France is Trying to Have it Both Ways on Tech Policy

November 20, 2018

Two recent quotes from French Finance Minister Bruno LeMaire reveal the contradictory nature of France’s current policy stance toward tech companies. On November 13, he said, “The financial policy of the government is three words: attractiveness, innovation, and stability. We want to make Paris the leading financial center in Europe.” While this claim is a bit absurd on its own (France has ranked in last place among OECD countries in all five years of our International Tax Competitiveness Index), this particular statement was made in the context of announcing progress on a new policy for cryptocurrencies. LeMaire claims that France will be the first nation in the world to adopt a comprehensive tax framework for cryptocurrencies.

Regulatory clarity and certainty are difficult to come by in the crypto market, so the French approach is surely welcome. However, another recent statement by LeMaire should cause crypto startups to pause.

On October 23, LeMaire tweeted, “On average, Europe companies pay 23 percent in taxes. Digital giants pay less than 9 percent. Citizens, parliamentarians, European leaders: it is time to put an end to tax injustice in Europe!” This strong statement is connected to the proposed digital services tax (DST) from the European Commission. This would apply a 3 percent tax to the revenues of large tech companies based partially on the location of their users. The proposal has been widely criticized even while LeMaire has remained one of its most vocal proponents.

On the one hand, LeMaire is telling a portion of tech businesses (cryptocurrency firms) that France is where they should invest and grow because the French government is dedicated to keeping the rules simple and clear. On the other hand, LeMaire is telling large digital companies that if you want to do business in Europe you may find yourself subject to a separate, punitive, and incredibly distortionary tax regime.

There is yet another issue with the mixed messages LeMaire is sending. His statement about the 23 percent rate faced by traditional firms and the 9 percent rate faced by digital firms is misleading. This argument has been used by the European Commission itself in support of the DST, but it does not reflect the difference in overall levels of taxation faced by businesses.

In reality, European tech companies pay slightly higher effective tax rates than traditional companies. The 9 percent figure that LeMaire refers to comes from a study that does not look at overall effective tax rates on profitability, but instead estimates how hypothetical new investments by different types of firms are taxed in various countries. These investments often see certain tax preferences, and it is simply the case that more tax preferences are targeted at tech firms than more traditional companies.

These preferences can include policies like patent boxes and research and development (R&D) tax credits, which lower the tax rates on investments by tech firms. Tax incentives like these can distort economic decisions, as revealed by the tax differential between what digital and traditional firms face, and in general, countries should pursue neutral rather than preferential policies like these to avoid creating distortions.

Among other incentives, France has both a patent box and an R&D tax credit resulting in an estimated 12.39 percent effective average tax rate (EATR) for new investments by digital firms. For new investments by digital firms, the average EATR among 33 countries surveyed in the study is 10.2 percent.

Contrary to LeMaire’s claims, the authors of that study have clarified that the research does not show that the digital sector is undertaxed.

In summary, when France’s own policies provide specific benefits to tech firms relative to more traditional firms, LeMaire’s approach is to push for a special EU-level tax on large tech firms. At the same time, LeMaire thinks that crypto companies will be attracted to invest in France even though they may eventually grow to a stage where the DST would apply to their revenues. And at the same time, firms may recognize LeMaire’s poor use of tax statistics to pursue his preferred policies–letting politics and misleading claims drag the policy along behind–and decide that they may one day be caught up by policies based on similar rhetoric.

Again, this is all in the context of France having the least competitive tax code in the developed world.

Attractiveness, innovation, and stability are certainly fine policy goals. However, it is high time for France to decide to apply good policy principles across the board rather than helping certain types of businesses while seeking to punish others.

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