The digital economy corresponds to 15.5% of global GDP and, according to the World Bank, has grown two and a half times faster than global GDP over the past 15 years.
This rapid expansion has sparked global debates in many legal and regulatory areas. In the area of international taxation, the debate has centered on whether current regulations are appropriate in the modern world economy, particularly with regard to the allocation of income and profits to countries for tax purposes or for purposes that may be taxable.
As a result, in 2018 the European Commission (EC) proposed to impose a Temporary Digital Services Tax (DST) of 3% on revenue from online advertising services, revenue or revenue from digital brokering activities and sales from users -collected data. Companies with annual worldwide sales of more than US $ 915 million and taxable income within the EU of more than US $ 61 million would be subject to tax. Although the original proposal was rejected at EU level, several EU and non-EU countries have viewed summer time as an effective way of generating income and modeled their proposed summer time according to the EC proposal.
In response, the US has threatened retaliatory tariffs, arguing that daylight saving time is wrongly targeting US multinational corporations (MNCs). While only some of the companies are immediately subject to summer time, many more will feel the effects when the tariffs come into effect. This article summarizes the various DST proposals around the world and discusses possible strategies for reducing tariffs should the US respond with retaliation.
Overview of summer times
In 2013, the Organization for Economic Co-operation and Development (OECD) / G-20 launched the BEPS (Base Erosion and Profit Shifting) project, which aims to create a uniform set of consensus-based international tax regulations. Overcoming the tax challenges posed by digitization has been the top priority of the OECD / G20 framework in BEPS since 2015 with the publication of the BEPS Action Report 1. At the request of the G20, the Inclusive Framework continued to work on the topic and presented an interim report in March 2018. In 2019, the members of the Inclusive Framework agreed to examine proposals in two pillars that could form the basis for a consensus solution to the tax challenges of digitization. In the meantime, several countries have begun to levy (or are considering raising) digital taxes to increase tax revenues (arguably to level the playing field) pending an agreement under the OECD / G-20 framework, inclusive. While the OECD originally intended to reach an agreement by the end of 2020, the OECD announced in October that it expects an agreement by mid-2021. This announcement has renewed the jurisdiction's interest in daylight saving time, with Spain being the youngest country to introduce such a tax, and the EC claiming it is ready to propose a daylight saving time structure should the OECD fail to reach an international agreement to achieve. In addition, the African Tax Administration Forum (ATAF) recently published a paper on the proposed approach to drafting tax laws for digital services, which includes a model DST law. (Orbitax, ATAF publishes paper on proposed approach to drafting tax legislation for digital services (October 5, 2020).)
Most of the DSTs that have been implemented or proposed share similar characteristics and are intended to be temporary measures (although India has not indicated that the extended countervailing levy is only a temporary measure). It is a mix of gross income taxes and transaction taxes that apply at rates between 1.5% and 7.5% to income from the sale of advertising space, the provision of digital intermediation services such as the operation of online marketplaces and the sale of collected data from Users. For the most part, DSTs are aimed at a small number of large digital companies. In order to be subject to daylight saving time, a company at group level must generally meet a double threshold: a worldwide sales threshold (e.g. 915 million US dollars (750 million euros) in daylight saving times imposed by France, Italy, Austria and Turkey were). and a domestic taxable turnover threshold (e.g. USD 30.5 million (EUR 25 million) in France or USD 6.71 million (EUR 5.5 million) in Italy). DST revenue collection is generally based on whether the taxed service is viewed or used by a user who has a device in the jurisdiction where the DST is being implemented. A device is generally in a DST jurisdiction based on its Internet Protocol (IP) address or any geolocation method.
There are of course differences between the summer times. For example, Austria only applies its daylight saving time to digital advertising, while Poland only rates its daylight saving time for streaming services. Interestingly, Turkey is levying its daylight saving time on digital content, as well as advertising, brokerage activities and the sale of user data. In contrast, India and Kenya tax revenues from a wide variety of digital services. In addition, some countries do not apply significant sales thresholds. For example, the threshold for the extended countervailing levy is much lower in India – non-resident companies must comply with the levy if they have gross taxable income over INR 20 million (US $ 260,000). The Kenyan Summer Time, which comes into effect on January 1, 2021, currently has no application threshold. Finally, countries have introduced various exceptions to daylight saving time, including for payment services (e.g. France, Italy and Turkey), digital content (e.g. France and Italy), and intra-group services (e.g. Italy).
