President Trump Orders French Digital Tax Investigation

The United States and France have clashed over the latter’s proposal to tax 3 percent on French revenue of large (mostly US-based) tech companies.

The United States said it is “very concerned” at the move and President Donald Trump has ordered an investigation. But France has hit back and said that as it is a sovereign nation, it is free to decide how will it impose taxes.

Last week Boris Johnson, the leading candidate to replace Theresa May as the next Prime Minister of the UK, said that the government had to find a way to tax technology giants on their income.

Digital tax

The US investigation could lead to the United States imposing new tariffs or other trade restrictions, if the US probe concludes the French digital tax scheme, which is set to be officially approved by the French Parliament on Thursday, harms American companies.

At the start of the year, France had begun implementing the digital tax on tech giants such as Google and Facebook after the European Union had failed to reach an agreement before Christmas.

France had indicated in December 2018 that it would press ahead with its own taxation on tech firms after EU finance ministers failed to agree a tax on digital revenues, despite France and Germany championing a compromise digital tax that was much narrower in scope than a plan originally proposed in the spring of 2018.

They had proposed a 3 percent tax on European advertising sales by digital companies, rather than the broad tax on the total revenues of large digital firms originally suggested.

But this compromise failed to be agreed, leaving France to press ahead with its own tax which it introduced on 1 January 2019.

France’s so-called GAFA tax targets major digital firms and hopes to raise €500 million (£451m) per annum.

The tax has long been championed by French president Emmanuel Macron as a way to show that governments are capable of taking action to rein in large tech companies, which are seen as paying minimal tax in Europe due to their use of accounting loopholes.

The digital tax had been defeated in its previous form, due to opposition by Ireland, Scandinavian countries and Luxembourg. It needs unanimous approval by member states.

A number of countries, including the UK, have also proposed national digital taxes with a broader base.

US concern

But the French are furthest along in their proposals, and this had prompted deep concern on the other side of the pond, prompting President Trump’s call for an investigation.

The French DST bill would impose a 3 percent tax on total annual revenues generated by some companies from providing certain digital services to, or aimed at, French users, said the Office of the US Trade Representative. “The tax applies only to companies with total annual revenues from the covered services of at least €750 million globally and €25 million in France.”

Essentially, the concern is that the French tax is going to affect mostly American companies.

“The United States is very concerned that the digital services tax which is expected to pass the French Senate tomorrow unfairly targets American companies,” said US Trade Representative Robert Lighthizer. “The President has directed that we investigate the effects of this legislation and determine whether it is discriminatory or unreasonable and burdens or restricts United States commerce.”

The US investigation could last a year before it reaches a conclusion.

French response

The French have reacted angrily to the news of the investigation and said it was free to decide how it applies taxes as a sovereign country.

“For us, (the tax) is totally compliant with international agreements,” a French finance ministry source told Reuters. “Countries are sovereign on tax matters. So for us it is inappropriate to use a trade instrument to attack a sovereign state.”

It should be noted that France has pledged to drop its tax as soon as an international agreement is reached at the Organisation for Economic Cooperation and Development, when it finally overhauls decades-old cross-border tax rules for the digital era.

G20 finance ministers have already placed large tech firms on notice over their tax arrangements going forward, with changes promised by 2020.

For their part, tech companies have previously defended their tax structures, and insist they abide by tax laws as they’re currently written.

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