France Approves Digital Services Tax; U.S. Explores Retaliatory Options

Taxes

Today the French Senate approved a new tax on large digital companies that will apply at a 3 percent rate on revenues generated from sales of user data, digital advertisements, and online platforms. The tax is both retroactive and temporary. Businesses subject to the tax will owe their first tax payment in October based on taxable revenues generated from January 1 of this year. The tax is also designed to expire in 2021. While it is in place, the tax is expected to raise €500 million (US $564 million) per year.

The structure of the tax is such that only a handful of businesses will be impacted, many being U.S.-based digital companies. In fact, French politicians have specifically pointed to American firms as the target for the tax.

Because of this focus on U.S. companies, the U.S. Trade Representative and U.S. lawmakers have, over the course of the last several months, continuously pointed to the French proposal as disproportionately impacting U.S. companies and threatening retaliatory measures against France should the digital services tax be implemented.

Wednesday, the U.S. Trade Representative announced that the administration would be opening a Section 301 investigation into the discriminatory nature of the French digital tax. These investigations have been used by the current administration to create justifications for tariffs on billions of imports.

Earlier this week, Senate Finance Committee Chairman Chuck Grassley (R-IA) and Ranking Member Ron Wyden (D-OR) called on the administration to use Sec. 891 of the U.S. tax code as a retaliatory option. This section of the tax code allows the U.S. to double the rates of tax on foreign companies and citizens when a country is taxing American companies or citizens in a discriminatory manner.

The French approach to taxing digital companies is one of several unilateral actions that are currently under consideration by countries around the world. At the same time the OECD has been working with a broad group of countries to reform international tax rules with respect to digital companies and businesses that rely heavily on intangible assets. The OECD is hopeful there will be a political agreement on a way forward by the end of 2019 and that a detailed solution can be completed by the end of 2020.

In the context of that multilateral effort it would be much better for countries like France to set aside their unilateral actions and allow the OECD process to work out a solution to these issues. Temporary, discriminatory taxes can create serious distortions and undermine broader multilateral efforts. Additionally, U.S. tariff policy has already imposed serious costs on U.S. businesses and consumers and further tariffs would increase those costs.

Given that other countries are considering enacting policies similar to the new French tax, this current U.S.-France dispute could foreshadow what might happen if Spain, Italy, Austria, the United Kingdom, or another country implements their proposed tax on digital companies.

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