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President Donald Trump has launched several damaging and counterproductive trade battles since taking office. But on July 10, 2019, he got it right by opening an investigation into France’s newly enacted digital tax, which unfairly targets Google, Facebook, Amazon, and other US technology giants. If not challenged, the French tax will serve as a model for other countries in the European Union and elsewhere to take a bite out of the US corporate tax base, at the expense of the US Treasury and American shareholders.
The French tax—which would impose a 3 percent levy on revenues these technology giants earn from providing digital services to French users—blatantly discriminates against American firms and thus violates bilateral tax treaties, the World Trade Organization’s nondiscrimination rules, and pledges against digital duties. French officials expect the annual yield from such companies will be in the range of €500 million, or more than $560 million, according to news reports. The companies would deduct this tax liability from their corporate income, hurting the US Treasury and taking dividends or capital gains from American shareholders.
French officials maintain that they must tax these sales because the big technology companies routinely locate their operations in tax havens and thus escape what many Europeans feel should be their fair share of taxes as the cost of doing business among European citizens.
France says it will terminate its tax once the Organization for Economic Cooperation and Development (OECD) reaches agreement on new tax rules for digital firms. But France has put nothing on the negotiating table that benefits the US economy, and France can indefinitely delay an OECD agreement.
Under these circumstances, the United States must balance the bargaining leverage by imposing a proportional trade or tax penalty on French firms while talks go forward. In a blog post in April, I called for the United States to invoke Section 301 of the Trade Act of 1974—a law that permits US retaliation against a foreign action that violates an international trade agreement or is unjustified, unreasonable, or discriminatory. Now President Trump has done just that, setting the stage for redressing French mischief.
In the April blog post, I wrote:
The French digital tax is ill-considered firstly because it contravenes the "permanent establishment" principle for dividing the profits of a multinational company between two or more taxing jurisdictions. Under current tax treaties, the existence of a permanent establishment—some sort of physical presence—is the threshold for including a portion of corporate profits in the domestic tax base. Digital firms, including US tech giants, purvey their websites globally with no physical presence in most countries. The claim is often made that the internet calls for a new threshold for dividing the corporate tax base. But until a new threshold is agreed between countries, national self-help measures, like the proposed French tax, will result in double taxation and discourage the spread of digital commerce, one of the strongest forces now lifting the global economy.[1]
Alongside its conflict with the permanent establishment principle is the de facto discriminatory nature of the French tax. The 3 percent tax on advertising revenue generated by digital platforms will hit about 30 tech companies. These are predominantly US firms, thanks to a high revenue threshold before a company is subject to the tax.[2] Moreover, an amendment adopted in the French Assembly would exempt the "intermediary" ad exchange platform offered by Criteo, a French firm. With this amendment, the tax is discriminatory on its face, flatly contradicting France's obligation to ensure national treatment of foreign digital firms under the World Trade Organization (WTO) General Agreement on Trade in Services (GATS).
If the French action leads to a constructive negotiation that sets the rules for digital companies without punishing American investors, innovators, and the US Treasury, that would be its sole virtue.
Notes
1. See "Can Digital Flows Compensate for Lethargic Trade and Investment?"
2. "France Poised to Tax Tech Companies' Digital Ads, Resale of Data," Bloomberg, March 5, 2019.