These summer times arguably distort market behavior by primarily discriminating against large US multinational corporations and accordingly providing a relative advantage to local businesses that fall below the revenue threshold. Another major criticism of daylight saving times is that they are imposed on business input that is likely to be passed on to consumers, although some jurisdictions like France have stated that consumers should not pay the tax. As a result, several companies have already announced that they will increase their prices due to these summer times. In addition, the lack of harmonization in the application of these taxes can lead to double taxation if, for example, two or more countries consider that they are generating a particular source of income. There is currently only a provision in the UK dealing with such situations.
The table below describes the proposed or adopted summer times in the various countries.
(Source for the status of summer time implementation: What European OECD Countries Are Doing About Taxes on Digital Services, Tax Foundation, https://taxfoundation.org/digital-tax-europe-2020/ (last accessed October 29, 2020 ); Taxation of the digitized economy, KPMG (October 27, 2020))
While daylight saving time is primarily aimed at large digital businesses, the differences in scope and thresholds can mean that a wider range of businesses are subject to these taxes. For example, the Indian countervailing levy also applies to online education services that may affect higher education institutions. This risk will only increase if more countries introduce summer time regulations that differ from the original EU proposal (e.g. Kenya). If no agreement is reached on the framework of the OECD / G-20 inclusive, countries could be tempted to widen the scope of their daylight saving time either by adding new services to the list of taxable services or by lowering the high thresholds they originally set have introduced. As a result, companies selling digital services internationally, including those that are not currently targeted by these measures or that they do not include, should consider the potential impact on them. Businesses should continuously monitor global developments regarding the introduction of these taxes and determine whether they have any obligations by reviewing the scope of their services and tracking sales amounts. As the countries have issued relatively few guidelines and the practical application of daylight saving time is unclear, there are numerous uncertainties that can affect companies, including the definition and parameters of in-scope services, the treatment of bundled transactions, the procurement of Transactions, data requirements, and registration and filing obligations.
Finally, companies involved in the sale of digital services should also consider their VAT obligations abroad. In over 80 countries, the provision of digital services by a non-resident to individuals (often including online education) results in an obligation to register, collect and remit VAT, even if the company does not have a local presence (e.g. permanent establishment) or the company has a nonprofit Status. Additionally, many of these jurisdictions have a very low or zero registration threshold (i.e., a minimum income requirement before being liable for sales tax). In general, the types of services that are subject to VAT are those that are essentially automated to provide with minimal human intervention. However, there are some jurisdictions where human intervention or lack of it is not relevant. Therefore, a wider range of companies are currently subject to these VAT rules than summer times. Make no mistake, however, businesses may be subject to both sales tax and daylight saving time, which significantly increases their tax burden.
Possible US retaliation
On July 10, 2019, the U.S. Commercial Agent (USTR) opened an investigation into French Daylight Saving Time to determine whether the tax would discriminate against US businesses, whether the tax is applied retrospectively, and whether French Daylight Saving Time is different from those in the US and internationally applicable standards deviates tax system. In December 2019, the USTR issued a statement stating that daylight saving time in France is "unreasonable or discriminatory and burdens or restricts US trade". (84 Fed. Reg. 66956 (December 6, 2019).) In July 2020, it was announced that certain luxury products of French origin such as make-up and handbags would be subject to a 25% duty. However, implementation was delayed by up to 180 days because daylight saving time was not yet in effect. (85 Fed. Reg. 43292 (July 16, 2020).) In late November, the French government began issuing DST survey notices to internet companies advising them that the tax was going into the future. ("Tariffs on French handbags, cosmetics might start, Wyden warns," Int'l Trade Today, Volume 36, No. 230 (November 30, 2020).) Tariffs apply from January 6, 2021.
In addition, on June 5, 2020, the USTR announced that it is initiating a Section 301 investigation in countries that have adopted or are considering adopting daylight saving time. This list includes Austria, Brazil, the Czech Republic, the European Union, India, Indonesia, Italy, Spain, Turkey, and the United Kingdom. The notice states that these proposed or implemented daylight saving times are likely to be targeted at large U.S. technology companies, and the USTR is exercising its powers to investigate whether these implemented or proposed daylight saving times unfairly discriminate against U.S. companies the DST retrospective are problematic and whether it is an inappropriate tax policy. The results of the investigations had not been published until the beginning of January 2021.
How should US importers prepare for the potential increase in tariffs?
