Image: Prada

Early this year, the U.S. Trade Representative (“USTR”) announced that it would indefinitely suspend the Section 301 tariffs on certain luxury goods from France – including handbags and cosmetics – tied to its investigation into the French digital services tax (“DST”), thereby, letting the likes of Hermès and co. off of the hook of the significant implications that were expected to follow such a duty overhaul. But while the U.S. trade body has shielded French companies from this particular type of tax treatment, certain apparel and leather goods, cosmetics, and fragrances from countries like Italy and the United Kingdom are still in the crosshairs of a budding trade war. 

In a statement in late March, the USTR announced the “next steps” in its ongoing Section 301 investigations, which center on various countries’ implementation of taxes on the digital earnings of companies that generate a certain level of revenue. Since American tech giants like Facebook Inc., Google, Amazon, and Apple are among the most heavily-targeted by such relatively new digital tax regimes, the USTR initiated investigations into the national DSTs adopted or under consideration in a number of jurisdictions – beginning in some cases in 2019 and expanding thereafter – in an effort to examine the individual tax initiatives, and determine where they fall in the larger context of international tax and trade laws.

“In January, USTR found that the DSTs adopted by Austria, India, Italy, Spain, Turkey, and the United Kingdom … discriminated against U.S. digital companies, were inconsistent with principles of international taxation, and burdened U.S. companies,” the USTR asserted in its statement late last month, noting that it will proceed with the public notice and comment process on possible trade actions “to preserve procedural options before the conclusion of the statutory one-year time period for completing the investigations.” 

Given the types of goods that the USTR proposes levying tariffs on in response to the various national DST programs, fashion is firmly cemented in at the heart the matter. In its proposal for the UK, for example, the USTR recommends adding tariffs of up to 25 percent on fragrances, different types of makeup (including lipstick, nail polish, powder, etc.), skincare products, “women’s or girls’ dresses, knitted or crocheted, of synthetic fibers,” women’s’ and men’s’ overcoats, and different types of footwear, among other things. The U.S. government agency’s proposed tariffs for Italy are even more focused on fashion, with the government proposing tariffs on a wider array of goods – from handbags (which are not on the UK list) and footwear to “women’s or girls’ suit-type jackets and blazers” and “men’s or boys’ track suits.”  

While the proposed tariffs are still subject to a public notice and comment process, they, nonetheless, raise concerns in light of the fact that such trade disputes “have a tremendously damaging impact on businesses’ ability to export to the U.S.,” according to Helen Brocklebank, CEO of UK luxury trade group Walpole, whose members include Alexander McQueen, Burberry, Farfetch, Mulberry, and Net-a-Porter, among others. KPMG’s Amie Ahanchian, Donald Hok, Philippe Stephanny, and Elizabeth Shingler echo this sentiment, stating that the proposed tariffs raise “serious concerns about the possibility of increased trade tensions,” while also standing to “substantially raise the cost of business for many companies,” including those within the fashion sphere.

With this in mind, they noted in a Bloomberg Tax article that “understanding the mitigation opportunities available to importers is essential to prepare for [such] potential retaliatory tariffs.” For instance, they state that “Section 301 duties may be eligible for duty drawback where goods imported into the U.S. are subsequently exported either: (1) as incorporated into products manufactured in the U.S. (i.e., manufacturing drawback); or (2) in the same condition as originally imported (i.e., unused merchandise or same condition drawback).” Since drawback rules enable companies to recover 99 percent of the duties originally paid on the imported merchandise when exported (subject to customs’ requirements), it is “becoming an increasingly popular duty mitigation program because of the substantial savings it offers,” per Ahanchian, Hok, Stephanny, and Shingler. 

Similarly, the First Sale for Export (“FSFE”) duty reduction program could also prove effective if the U.S. importer can prove that “the purported FSFE transaction is a bona fide sale, that the goods are clearly destined for export to the U.S., and that the price paid to the foreign manufacturer by the foreign middleman is at arm’s-length.” Ahanchian, Hok, Stephanny, and Shingler contend that this program has historically “been used among retail and apparel importers who faced steep duties,” it is now becoming more popular in other industries due to the high-tariff environment, and “while the requirements to apply the FSFE principle are stringent and reasonable care must be exercised, U.S. importers have experienced significant savings through the implementation of this strategy.” 

In terms of what will ultimately come of the U.S. tariff threats, that is unclear. “It is believed the Biden Administration aims to ultimately resolve the disputes over DSTs, and other issues of international taxation, through building consensus among the members of the Organization for Economic Co-operation and Development,” per Husch Blackwell LLP’s International Trade Insights blog, which notes that “Secretary of Treasury Janet Yellen also supports engaging in OECD negotiations on the separate issue of minimum corporate taxation.” Meanwhile, U.S. Trade Representative Katherine Tai says that the U.S. “is committed to working with its trading partners to resolve its concerns with digital services taxes” and “remains committed to reaching an international consensus through the OECD process on international tax issues.” However, Tai claims that “until such a consensus is reached, we will maintain our options under the Section 301 process, including, if necessary, the imposition of tariffs.”

Regardless of the outcome, Ahanchian, Hok, Stephanny, and Shingler expect that “it is likely that tariff actions will continue to be part of the political toolbox.”