In a further sign that the Trump Administration intends to use tariffs as a tool to help advance all of its domestic and foreign policy objectives, the White House issued a directive on February 21, 2025 designed to protect American companies (in particular, U.S. technology companies) from foreign taxes, fines, penalties or any type of regulatory restriction that is deemed to be unfair to American businesses. The Memorandum (Memo)—entitled “Defending American Companies and Innovators From Overseas Extortion and Unfair Fines and Penalties”—and accompanying Fact Sheet directs the Departments of Commerce and Treasury, as well as the Office of the U.S. Trade Representative (USTR), to propose retaliatory measures in the form of U.S. tariffs against merchandise imported from countries that discriminate against U.S. technology companies.
According to the Memo, imposing new U.S. tariffs would also seek to remedy persistent trade deficits (especially with the EU) and help dissuade foreign countries from collecting corporate income taxes from U.S. tech companies operating abroad. The highest profile of these foreign taxes takes the form of a Digital Services Tax (DST), a tax on specified gross revenue streams, which, while in theory is country-neutral, has the practical impact of only taxing the largest global tech companies, almost all of which are located in the U.S.
President Trump has directed USTR to consider re-opening investigations that his first Administration and the Biden Administration had pursued under Section 301 of the Trade Act of 1974 to investigate the DST of any country that discriminates against U.S. companies or burdens or restricts U.S. commerce. Countries with DSTs in place include Austria, Canada, France, Hungary, Italy, Poland, Portugal, Spain, Turkey, and the UK (India abolished its “equalization levy” in 2024). Certain concessions were made between the U.S. and some of these countries (such as pausing full implementation). Nonetheless, President Trump previewed this action, stating that he would impose tariffs on goods from Canada and France over their DSTs (for prior coverage, see the alert dated February 17, 2025).
The Canadian DST was previously the subject of a request for consultations under the United States Mexico Canada Agreement (USMCA) procedures for dispute settlement (for prior coverage, see the alert dated October 8, 2024). The new Memo specifically directs USTR to consider the establishment of a binational panel under USMCA’s Section 302(b) despite the fact that DSTs concern corporate income taxes and the roster of available USMCA binational panelists consists almost entirely of trade and customs attorneys in the U.S., Canada, and Mexico.
The Memo also specifies that the named agencies “determine whether any foreign country subjects United States citizens or companies, including, without limitation, in the digital economy, to discriminatory or extraterritorial taxes, or has any tax measure in place that otherwise undermines the global competitiveness of United States companies, is inconsistent with any tax treaty of the United States, or is otherwise actionable under section 891 of title 26, United States Code, or other tax-related legal authority.” The Memo specifically directed the Secretary of the Treasury to include the results as part of the report required in section 2 of the Presidential Memorandum of January 20, 2025, in which President Trump effectively withdrew the U.S. from participation in the OECD’s BEPS 2.0 initiative (for prior coverage, see the alert dated February 4, 2025).
Unlike the other reports that were mandated by the “America First Trade Policy” and the “Fair and Reciprocal Plan” (which reports are due on April 1), the February 21 Memo did not impose any deadlines for concluding the subject reviews or commencing further investigations (other than that noted above) (for prior coverage, see the alert dated January 23, 2025).
Finally, the Memo instructs USTR to “identify tools the United States can use to secure among trading partners a permanent moratorium on customs duties on electronic transmissions.” This issue is also pending at the World Trade Organization, which has long been struggling to identify exactly which tools and under which legal basis such a moratorium could be justified.
BDO Insight
As President Trump seeks to protect the position of American tech companies against foreign competition, the new Memo imposes requirements for a sweeping review of all DSTs and other perceived discriminatory foreign measures that burden U.S. commerce and innovation. While tariffs may be the preferred mechanism to counter such practices, other measures in the tax world may also be considered, such as Section 891 of the Internal Revenue Code, which allows the president to double U.S. taxes on citizens and corporations of foreign countries that engage in discriminatory taxation against American companies.
Any new tariffs or other measures introduced in response to the directives in the new Memo will no doubt continue to reinforce the view that the second Trump Administration is relying on tariffs in novel ways to further advance its domestic and foreign policy agendas. In this case, if tariffs are introduced to combat foreign practices ultimately determined to be adverse to U.S. commerce (and tech companies in particular), foreign countries may retaliate with tariffs of their own.
How BDO Can Help
The BDO Customs and International Trade team is closely monitoring the rapidly evolving trade landscape relating to the newly announced U.S. tariffs and the expected responses from the targeted countries.
For further assistance and detailed analysis tailored to your business needs, please contact our team of international trade experts at BDO. We are here to help you assess key vulnerabilities, ensure compliance with new measures, and identify opportunities for tariff relief and supply chain diversification moving forward.
Please visit BDO’s International Tax Services page for more information on how BDO can help.