The United States Trade Representative (USTR) initiates investigations into Digital Service Taxes

The United States Trade Representative (USTR) initiates investigations into Digital Service Taxes

Part of: GS-Prelims and GS-II – International Relations & GS-III – Trade; Intellectual Property

In News:

• Recently, the office of the United States Trade Representative (USTR) has initiated investigations into taxes adopted or under consideration by 10 nations, including India. 
• These nations had charged taxes on revenues of American digital service companies like Netflix, Airbnb, Spotify, etc.
• Such taxes are known as Digital Service Taxes.

Key takeaways 

• The US is probing the 2% Digital Services Tax (DST) that India adopted in March and which went into effect on April 1, 2020.
• The tax applies only to non-resident companies with annual revenues over $267,000, and covers online sales of goods & services to persons in India.
• Further, equalisation levy at 6% has been in force since 2016 on payment exceeding Rs. 1 lakh a year to a non-resident service provider for online advertisements. 
• This is applicable for e-commerce companies that are sourcing revenue from Indian customers without having significant presence in the particular country.
• It is argued that India’s equalisation levy is complex and ambiguous which includes the possibility of double taxation. 
• In India’s case, the probe could potentially affect the outcome of a bilateral trade deal that India has been looking to forge with the US.
• Further, India continues to be on the ‘Priority Watch List’ of USTR for lack of adequate Intellectual Property (IP) rights protection and enforcement.

Important value additions 

The Office of the United States Trade Representative (USTR)

• It is responsible for developing and coordinating US international trade.
• The Section 301 gives the USTR broad authority to investigate and respond to a foreign country’s actions which may be unfair or discriminatory and may negatively affect US commerce.
• Section 301 was adopted through the 1974 Trade Act. 
• It allows the US President to impose tariffs or other curbs on foreign nations.
• However, the law mandates consultations with trading partners.

Digital Services Taxes (DSTs)

• These are the adopted taxes on revenues that certain companies generate from providing certain digital services. 
• E.g. digital multinationals like Google, Amazon and Apple etc.
• The Organisation for Economic Cooperation and Development (OECD) is currently hosting negotiations with over 130 countries that aim to adapt the international tax system. 
• One goal is to address the tax challenges of the digitalization of the economy.