In her recent post, Zoe Andrews suggested that, given the importance for the UK of securing a post-Brexit trade agreement with the US, now might not be the best time for the UK to introduce a digital services tax.  

Support for her view is to be found in the U.S. Trade Representative's (USTR) investigation that concludes that France’s DST discriminates against U.S. companies, is inconsistent with prevailing principles of international tax policy and is unusually burdensome for affected U.S. companies. Expanding on those arguments:

• Discrimination

It was clearly unhelpful that in France the DST is widely referred to as the GAFA tax (Google, Apple, Facebook and Amazon), twelve of the twenty-one groups that are expected to be subject to the DST are US based and there is a suspicion that the scope and thresholds for the tax have been structured to exclude French groups.  DST is also deductible against French corporate income tax, but that is only a benefit for groups that pay significant income tax in France.  

• Inconsistency

Tax is generally imposed on profits not income, but DST contravenes this principle. More importantly, the current international tax system is based on the principle that a company needs to have a territorial presence in a country before it becomes subject to that country's corporate tax regime.  The retrospective nature of the tax - it has been in force since 1 January 2019, although the law was not enacted until July 2019 - is also contrary to the principle of tax certainty.

• Burdensome

The tax will require complex new reporting systems, in particular given that it is retrospective in its effect.  As a tax on revenues, it can also result in significant tax liabilities for non-profitable companies and double taxation.

In the words of Ambassador Robert Lighthizer, the "USTR’s decision...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” (see announcement on the USTR's website). Indeed, the USTR is exploring whether to open Section 301 investigations into Austria’s, Italy’s and Turkey’s DSTs and has proposed additional duties of up to 100 per cent on certain French products with the option of also imposing fees or restrictions on French services.

All of this would not appear to bode well for the compatibility of a UK DST with a post-Brexit UK-US trade deal.