The outcome of the USTR announcement raises serious concerns about the possibility of heightened trade tensions with EU member states and any other country considering adopting daylight saving hours, even if a new US administration is in office in 2021 in preparation for possible retaliation . First, while the investigation into the USTR was commenced under Section 302 (b) (1) (A) of the 1974 Commerce Act and retaliatory tariffs under Sections 301 (b) and 304 (a) (similar to Section 301) would be countervailable on some of the 301 tariffs Goods of Chinese origin), a process of elimination is unlikely to be available, as was the case for certain Chinese goods, because the purpose and targets of retaliatory tariffs are different. Regardless, there may still be opportunities to lower tariffs to offset the impact of the tariff.
Section 301 tariffs may be penalized if US-imported goods are subsequently either (1) exported as contained in US-made products (i.e., manufacturing disadvantage); or (2) in the same condition as originally imported (i.e. unused item or disadvantage in the same condition). The disadvantage rules allow the recovery of 99% of the customs duties originally paid on the imported goods upon export, subject to the requirements of the customs regulations of 19 C.F.R. Part 191. The Downside is becoming an increasingly popular royalty reduction program because of the significant savings it offers.
First sale for export
In a multi-step transaction (e.g. when the US importer buys goods from a foreign middleman who in turn buys goods from a foreign manufacturer), the First Sale for Export Principle (FSFE) determines the dutiable value of goods based on the "First Sale" between the overseas middleman and the overseas manufacturer, not between the sale between the US importer and the overseas intermediary. As a result, the tariffs paid by the US importer exclude ad valorem tariffs on the overseas middleman surcharge, as the tariffs are only applied to the overseas manufacturer's price, thereby lowering the tariffs payable. If the US were to impose retaliatory tariffs, those tariffs would also only apply to the "first sale" transaction.
To qualify, a US importer must provide evidence (generally with supporting documents) that the alleged FSFE transaction is a real sale, that the goods are clearly intended for export to the US, and that the price is on the foreign manufacturer is paid by the US foreign middleman is at a distance. In the past, this program has been used by retail and clothing importers who have faced high tariffs but are becoming increasingly popular in other industries due to the high tariff environment. While the requirements to apply the FSFE Principle are strict and reasonable care must be taken, US importers have made significant savings by implementing this strategy.
Foreign trade zone
Foreign Trade Zones (FTZ) are physical locations within the United States that are outside of customs territory. On arrival at the port, the goods are placed in an FTZ and customs are not paid until they are withdrawn. An FTZ, while not eliminating Section 301 tariffs, does allow importers to plan and manage customs payments – an opportunity that can be critical to achieving other strategic goals. In contrast to a customs warehouse, in which goods may not be stored for longer than five years, goods can remain in an FTZ for an indefinite period of time. In addition, it is relatively easy to expand the area of an FTZ to meet business needs. This is becoming increasingly important as more and more companies are present online. Many importers also achieve significant savings on fees and brokers, with only one entry per week, rather than each time a shipment arrives. As part of a long-term cost management strategy, an FTZ can be a powerful tool.
De minimis value
Customs regulations also provide a duty exemption for imported goods valued at less than $ 800 at fair retail value in the country of dispatch if imported by one person in one day. Use of this exemption has increased the volume of e-commerce transactions direct to the consumer, which has accelerated further as more consumers shop from home due to Covid-19.
However, importers should be aware that CBP recently made a proposal to the Bureau of Administration and Budget to remove the $ 800 de minimis exemption for goods subject to Section 301 tariffs. Therefore, importers planning to use the de minimis exception should take this into account.
Summertime threatens to significantly increase the cost of doing business for many businesses, while also creating confusion over the services that will trigger the tax. The first step for many businesses is understanding which jurisdictions they are likely to be affected in and when the tax will take effect. For US importers facing a number of potentially high tariffs, understanding the company's trading profile is critical in determining the right savings strategies. While it is possible that the US will have a position on daylight saving times by March 2021, it is likely that collective bargaining measures will continue to be part of the political toolbox. Importers should develop a short, medium and long term customs management plan that allows flexibility in the introduction of tariffs. Higher taxes and higher tariffs may persist, but proper planning can help companies control costs.
This column does not necessarily reflect the opinion of the Bureau of National Affairs, Inc. or its owners.
Information about the author
Amie Ahanchian is Principal in Trade and Customs at KPMG. Donald Hok is a senior manager in the Commerce and Customs Services group of the Washington National Tax Practice at KPMG LLP. Philippe Stephanny is Senior Manager at WNT-SALT at KPMG LLP. Elizabeth Shingler is a manager in the trade and customs practice for KPMG LLP.
These comments reflect the views of the authors only and do not necessarily represent the views or professional advice of KPMG LLP. The information contained herein is of a general nature and is based on authorities, which are subject to change. The applicability of the information to specific situations should be determined in consultation with your tax advisor.