US’ ‘301’ threat deals another blow to multilateralism

Pralok Gupta/Shailja Singh | Updated on June 19, 2020

The investigation of India’s digital tax under Section 301 of the US Trade Act is violative of the WTO dispute settlement protocol, and will further weaken trust in the global trade body

Old habits die hard, especially for the US. By yet again bypassing the WTO and resorting to unilateral trade tactics, the US refuses to align with the global consensus on trade. Recently, the US Trade Representative initiated ‘Section 301’ investigations with respect to digital services taxes (DSTs) adopted by India and other countries, mainly from Europe. The investigations will focus on the perceived ‘discrimination’ against US companies, ‘unreasonable’ tax policy and apparent ‘inconsistency’ with obligations under the WTO.

While these actions are clearly meant to generate pressure for the US’ strategic and commercial gains, are they justifiable? And will they further weaken the global multilateral trade system that the WTO represents?

The 301 stick

So, what exactly is Section 301? Title III of the US Trade Act, 1974 (Sections 301 through 310) is often collectively referred to as Section 301. It provides a statutory means by which the US can impose trade sanctions on foreign countries that ‘violate’ US rights under any trade agreement, or engage in acts that are ‘unjustifiable’ or ‘unreasonable’ and ‘burden’ US commerce.

Prior to the WTO’s creation in 1995, the US used Section 301 extensively — to pressure other countries to open their markets to US exports. Its use declined once the WTO’s dispute settlement mechanism came into existence. But in recent years, the Donald Trump administration has returned to the use of these old weapons. For instance, 301 proceedings were initiated against France’s new DST last year. The US threatened to impose additional tariffs of up to 100 per cent, and fees or restrictions on services from France.

But, Section 301 itself goes against the core principles of WTO’s dispute settlement mechanism. The WTO mandates that any determination of a potential violation should be only undertaken at its platform. In fact, a WTO panel in a prior dispute on the issue (US-Section 301 Trade Act) had stated that even having a provision that threatens unilateral action is akin to carrying a big stick. One may not use it, but just threatening action is as good as swinging the stick. Yet, that panel fell short of holding Section 301 provisions to be inconsistent with the WTO. This was on account of an undertaking approved by the US Congress that any determination of a WTO violation will only be based on the findings adopted by WTO’s dispute settlement body.

Need for digital taxes

DSTs are a big concern for the US tech giants. They are clearly the most dominant players in the digital world. However, their revenue from foreign jurisdictions is generally not taxed as they do not have significant economic presence in many of these jurisdictions. This is contrary to the basic philosophy of taxation. An entity should pay taxes to contribute to the development of a place from where it is earning revenue. More and more countries are now realising that foreign digital services providers are escaping the tax net in their jurisdictions. This also creates an uneven playing field for domestic service providers. A DST or ‘equalisation levy’ is imposed to remove these anomalies.

India introduced its equalisation levy in 2016, with its scope limited only to online advertisement services. However, the Finance Act, 2020, extended it to include e-commerce supply or services made or facilitated by an e-commerce operator. Businesses that could be impacted include non-resident e-commerce platforms, subscription-based platforms that provide video streaming, music downloads and online gaming, travel and hotel aggregators, social media platforms, and search engine services, to list a few. Even online services provided by parent foreign companies to their Indian entities are covered by the levy.

The levy seeks to provide a level playing field, not discriminate between domestic and foreign service providers. It is also not unreasonable, as it is charged only at 2 per cent. Other nations have higher rates — 5 per cent in Austria and 7.5 per cent in Turkey, for example. Even if it is considered discriminatory, it does not violate India’s obligations under the WTO. India has not taken any commitments at the WTO for online delivery of most services. These include ‘computer-related services’ such as cloud and search engine services, audio-visual services such as video and music downloads, cab and hotel aggregators, etc. India certainly has the flexibility to impose such a levy on foreign service suppliers.

Protecting US tech giants

The main purpose of starting 301 investigations against India is America’s concern about the adverse impact of this equalisation levy on its tech giants such as Google, Facebook, Amazon, Netflix etc, given their dominant position in Indian digital and e-commerce markets. Besides, the US is also worried that based on India’s experiences other countries will also start imposing similar regulations, which will hurt US tech giants further. India is often considered a leader by many countries for leading initiatives for greater regulation of digital companies.

Even the EU, whose interests generally match that of US, is considering imposing DST on foreign digital companies. But why should Europe go down this DST path? The reason is simple: Europe does not have any digital companies as big and dominant as US tech giants. So it is also apprehensive that US companies are appropriating revenue from their turf without paying taxes. DST on foreign digital companies was the answer.

It is unfortunate that the US continues to resort to unilateral determinations using mechanisms like Section 301. If the US follows this up with trade sanctions, without going through the due process of the WTO, it will be violating its binding commitments to the organisation. It will also be violating its own undertaking approved by its Congress and to the WTO. Such unilateral actions will further weaken global trust in the multilateral rules-based system, which is already under serious assault.

The writers are associate professors at the Centre for WTO Studies, IIFT, New Delhi. Views are personal

Published on June 19, 2020

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