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France’s Digital Services Tax: Facts and Analysis

6 min readBy: Daniel Bunn

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.

On March 6, the French government released a policy document outlining its Digital Services Tax (DST) proposal that will be taking effect in 2019. The tax would apply at a rate of 3 percent to revenues from certain digital business models and is expected to raise €500 million ($567 million) per year from the tax.

The policy document makes a key assertion in the arguments for the proposal that misrepresents the facts about digital companies and their taxes. The document also describes some features of the policy that reveal the protectionist nature of the policy and the difficulties it would create for compliance.

Claims and Counterpoints

The French government argues in the document that small and medium-sized firms pay an average tax rateThe average tax rate is the total tax paid divided by taxable income. While marginal tax rates show the amount of tax paid on the next dollar earned, average tax rates show the overall share of income paid in taxes. that is 14 points higher than digital companies. Specifically, it says that digital firms pay a rate of just 9.5 percent while the average tax rate of a company in the European Union (EU) is 23.2 percent.

This is a twist on a claim made by the European Commission as part of its push for a DST at the EU level last year. In its impact assessment for the EU DST, the European Commission cited studies of the marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. on a hypothetical investment in various contexts. However, the commission erred in its interpretation of those studies as they relate to the average taxation of digital companies.

Dr. Christoph Spengel from the University of Mannheim was one of the authors of the studies cited for that comparison by the European Commission. Dr. Spengel directly disputed the European Commission’s interpretation of his research. Another cited study was written in partnership by Dr. Spengel and a PwC affiliate. PwC published a note explaining how the findings do “not support conclusions that the digital sector is undertaxed.”

The difference between what the studies show and what the Commission claims is in the metric. Dr. Spengel and his coauthors analyzed the tax rate that applies to the marginal investment by a digital firm. This is different from an average tax rate. The marginal tax rate applies to the next dollar of income earned, while the average rate is the amount of tax divided by total income.

The difference between average and marginal corporate tax rates varies among countries. The difference between the effective average and marginal tax rates on corporate income is 12.3 percent on average. This is according to OECD data on 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. es from among 74 countries. In France, the effective average rate is 33 percent and the effective marginal rate is just 14 percent, a difference of 19 percentage points.

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It would not be useful to compare the rates that a business faces on a new investment to the rate that a different business pays on all its profits. However, that is similar to the comparison in the policy document on the DST.

Apart from the difference between average and marginal rates, businesses might pay low rates of tax for various reasons that may have more to do with a country’s domestic tax policies than special tax planning by the businesses themselves. Dr. Matthias Bauer, a senior economist at ECIPE, used a different methodology to compare how various businesses are taxed around the world and has found that there is a decent amount of variance in tax rates even when looking at companies that have their headquarters in France.

To the extent that new investments by companies face low marginal tax rates in France it is likely due to their tax policies that subsidize certain activities. OECD data on tax incentives show that France has generous subsidies research and development. In 2018, France had a 43 percent tax subsidy rate for spending on research and development by profitable firms, the highest in the OECD.

On the one hand France is heavily invested in promoting innovative firms through research and development subsidies, but on the other hand the government is pushing for a special tax on some of the most successful digital companies.

Tax Protectionism

Beyond the faulty arguments made in favor of the tax, the French proposal has a protectionist design. Not only will the tax hit a narrow group of companies, but French Finance Minister Bruno Le Maire has said that it would impact just one French company.

Companies that pay French corporate income tax would be treated differently than those that do not. The proposal provides for DST payments to be deductible expenses against French corporate income tax. This means that the French company subject to the tax could be less impacted by the tax policy than the other companies.

The DST, then, works much like a tariff on foreign companies that are selling into France or providing services (some of which are free) to French citizens.

Additionally, if foreign governments determine that their foreign tax credits do not apply to payments of the French DST, then this policy will clearly result in double taxationDouble taxation is when taxes are paid twice on the same dollar of income, regardless of whether that’s corporate or individual income. .

More Details, Please

According to the policy document, companies that are subject to this tax will need to make their first payment of the tax by October. This will require the businesses to calculate how much of their revenue falls within the scope of the policy. However, because the tax is retroactive, it could prove quite difficult for companies to determine what revenues are taxable. This is because the companies likely were not tracking their revenues to calculate this tax prior to the release of the policy.

Additionally, the policy mentions that various users will be assigned different allocation metrics depending on the business model that the users are interacting with. Without specifying what this means for businesses, the French government is inviting more questions than providing answers.

Given these challenges to compliance, it is quite possible that for some companies that will be paying this tax the initial compliance costs could exceed the amount of tax that will be paid.


The French government should avoid making incorrect arguments in favor of its policies. If it is a national priority to tax foreign digital firms, then the government should make that case without misrepresenting the facts about the taxes that digital firms pay.

Additionally, the government should move quickly to provide tax certainty to businesses that will be subject to this tax. Clarifications and detailed examples of how to identify revenues that are subject to the tax and calculate the appropriate tax payment based on users could be quite helpful to taxpayers.

The DST will likely harm innovative firms, not only abroad, but also within France. Digital firms looking to grow or expand in France may instead pursue a buyout or a relocation to avoid eventually having to pay the DST.

Instead of adopting distortionary policies like a DST, it would be much better for France to pursue a neutral tax policy that could improve its tax system overall. Thankfully, the government will be making some reforms that will prove beneficial. Unfortunately, the government is trying to have it both ways on tech policy.

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