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US considers retaliation after France passes new digital tax

US considers retaliation after France passes new digital tax

Despite warnings from the US over “unfair targeting” of US tech companies, the French parliament today approved a new digital services tax, leading the way in fiscal innovation for the digital economy.

The 3% tax will be applied to sales made within France by digital companies with a revenue of over €750 million, with at least €25 million generated in France.

Normally, tech companies declare the majority of their profits where they are headquartered, meaning that in most countries they are able to pay very little tax as they do not have a large physical presence.   

However, this measure will based on sales made within France, rather than on overall profits declared outside the country, attempting to close the loophole and force tech giants to stop paying significantly less tax compared to traditional businesses.  

Commonly referred to as the “GAFA tax”, used as an acronym for companies Google, Apple, Facebook and Amazon, the measure will affect several US firms. However, a number of European firms will also be affected, including French giant Criteo.

Before the French vote had even taken place, the US announced it would be launching a Section 301 investigation, which has become a familiar feature of the Trump administration, having been previously used as a way to eventually implement punitive tariffs. US Trade Representative Robert Lighthizer said the inquiry would “investigate the effects of this legislation and determine whether it is discriminatory or unreasonable and burdens or restricts United States commerce,” noting “concern” that it “unfairly targets American companies”.

In a joint statement, Senate Finance Committee Chairman Chuck Grassley and Senator Ron Wyden also called the tax “clearly protectionist”, targeting US companies “in a way that will cost US jobs and harm American workers”.

Nevertheless, the French have vigorously defended the new tax. After its passing, finance minister Bruno Le Maire stated that “France is a sovereign nation,” and will continue to exercise its sovereign right to take its own decisions regarding taxation. “Allies should settle their differences ways other than through threats,” he added.

The French measure comes after stagnation in EU-wide discussions on the need for a digital tax. A Commission report published last year called for the need for a fairer taxation system, noting that digital companies pay less than half the tax that traditional businesses pay on profits within the EU, paying only 9.5% compared to traditional businesses’ 23%.

However, opposition and reluctance from several member states, including Ireland, Sweden and Germany, prevented agreement.

Despite the failures at the EU level, France has been one of the key countries in Europe pushing the initiative forward, arguing for the need for a tax based on companies’ digital presence, rather than just their physical presence. “We are constructing a tax system for the 21st century,” Le Maire declared on Thursday.

President Macron initially announced the tax at the height of the “yellow vests” crisis last year, arguing that it will contribute to financing economic and social measures. The tax will be backdated to the beginning of 2019, and is expected to generate around €400 million this year alone.

While the new tax has been viewed as a risk for France, leaving it isolated in facing up to US retaliation, it could still pave the way for more countries to follow with their own laws, potentially also reigniting multilateral discussions on a wider international agreement. Le Maire noted that the passing of the tax should be an “incentive” for the US to “accelerate even more our work to find an agreement on the international taxation of digital services”.

With France acting as the pioneer country in Europe, so far it is looking likely that other countries will indeed follow its lead, suggesting it may not be isolated for long. The UK is moving forward with its own Digital Services Tax, originally announced back in October by Chancellor Phillip Hammond. The tax was included in the draft legislation for the next Finance Bill, published today.

Several other European countries, including Spain, are also aiming to pass similar laws.

This could be the start of a domino effect, acting as step towards the adaptation of fiscal policy for the new age. While it seems likely that the US will launch retaliatory measures for now, the US Trade Representative did concede that “the United States will continue its efforts with other countries at the OECD to reach a multilateral agreement to address the challenges to the international tax system posed by an increasingly digitised global economy.”  

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