A new Digital Service Tax in France soon to be followed by other countries: digital presence and tax sovereignties


lcmm@melchionnalaw.com
A new Digital Service Tax in France soon to...

The increasingly globalized economy and income produced from digital media, combined with a renewed push for nationalism and protectionism, raises the issue of whether multinational enterprises (MNEs) deriving income from cross-border digital sources should pay taxes and which jurisdictions should be permitted to impose these taxes. Both the European Union (EU) and the Organization for Economic Co-operation and Development (OECD) have committed to taking a tougher stance on taxing the income generated by the digital economy, but neither has published a concrete plan thus far. The lack of international consensus on the matter has driven some governments to take unilateral action.

On July 11, 2019 the French government passed a 3% Digital Services Tax (DST) on certain digital services provided by companies with over €25 million ($28 million) earned in France and €750 million ($830 million) earned worldwide. The tax applies retroactively to all transactions beginning January 1, 2019, and the first payments for these taxes are due in October 2019. The tax applies to revenue from online interfaces that allow users to interact with each other and digital services that enable advertisers to target messages based on user data (KPMG, https://home.kpmg/us/en/home/insights/2019/07/tnf-france-digital-services-tax-enacted.html ). To determine how the tax will be assessed, the legislation establishes a formula based on the number of French users, the MNE’s total number of transactions, and the MNE’s gross receipts for a given year to determine what percentage of services is taxable. It also relies on the user’s IP address to decide whether a transaction takes place in France.

France is joined by the UK, Spain, Italy, Hungary, Belgium, and Austria, all of which have also either proposed or implemented a similar tax (Tax Foundation, https://taxfoundation.org/digital-taxes-europe-2019/ ). The countries’ eagerness to impose such a tax may partially be explained by the huge amount of revenue such taxes can raise. In 2019 alone, Apple, Microsoft, Alphabet, Facebook, and Amazon are expected to rake in a collective $192 billion in profits (Reuters, https://www.reuters.com/article/us-france-tax-breakingviews/breakingviews-breakdown-the-global-fight-over-big-techs-taxes-idUSKCN1VC11C ). The French Finance Minister estimates the new DST will affect fifteen American companies but only one French company, making this “tax” more akin to a fee foreign digital MNEs must pay to do business there.

The US Trade Representative has opened an investigation into this tax to determine whether it should be considered a discriminatory tariff. If they find this is the case, retaliation in the form of tariffs or quotas from the United States is expected.

In the end, it is the final consumer who will likely bear the brunt of this dispute. MNEs conducting business in France will likely pass the additional costs on to French consumers, pursue buyouts, or relocate in order to mitigate the effects of the new tax. Pending the US Trade Representative’s decision, American consumers may also find themselves paying higher prices for French goods in the future.

Taxpayers and consumers will always take advantage of the competition that exists among tax authorities, especially in our global economy, as long as this competition exists. In order to make such a tax truly effective without damaging the already stagnating Western economy, the international community will either need to let free trade flow or make consensus-building a priority.