USTR announces 25% punitive tariffs on six specific countries in response to their Digital Services Taxes; Suspends tariffs for 180 days

Executive summary

On 2 June 2021, the United States (US) Trade Representative announced the imposition of 25% punitive tariffs on goods from Austria, India, Italy, Spain, Turkey, and the United Kingdom (UK) in response to the countries’ Digital Services Tax (DST) regimes.¹ In the same announcement, the USTR suspended the imposition of tariffs for 180 days, with collection of the duties not beginning until 29 November 2021 in an effort to provide additional time for the ongoing multilateral negotiations among the nations regarding international taxation at the Organisation for Economic Co-operative Development (OECD).

Detailed discussion

In June 2020, the USTR initiated investigations under Section 301 of the Trade Act of 1974 into Austria, Brazil, the Czech Republic, the European Union (EU),² India, Indonesia, Italy, Spain, Turkey and the UK relating to the adoption or contemplated adoption of a DST.³

In early January 2021, the USTR announced its findings in the investigations of the DST regimes of Austria, India, Italy, Spain, Turkey and the UK. In each instance, the USTR concluded that the DST regimes adopted were discriminatory to US companies, inconsistent with prevailing principles of international taxation, and also burden or restrict US commerce.

On 26 March 2021, the USTR announced proposed punitive tariffs of 25% on goods originating in each of the countries with adopted DST regimes and requested public comment.⁴ Further, the USTR determined to terminate the Section 301 investigations into the DST regimes of Brazil, the Czech Republic, the EU and Indonesia as the countries had not adopted or imposed the tax since the initiation of the investigations. The USTR noted, however, if any of these jurisdictions adopts or implements a DST, the USTR may initiate new investigations.

Following review of public comments and virtual hearings, on 2 June 2021, the USTR published the final determination of action against Austria, India, Italy, Spain, Turkey and the UK. For each country, the USTR published a listing of goods subject to the 25% punitive tariffs. Examples of the goods are listed in the following table.

*Estimated trade value based on 2019 calendar year and stated in US dollars.

Actions for business

Companies that import goods into the US originating in Austria, India, Italy, Spain, Turkey, and/or the UK, which may be impacted by these actions should begin planning. Immediate actions companies should consider are:

• Fully understand the extent of products impacted on the list(s) of 8-digit Harmonized Tariff codes
• Review options to mitigate the impact of any potential duties, such as:
  • Utilizing US Foreign-Trade Zones or bonded warehouse storage mechanisms to provide tariff deferral, and eliminate tariffs on products re-exported
  • Structuring transactions to obtain refunds of the 301 tariffs paid through the US drawback program
  • Adjusting approaches to reduce the customs value of US imports such as first sale for export or adjustments to transfer prices
• Determine whether US customs bonds are adequate to support the increase in tariffs

Additionally, US distributors who purchase from related parties should consider transfer price impacts by the imposition of any new Section 301 duties. Along with the strategic importance of mitigating duty impact while aligning the income tax and customs approaches, mechanics for reporting any transfer pricing adjustments to US Customs should also be reviewed.

This process may be particularly complex when duties are present for only a portion of the year. US Customs has very specific rules for reporting adjustments to prices made after importation, such as transfer pricing adjustments. These rules require that the importer take specific actions before importation of goods for which prices may be adjusted, including adding customs specific language to transfer pricing policies. With proper planning, refunds may be obtained on duties paid should transfer prices be reduced.

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (United States), Global Trade

• Michael Leightman, Houston
• Lynlee Brown, San Diego
• Michael Heldebrand, San Jose
• Robert Smith, New York
• Nathan Gollaher, Chicago
• Justin Shafer, Cincinnati
• Bill Methenitis, Dallas
• Armando Beteta, Dallas
• Bryan Schillinger, Houston
• Michelle F. Forte, New York
• Prentice Wells, San Jose
• Anand Raghavendran, Irvine
• Nesia Warner, Austin
• Jay Bezek, Charlotte
• Helen Xiao, Chicago
• Sharon Martin, Chicago
• James Grogan, Houston
• Oleksii Manuilov, New York
• Parag Agarwal, New York
• James Lessard-Templin, Portland
• Sundar Markandan, Irvine
• Rodney Appling, Austin
• Cameron Gauntner, Atlanta
• Jack Harvey, Cincinnati
• Alexa Reed, Detroit
• Doug Bell, Washington, DC

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.