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Beware. Other Nations Will Follow France With Their Own Digital Tax. Beware. Other Nations Will Follow France With Their Own Digital Tax.
(about 13 hours later)
Last Thursday, the French Senate passed a digital services tax, which would impose an entirely new tax on large multinationals that provide digital services to consumers or users in France. Digital services include everything from providing a platform for selling goods and services online to targeting advertising based on user data, and the tax applies to gross revenue from such services. Many French politicians and media outlets have referred to this as a “GAFA tax,” meaning that it is designed to apply primarily to companies such as Google, Apple, Facebook and Amazon — in other words, multinational tech companies based in the United States. Last Thursday, the French Senate passed a digital services tax, which would impose an entirely new tax on large multinationals that provide digital services to consumers or users in France.
The digital services tax now awaits the signature of President Emmanuel Macron, who has expressed support for the measure, and it could go into effect within the next few weeks. But it has already sparked significant controversy, with the United States trade representative opening an investigation into whether the tax discriminates against American companies, which in turn could lead to trade sanctions against France. Digital services include everything from providing a platform for selling goods and services online to targeting advertising based on user data, and the tax applies to gross revenue from such services. French politicians and media outlets have referred to this as a “GAFA tax,” meaning that it is designed to apply primarily to companies such as Google, Apple, Facebook and Amazon — in other words, multinational tech companies based in the United States.
The French tax is not just a unilateral move by one country in need of revenue. Instead, the digital services tax is part of a much larger trend, with countries over the past few years proposing or putting in place a veritable alphabet soup of new international tax provisions. These have included Britain’s DPT (diverted profits tax), Australia’s MAAL (multinational anti-avoidance law), and India’s SEP (significant economic presence) test, to name but a few. At the same time, the European Union, Spain, Britain and several other countries have all seriously contemplated digital services taxes like the one just passed by France. The digital services tax awaits the signature of President Emmanuel Macron, who has expressed support for the measure, and it could go into effect within the next few weeks. But it has already caused significant controversy, with the United States trade representative opening an investigation into whether the tax discriminates against American companies, which in turn could lead to trade sanctions against France.
These unilateral developments differ in their specifics, but they are all designed to tax multinationals on income and revenue that countries believe they should have a right to tax, even if international tax rules do not grant them that right. In other words, they all share a view that the international tax system has failed to keep up with the current economy. The general outlines of that system originated in the early 20th century, and all of these recent proposals and provisions suggest that the current system is out of date and needs to be updated for a world in which companies can make significant amounts of income without ever being physically present in a country or selling any tangible goods. The French tax is not just a unilateral move by one country in need of revenue. It is part of a much larger trend, with countries over the past few years proposing or putting in place a veritable alphabet soup of new international tax provisions. They have included Britain’s DPT (diverted profits tax), Australia’s MAAL (multinational anti-avoidance law), and India’s SEP (significant economic presence) test, to name but a few. At the same time, the European Union, Spain, Britain and several other countries have all seriously contemplated digital services taxes like the one just passed by France.
In response to these many unilateral measures, the Organization for Economic Cooperation and Development is currently working with 131 countries to reach a consensus by the end of 2020 on an international solution. Both France and the United States are involved in the organization’s work, but France’s digital services tax and the American response raise questions about what the future holds for the international tax system. These unilateral developments differ in their specifics, but they all seek to tax multinationals on revenue that countries believe they should have a right to tax, even if international tax rules do not grant them that right. In other words, they all reflect a view that the international tax system has failed to keep up with changes in the economy.
One possible path is for countries to follow France’s lead and impose their own digital services taxes. The downsides of this are not only that the United States may impose retaliatory measures but also that such taxes could subject tech companies and other multinationals to layers of new taxes, all with slightly different rates, definitions of digital services or determinations of taxing rights. This could lead to the same revenue being taxed multiple times or could make it harder for countries to raise revenue if others have already staked a claim to it. The general outlines of that system originated in the early 20th century, and all of these recent proposals and provisions suggest that it needs to be updated for a world in which companies can make significant amounts of income without ever being physically present in a country or selling any tangible goods.
In response to these many unilateral measures, the Organization for Economic Cooperation and Development is working with 131 countries to reach a consensus on an international solution by the end of 2020. Both France and the United States are involved in the organization’s work, but France’s digital services tax and the American response raise questions about what the future holds for the international tax system.
One possible path is for countries to follow France’s lead and impose their own digital services taxes. The downsides of this are not only that the United States may take retaliatory measures but also that such taxes could subject companies to layers of new taxes, all with slightly different rates, definitions of digital services and determinations of taxing rights. This could lead to the same revenue being taxed multiple times or could make it harder for countries to get what they see as their due if others have already staked a claim to that revenue.
Another possible path would be for countries to see France’s move as a portent of the disorder that could arise if they do not reach an agreement at the international level. This could push them to participate more fully in the O.E.C.D.’s digital tax project. The proposals being considered by that group could lead to significant changes to the international tax system, with the potential for increased taxes, taxation in more countries and new rules for companies.Another possible path would be for countries to see France’s move as a portent of the disorder that could arise if they do not reach an agreement at the international level. This could push them to participate more fully in the O.E.C.D.’s digital tax project. The proposals being considered by that group could lead to significant changes to the international tax system, with the potential for increased taxes, taxation in more countries and new rules for companies.
But the outcome would represent an international solution. The new rules imposed would be coordinated rather than layered over one another, which could offer companies more opportunities to limit double taxation or make use of dispute resolution mechanisms.But the outcome would represent an international solution. The new rules imposed would be coordinated rather than layered over one another, which could offer companies more opportunities to limit double taxation or make use of dispute resolution mechanisms.
France’s planned tax is a clear warning: Unless a broad consensus can be reached on reforming the international tax system, other nations are likely to follow suit, and American companies will face a cascade of different taxes from dozens of nations that will prove onerous and costly.France’s planned tax is a clear warning: Unless a broad consensus can be reached on reforming the international tax system, other nations are likely to follow suit, and American companies will face a cascade of different taxes from dozens of nations that will prove onerous and costly.
Lilian V. Faulhaber is a professor at Georgetown University Law Center. She previously worked on international tax issues at the Organization for Economic Cooperation and Development.Lilian V. Faulhaber is a professor at Georgetown University Law Center. She previously worked on international tax issues at the Organization for Economic Cooperation and Development.
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