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Dialogue Becomes Amicable Between France and US over Tax on Cross-border Digital Services

Bruno Le Maire, France’s Minister of Finance, has announced that “there won’t be a trade war” between France and the United States and explained that the two countries will continue their dialogue over the new global tax rules for companies that provide cross-border digital services. The announcement by Le Maire stands as confirmation of the reported ‘truce’ agreed between French President Macron and US President Trump.      

Last year, France introduced a 3% levy on gross revenues from companies that provide two types of cross-border digital services, namely: (i) digital interface services; and (ii) targeted advertising services. According to the French law, French or foreign companies that perform at least one of the aforementioned two taxable digital services would fall within the scope of the digital services tax when the group they belong to receives revenue in consideration of such taxable digital services during the previous calendar year in excess of the following two thresholds: €750 million for taxable digital services supplied worldwide; €25 million for taxable digital services supplied in France.

The debate concerning the tax has revolved around the fundamental questions regarding where the economic activity in the digital age is generated, where it should be taxed and who should collect such tax revenue. The potential for the collection of a significant amount of tax money prompted the French Government to seek the imposition of a measure of that kind.

In response, the United States warned that imports originating in France – estimated to be worth about $2.4 billion in 2018 – could be burdened with tariffs of up to 100% as retaliation against the French tax. According to the US, the French digital services tax discriminates against its tech companies.

Earlier this year, Le Maire and Steven Mnuchin, US Treasury Secretary, agreed to increase efforts to seal a preliminary deal during the World Economic Forum meeting. However, as negotiations proved to be difficult the deadline that had been agreed by the two countries might not have provided enough time to reach an agreement suitable to both of them. Traders interested in the outcome of the situation will find relief in knowing that the Trump-Macron truce gives both sides more time to reach a deal, without the need for entering into a tariff confrontation or the imposition of retaliatory measures. Le Maire claimed that the agreement reached between the two leaders to continue negotiations and to hold off on any punitive measures by the end of the year is a "very positive starting point".

However, Le Maire explained that talks with the US are not easy, notwithstanding the shared ambition to agree on a "fair taxation" at the global level. France’s Minister of Finance claimed that the “devil is in the detail” and added that the target that remains is to impose a minimum tax rate on large tech companies. Such a target by the French Government is believed to be in line with a proposal put forward last year by the Organization for Economic Cooperation and Development (“OECD”).

Hong Kong traders might recall that last year, negotiators at the OECD, which included a delegation from the Trump administration, agreed to a first-step framework that would allow countries to tax certain digital service providers even if these do not have a physical presence within the countries’ borders and provide their services from abroad. But the US Treasury Secretary surprised OECD officials with a letter requesting a reshuffle of the framework. Such letter required the endorsement of a framework that would effectively allow several US companies to opt out of those taxes. In view of the letter and in consideration of the threat posed by recurrent trade retaliatory practices of the Trump Administration, OECD officials decided to push back the discussions.

French authorities have explained that any international agreement reached within the OECD on a global minimum tax that all multinational companies must pay on their profits – regardless of where the profits are booked – would immediately supersede the French tax. Moreover, the White House claimed that both Trump and Macron agreed on the importance of completing successful negotiations on the digital services tax.

Hong Kong traders can reasonably expect that no tariffs will be imposed on French products by the US, at least before this year comes to an end. Moreover, the French Government has announced that it will back down on the imposition of its digital tax. Overall, the disagreements between France and the US has sped up the OECD process, which should lead to the proposal of rules that will meet the expectations of all parties involved.

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