On 21. October 2021 a joint announcement was published of a compromise agreement between the US, UK, France, Italy, Spain and Austria which agreement will be much welcomed by businesses, particularly in the five European countries.
These countries have all introduced domestic Digital Services Taxes, which impose a tax on certain local revenues generated by large digital businesses – which, of course, prominently includes some very well-known US tech giants in its scope. In return, the US has introduced tariffs (although suspended while discussions continued) on countries which persist in levying a domestic DST, on the basis that the taxes discriminate against US digital companies.
In one sense, the agreement to phase out the domestic DSTs has been heavily foreshadowed. All six signatories were amongst the 136 countries which earlier this month agreed in principle to an OECD/G20 BEPS 2.0 blueprint for the overhaul of the global tax framework. Under this blueprint, domestic DSTs would all be repealed. The framework also includes a limb referred to as ‘Pillar One’ which is similar in certain respects to a DST, applying to allocate more of the taxable profits of the largest global businesses (other than financial services) to the countries in which they operate, as well a 15% global minimum tax as ‘Pillar Two’.
The US had wanted domestic DSTs to be repealed immediately following the OECD/G20 agreement. The compromise agreement however is that the existing DSTs will be repealed only when Pillar One takes effect, expected to be by the end of 2023. The UK has emphasised that this was always its plan. In addition, under the agreement tax credits will be made available to offset future taxes, if a company’s DST charge during this transitional period proves to be more than the equivalent local tax bill under Pillar One as eventually implemented.
For its part, the US has agreed to terminate its proposed trade measures to retaliate against the relevant domestic DSTs, which will be a relief to exporters who might have been caught by the tariffs.
That said, as India and Turkey are not party to the agreement, their domestic DSTs and potential US trade measures in response to them are not within the scope of the agreement.