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France Aims Its Tax Laws At Big Technology Companies

French Finance Minister, Bruno Le Maire.Source: Wikimedia

Since the dawn of the internet, it has been used for commerce. While many operators pay their taxes locally for transactions that have been made on the web, the policing of those who do not has been hard for tax authorities the world over. This is especially the case when cross-border transactions are made and supply from one country to another may involve the actual transaction going on in cyberspace, potentially on servers outside of normal jurisdictions. For the tax collecting arms of many governments around the world, it has been a knotty problem.

Recently, France’s Finance Minister said he would look again at the loophole that allows multi-million dollar businesses to operate in different tax territories around the world but pay little tax because their transactions are recorded elsewhere. In the past, the European Commission has taken swipes at the likes of Apple, retrospectively applying tax bills to it. However, France’s approach is somewhat different. While the introduction of new French tax rules will be unlikely to impact negatively on online casinos, which are too small to come under their remit, the move may indicate the beginning of a push towards wider international taxation and regulation of the global digital economy. What is France up to?

Taxing Sales Generated Domestically

According to numerous reports in the press, France will move to tax tech giants, not on their profits or their turnover, but apply a levy on sales generated domestically. This means that the likes of Google or Amazon may have their headquarters outside of the country and pay no corporation tax but if a sale is made to a French consumer living in France on one of their platforms, then a three per cent sales duty will be added. Crucially, this will apply on all sorts of goods and services purchased over the internet. The move has already been approved by the country’s Senate as well as its National Assembly. What’s even worse for internet-based businesses which make sales to French consumers is that the new tax regulations will be applied retrospectively to the start of the financial year, thereby netting millions for the public purse.

Some have estimated that the French government stands to collect as much as €400 million in its first year, so it is easy to see why it has made this move. In fact, France had made attempts for an EU-wide approach to the problem of tech giants paying little by way of tax, a move that was countered by countries such as Ireland and Sweden, where some of the big global tech companies have their European headquarters. However, the French administration has been careful to point out that it is not trying to stifle entrepreneurial spirit on the internet, merely to tax the big operators. Only companies that have a turnover of €750 million or more will be subject to the tax at all. However, that is based on global sales, not French ones, which has caused a stir in the United States. Why? Because most of the big technology operators with turnovers of that size happen to be American.

Tech giants like Google may be subject to more taxation.Source: Wikimedia

The American Response

Given that the US has already shown itself as an economy that is willing to go toe-to-toe with the world’s biggest economies, such as China, it is hardly surprising that the French government’s proposal has not gone down well in Washington. The US President announced within days of the change to French tax regulations that he took a dim view of them and that they merited further investigation. Indeed, a key US trade representative, Robert Lighthizer, said that the President had directed his team to investigate the effects of the tax legislation to decide whether it is discriminatory or unreasonable to American businesses.

One US Senator significantly upped the ante when he said that the digital services tax being rolled out in France was ‘deliberately protectionist’ and that it was unfairly targeting American technology companies. A Section 301 investigation is now in full swing in Washington and some commentators think that it is more likely than not that the US will take some retaliatory action against France, possibly in the form of tariffs. Given that France trades as part of a bloc, in the form of the EU, it is not yet known how this might play out with other member states unless a compromise solution can be found.