Digital Taxes, Meet Handbag Tariffs

Today the U.S. Trade Representative (USTR) announced new tariffs in response to the French digital services tax. The tariffs of 25 percent on $1.3 billion worth of trade would not go into effect until January 6, 2021. The tariffs would apply to several make-up products, handbags, and assorted soaps.

In January, the U.S. and France agreed to avoid escalating a bilateral dispute over the French DST which the USTR found discriminates against U.S. companies. That agreement allowed France to keep the DST in place, but not collect the tax until the end of 2020. In response, the U.S. backed off on its tariff threats.

Now, the U.S. has recommitted to levying tariffs against France and recently opened investigations into DSTs in nine other countries and the European Union.

Today’s announcement suggests that approximately $450 million of the expected $500 million tax burden from the French DST would fall on U.S. companies. The USTR notice points out that the tariffs would raise a comparable amount of revenue. However, the burden of those tariffs would be faced by U.S. consumers.

This digital tax and trade conflict occurs at a time when multilateral negotiations over changing international tax rules have stalled, making it likely that bilateral conflicts will continue to create uncertainty. The challenges created by the pandemic have weakened the global economy, and policymakers in the U.S. and elsewhere should work to avoid disputes that could undermine recovery efforts.