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Controversial French Tax to Be Imposed on Tech Giants; France Faces US Retaliation

On 24 July 2019, France’s President Macron signed into law a 3 percent tax on large tech companies' local revenues. The law was published in the country’s official gazette on 25 July. Tech giants will thus have to pay higher amounts of tax in France when doing business there, and not in the countries in which their headquarters are located. US President Donald Trump reacted to the move by launching an investigation into the new legislation in order to ascertain whether or not it is an unfair trade practice intended to target American tech giants. This could potentially result in another round of punitive tariffs imposed by the US Government, the European press has reported. On 26 July 2019, it was reported that President Trump announced the possible imposition of a tax on French wine imports to retaliate against France for enacting into law the digital services tax.

On 11 July 2019, the French senate, following the French National Assembly, adopted a law creating a “Tax on certain services provided by large companies in the digital sector”. The law was published on 25 July. The legislative act imposes a 3 percent tax on large tech companies' local revenues, i.e. income from digital business generated by providing services to French users. It will apply to tech companies with global sales of over EUR 750 million, and which make more than EUR 25 million a year in France. The move will affect major tech giants like Google, Facebook, and Amazon, and was carried out as a result of the stalled plans for EU-wide tax changes.

Global tech companies have frequently been accused of finding ways to avoid paying tax. It is said they do this by paying most of their taxes in the EU Member States where they have headquarters, and not where they make their sales. They have, for instance, offices in Ireland or Luxembourg, where the tax rates are low, while doing business in countries like France or the UK where they end up paying very little tax.

Consequently, French Finance Minister Bruno Le Maire pushed for EU legislation to be adopted that would oblige companies to pay a 3 percent levy on the digital revenues of large firms that are accused of averting tax in this way. Having failed to gather enough support for unanimous EU approval due to opposition by a number of Member States, including small low-tax countries, he settled for a national tax instead. France is thus the first European country to introduce a tax on tech giants like Google, Facebook and Amazon.

In the words of Le Maire, about 30 companies, most of which are based in the US, will be affected by the new tax. It has been reported that it will also apply to one French company, the advertising firm Criteo, as well as some German, Spanish, British and Chinese companies. The law will apply retroactively as from 1 January 2019 and is expected to bring about EUR 400 million into the French budget this year. “We are merely re-establishing fiscal justice”, the Minister said, adding that the purpose is to create “taxation for the 21st century that is fair and efficient”.

In a statement of 10 July 2019, shortly before the adoption of the digital services tax, US Trade Representative Robert Lighthizer expressed serious concerns about it, claiming that it unfairly targets American companies. He said, moreover, that US President Donald Trump has directed the investigation of the effects of this law in order to determine whether it represents an unfair trade practice. “The services covered are ones where US firms are global leaders,” the USTR's office said. “The structure of the proposed new tax, as well as statements by officials, suggest that France is unfairly targeting the tax at certain US-based technology companies”.

The initiative was welcomed by Republican Senate Finance Committee Chairman Chuck Grassley and Senator Ron Wyden. In a joint statement, they said that the tax is “clearly protectionist and unfairly targets American companies in a way that will cost US jobs and harm American workers".

It is possible that the USTR investigation results in the imposition of punitive tariffs or other retaliatory measures, given that the French legislation is being examined under Section 301 of the US Trade Act of 1974. This gives the administration broad discretion to take measures in response to foreign trade practices that impede US exports. US President Trump has, furthermore, already imposed punitive tariffs a number of times in the framework of investigations covering the European Union and Chinese trade practices.

Following the USTR statement, French Finance Minister Le Maire said that France was "sovereign and decided its own tax rules". He remarked that such an investigation into French legislation was a precedent in the history of the relationship between the United States and France. “Between allies, I believe we can and must resolve our differences in another way than through threats”, he added.

On 26 July 2019, it was reported that, during a White House briefing, President Trump announced that he may impose a tax on French wine imports, so as to retaliate against the France. “We're working on that right now,” Trump is believed to have told reporters at the White House.

If duties on any goods are indeed imposed by the US, France would probably challenge them as an illegal trade move, the European press has reported. The argument would be that the proper course would be to challenge the tax at the World Trade Organization.

Apart from France, other European countries, including the United Kingdom and Hungary, are also considering or already advancing taxes on digital services. The same holds true for some countries in South America, such as Chile and Mexico. At the same time, the Organisation for Economic Co-operation and Development (OECD) is making efforts to develop a large-scale multilateral agreement, which has been supported by U.S. officials and companies.

Content provided by Picture: HKTDC Research
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