Digital Services Taxes: Do They Comply with Tax and Trade Agreements and EU Law?

Executive Summary

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The development and proliferation of digital technologies has led to a wave of digitization within our economy. While enriching our daily lives and enhancing the welfare of society, digitization has also upended a host of longstanding legal and regulatory regimes. Among them is the international system for corporate income taxation. Bilateral tax treaties negotiated with brick-and-mortar trade in mind have failed to address the challenges associated with the taxation of digitized economy.

Concerned about erosion of their tax base and pessimistic about the possibility of reaching a global consensus on the issue, several countries, led by France, have proposed or implemented digital services taxes on the world’s largest technology companies to redeem the value of user-created data allegedly exploited by those digital service providers. By using the French Digital Services Tax (hereinafter “the French DST”) as a case study, this memorandum aims to assess the compliance of digital services taxes under the frameworks of international tax, international trade and EU law.

For issues arising under international tax law, the memorandum uses the Ireland-France Treaty as the framework of analysis. Under the Treaty, the French DST is not a covered tax. However, it does not prevent the targeted companies from filing discrimination claims based on the non-discrimination clause of the Treaty. Under the non-discrimination clause, the targeted Irish companies, their permanent establishments in France and their French subsidiaries will be able to make a discrimination claim. Ultimately, it is likely that the targeted Irish companies and their French subsidiaries will prevail in their challenge against the DST on non-discrimination grounds.

As for international trade law, there are three trade law instruments relevant to a legal analysis of the French DST: (1) The WTO moratorium on electronic transmissions; (2) The WTO General Agreement on Trade in Services; and (3) individual bilateral or plurilateral free trade agreements. The WTO moratorium on electronic transmissions would likely not cover the French DST, so a U.S. challenge to the French DST is unlikely to prevail. However, a U.S. challenge under the GATS – on claims that the French DST violates the National Treatment and MFN obligations – would likely succeed because of the DST’s discriminatory structure and consequent inability to be justified under the exceptions provisions in the GATS. Finally, the U.S.’s ability to challenge a measure like the French DST through a free trade agreement depends on the substance of the relevant provisions. If the agreement mirrored the U.S.-Japan Digital Trade Agreement, a U.S. challenge would likely succeed. However, if the agreement mirrored the CETA, the U.S. challenge would probably fail.

Finally, under EU law, there are three provisions under which the DST may be challenged: (1) Article 401 of the EU VAT Directive; (2) Article 49 & 56 of the TFEU – freedom of movement provisions; and (3) Article 107 of the TFEU – the prohibition of State Aid. The French DST most likely cannot be characterized as a turnover tax where the final burden rests on the consumers. Accordingly, Article 401 of the VAT Directive does not prevent France from introducing that tax in addition to its VAT. Foreign companies can bring a challenge under the freedom of movement provisions, but it is difficult to determine whether such challenge would prevail in light of the CJEU’s recent case law on de facto discrimination against foreign-owned companies. Finally, there is a good chance that the targeted foreign companies would succeed in their challenge under the state aid provisions as the DST selectively favors French companies by exempting them from paying the tax.

Full report can be read here.

(Abridged report)

Watch video here

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