May 2021

 

Submission of Turkey DST hearing rebuttal comments

17 May 2021

 

Submission of India DST hearing rebuttal comments

18 May 2021

 

Submission of Austria DST hearing rebuttal comments

The USTR is soliciting comments and testimony on the following issues:

  • the level of the burden or restriction on US commerce resulting from the DST, including the amount of DST payments owed by US companies, the annual growth rate of such payments and other effects, such as compliance costs;
  • the appropriate aggregate level of trade to be covered by additional duties;
  • the level of the increase, if any, in the rate of duty;
  • the specific products to be subject to increased duties, including whether the tariff subheadings listed in the annex should be retained or removed; and
  • whether imposing increased duties on a particular product would be practicable or effective to obtain the elimination of the acts, policies, and practices and whether imposing additional duties on a particular product would cause disproportionate economic harm to US interests, including small or medium-sized businesses and consumers.

Pause for EU tariffs

Additional tariffs were imposed under Trump to enforce the rights of the United States in the World Trade Organisation (WTO) dispute involving subsidies provided to the large civil aircraft industry by the European Union. This is a 17-year old WTO litigation in search of a negotiated settlement. Over the course of this litigation, both sides have imposed tariffs on aircraft, as well as on a range of unrelated agricultural and industrial products. In the last round of retaliation, tariffs with an annual trade value of approximately $7.5 billion have been in effect since 19 October 2019, on imports from the European Union and the United Kingdom. Although EU representatives have been vocal regarding their desire for a negotiated settlement, an agreement failed to materialise under Trump and the tariffs were modified to increase product coverage on 30 December 2020, shortly before he left office.

However, at least initially, things have progressed more positively under the Biden administration, first with a joint US-UK statement suspending the additional tariffs on imports from the United Kingdom for four months beginning 4 March 2021, then with a joint US-EU statement similarly suspending the tariffs on imports from the European Union the following day. The four-month pause for the additional EU tariffs was formalised in a Federal Register notice and took effect on 11 March 2021. In turn, the European Union also suspended its own tariffs on approximately $4 billion of US goods, which have affected prominent US exports such as alcohol, agricultural products and aircraft.

In the joint statements with the United Kingdom and the European Union, the USTR emphasised a desire to "de-escalate the issue", "create space for a negotiated settlement" and "ease the burden on their industries and workers". In the joint statement with the European Union, the USTR delineated "key elements" of the comprehensive negotiated settlement that it is seeking in this dispute, including:

disciplines on future support in this sector, outstanding support measures, monitoring and enforcement, and addressing the trade distortive practices of and challenges posed by new entrants to the sector from non-market economies, such as China.

As noted above, tariffs on both UK and EU imports will remain suspended for four months to allow such an agreement to be negotiated between the jurisdictions. There are special timing rules governing withdrawals from foreign trade zones, depending on the status of the goods being admitted to the foreign trade zone prior to the effective date of the exemptions.

What should affected companies do?

Due to the significant potential impact that these additional tariffs of up to 25% may have on a wide range of products from Austria, Spain, the United Kingdom, India, Italy and Turkey, importers should consider filing written comments and appearing at the virtual hearing if they are importing any of the listed products in the annex for each country. This testimony can be instrumental in the USTR's determination of whether to implement the Section 301 duties or whether to assess the duties on specific products.

The use of Section 301 tariffs as a negotiation tool creates substantial risks for companies that import products from implicated countries. While the large civil aircraft dispute Section 301 tariffs have been temporarily suspended, they may be re-instated if the negotiations are unsuccessful. It is also uncertain whether Section 301 tariffs will be assessed on products in connection with DST. Companies should seek advice to identify strategies and duty savings avenues to mitigate the effects of the proposed tariffs.

Leah Scarpelli, associate, and Russell A Semmel, attorney, assisted in the preparation of this article.