July nearly turned into a tit for tat between the United States and France that involved Google, Facebook, French wine, and a tax on digital services revenue. The two sides resolved the disagreement over France’s Digital Services Tax, but the root of the France-U.S. conversation remains: Should the U.S. change the way digital business activities are taxed?
Technology has always disrupted legacy business practices, but the manner in which technology could—or perhaps should—impact business taxation fundamentals is only just emerging. A technology-driven business issue involving online sales lay at the core of the 2018 U.S. Supreme Court case, Wayfair vs South Dakota. France’s Digital Services Tax speaks to another technology-centric issue: how tax policy should adapt to the revenues that come from the electronic services provided by companies like Google, Facebook and Amazon. The revenue streams that accompany these technological advances are presenting challenges for taxing authorities worldwide.
The Context: A Closer Look at France’s Digital Services Tax
France announced its digital services tax back in March 2019, and concerns emerged immediately. Tensions escalated when the French Parliament passed the tax into law in July.
The French law imposes a 3% tax on revenues tied to “digital business models,” including:
- Digital services that enable users to interact with one another, excluding companies that provide communication services
- Services involving the sale of consumer data obtained digitally from consumers who use a digital interface, solutions related to the storage of targeted advertising messages, monitoring targeted ad performance, and the transmission of user data from its collection source to the advertiser. The law does not apply to digital advertising services.
The Digital Services Tax includes provisions specifically targeted at the revenue from French consumer data, and it applies to any company that would have French users—i.e., the company does not have to be headquartered in France to be liable for the country’s Digital Services Tax.
There are provisions within the French law to ensure that small and medium-sized companies are not adversely affected. Companies must have taxable dollars from their digital services that exceed €750 million worldwide and €25 million for services supplied to French consumers. The totals are taken at the consolidated group level.
In announcing its Digital Services Tax, France said the additional tax would help the country capture more tax revenue from digital services companies. It pointed to data collected by the European Union (EU) that indicated tech companies pay an average 9.5% tax across the EU, whereas other companies pay an average 23.2% tax.
The U.S. Response to France’s Digital Services Tax
The Digital Services Tax will disproportionally affect U.S. companies, notably three of its biggest: Facebook, Amazon, and Google. All three profit from online transactions involving consumer data to target advertising. These businesses have also been profiled for the amount of taxes that they pay, or the lack thereof in some instances.
Representatives from U.S. technology companies including Facebook, Amazon, and Google held a hearing with the Office of the United States Trade Representative in early August to discuss their concerns with France’s Digital Services Tax. They argued it could end up hurting U.S. consumers. Amazon proposed to offset the cost of the tax by raising its seller fees by 3% for the businesses it transacts with in France.
President Trump told reporters that the U.S. would consider taxing French wine as a retaliation for the Digital Services Tax.
Fortunately, the two countries reached an agreement before the U.S. imposed any tariffs or import taxes on French wine. The resolution incorporates the results of a broader conversation involving the Organisation for Economic Cooperation and Development (OECD) and its proposed tax plan for digital services.
The OECD’s tax initiatives may be familiar to companies with international operations because of its work with transfer pricing laws and its Base Erosion Profit Shifting (BEPS) project. Although the OECD has no authority to enforce a global tax regime, it establishes frameworks that countries can use to create more universal tax systems and reporting requirements.
Its latest venture with digital taxes addresses the core concern that governments around the world are experiencing: how to adapt tax policies that respond to technological changes in business practices. The OECD plans to address such changes involving digital services by creating a framework under which various types of activities will be taxable, together with the identification of the tax collection jurisdiction (i.e., clarifying whether the buyer’s or seller’s jurisdiction applies). The OECD is also proposing a minimum level of tax for multinational companies that responds to profit-shifting practices. A draft of the OECD proposal is expected to be issued shortly, with the goal to finalizing a global agreement by the end of 2020. Once finalized, governments would be required to implement the agreement over a period of several years.
In the tentative “truce” between the U.S. and France, France agreed to pay the difference between its digital tax and the taxes being proposed by the OECD’s plan. France’s president, Emmanuel Macron also noted that if international tax policies consistently follow the OECD’s initiative, France would eliminate its national digital services tax.
Are We Getting Closer to International Tax Uniformity?
As businesses globalize, taxing authorities encounter the same issue that the U.S. now faces with its state and local tax system. Differences in the way jurisdictions tax businesses can make doing business between jurisdictions more complicated. It makes tax compliance difficult, and on an international front, it incentivizes profit shifting practices whereby companies move their headquarters to foreign tax jurisdictions with lower tax rates.
National initiatives like the one from France may also add to the urgency of international tax policy that responds to technological shifts involving digital services. The EU considered (but failed) to pass an EU-wide digital services tax. The U.K. is considering a digital services tax as well, a 2% tax on digital activities that would go into effect in April 2020. Spain also considered a digital services tax that would have gone into effect in 2019, but the proposal faced widespread criticism and has not yet been implemented.
Our international tax team keeps a close eye on issues that affect your business and will keep you up-to-date as movement in the digital services tax arena emerges. For more information, contact a member of our team.
Published on September 17, 2019