UPDATE (July 12, 2019): The French government passed the digital services taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. on July 11. The tax is retroactive to January 1, 2019, and the first tax payment will be due in October. In reaction to this, the United States Trade Representative has opened an investigation into the discriminatory nature of the tax to determine whether to retaliate against the French with tariffTariffs are taxes imposed by one country on goods or services imported from another country. Tariffs are trade barriers that raise prices and reduce available quantities of goods and services for U.S. businesses and consumers. s.
French Finance Minister Bruno Le Maire has announced new information regarding a digital services tax proposal which, when enacted, would have retroactive effect to January 1, 2019.
A digital services tax (DST) is a tax on the revenues that certain digital companies or business models generate from the markets in which they operate. Many digital firms pay little to no corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. in the markets where their services are available either because they provide services for free or because they do not have physical assets or employees based in those countries.
However, a DST would be harmful and distortive because it narrowly focuses on one sector of the economy and could end up taxing businesses that are not profitable.
Last year, the French government was at the forefront of the push for an agreement at the EU level to enact a DST, and it continues to push for a trimmed down version of that approach. However, given the failure at the EU level to adopt such a policy, many countries have taken a unilateral approach to adopting digital services taxes.
The French government is now proposing a DST with a rate of 3 percent (but could go up to a maximum of 5 percent) on companies that have worldwide revenue from digital services of at least €750 million ($851 million) and French revenue of more than €25 million ($28 million). The government expects to raise €500 million ($567 million) per year from the tax.
According to OECD data, the French central government collected €364 billion ($413 billion) in total tax revenue in 2017 and €54 billion ($61 billion) in revenue from corporate taxes. Relative to the 2017 levels, this new tax would represent just a small increase of 0.14 percent in total revenue and a 1 percent increase in corporate tax revenue.
Reports on the proposal said that the tax will apply to revenues from local targeted ads, marketplaces, and the reselling of personal data.
The tax is likely to apply to 30 or so large multinationals that provide digital services and will likely apply to at least one French firm.
Le Maire has said this tax would be deductible against French corporate taxes, ensuring that businesses that already pay corporate taxes in France would be impacted less by the DST than foreign corporations that do not pay corporate taxes in France.
The DST will likely make it less likely for digital firms to directly expand their investment in France. European tech firms already have low levels of capital spending relative to the U.S. or Japan, and policies like this only work against improvements on that metric.
When Le Maire was asked about how the DST might impact France’s attractiveness for business investment, he responded by talking about the scheduled corporate rate cut from 33.33 percent to 25 percent by 2022 (combined rate of 25.83 percent). While he is correct in suggesting that the rate cut should improve the business investment climate in France, policies like the DST create an unlevel playing field for certain business models. France should work toward adopting neutral tax policies rather than special proposals targeted at one sector or another.
From a global perspective, the French DST could be a significant development because DST proposals may not fit within the framework that will come from the ongoing discussions at the OECD. The OECD should work to evaluate policies like the DST to determine whether they will fit with the new international system that will result from the OECD process.
From a U.S. perspective, it seems that Treasury Secretary Steven Mnuchin has approved of the French DST approach. As one article about the proposed DST states: “Le Maire said there was no risk of the new measure clashing with a tax agreement between France and the U.S. He discussed the plan with Steven Mnuchin during the U.S. Treasury Secretary’s stop in Paris late last month.”
So, within the span of just one week, it appears that the U.S. Treasury has both endorsed an end to tax competition with a global minimum tax and the French approach to directly taxing digital companies that currently have no taxable profits in France.
This is in contrast to the views of the Chairman and Ranking Member of the Senate Finance Committee on how distortionary and discriminatory DST proposals are to U.S. companies.
The French government is setting itself up to be a leader on policies that could hurt businesses that rely on digital sales platforms to market their goods. They should be cautious to avoid creating not only domestic challenge to their digital firms but also work to avoid creating more uncertainty and double taxationDouble taxation is when taxes are paid twice on the same dollar of income, regardless of whether that’s corporate or individual income. scenarios for multinational businesses.
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