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US armistice on Digital Services Tax retaliation

5-country trade measures truce on DST’s extended as OECD Pillar 1 talks struggle

The US has extended a truce on trade measures against five countries that have imposed Digital Services Taxes.  The truce is pushed out to 30 June 2024 for: the UK, Italy, France, Spain and Italy. Yesterday, the the OECD Pillar 1, Amount B guidance was published to help reach global agreement on this issue.

Check our global DST tracker.

This is pending global agreement on the right to tax income from digital services sold from abroad to local consumers. Currently, this fall outside of the income tax net; although global VAT on digital services is well established.

Talks on this at the OECD, known as ‘Pillar 1’, are showing little progress with a recent 1-year extension of negotiations deadline.  Whilst these talks have been progressing, many countries, including these five, have introduced DST’s.  This led to threats of trade measure retaliations by the US where many of targeted digital multinationals are based.

Even if agreement at the OECD can be reached, it is unlikely that US Congress will ratify it because it would mean more taxing rights for other countries on its digital giants.

Canada DST was imposed January 2024 with first collections due at the start of 2025 if no broad agreement is achieved at the OECD.

Pillar 1 – taxing revenues on large, foreign digital services corporates

There has been little progress since October 2021 on the components of Pillar 1 because of the resistance in the US Congress.  Pillar 1 is only intended to allow the taxation by foreign jurisdictions of around 100 global digital companies using the following criteria under Amount A:

  1. Global revenue of €20 billion, with at least €1 billion allocated to the tax jurisdictions looking to raise an assessment (€250m for smaller countries).
  2. Profit margin of at least 10%.

There is ongoing work on Amount A at the OECD, including a public consultation.

However, there is a second element, Amount B, to Pillar 1. This is centred around transfer pricing simplifications and baseline marketing and distribution calculations for foreign entities. After a long period of silence, the OECD Pillar 1, Amount B published on 19 February 2024 guidance on its calculation. This covers the application of the arm’s length principle at jurisdiction level. The aim being to reduce transfer pricing disputes, compliance costs and improve certainty for all.



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