France introduced new digital tax

French government has approved as the first country worldwide a new digital tax aimed at big technology companies such as Amazon, Facebook, Amazon and Google. France argues they pay little or no tax in France. However, the new tax has upset the US where many of these large technology companies are based and claims that American companies are being unfairly targeted. Hence, President Donald Trump has ordered an investigation into the new tax which could result in retaliatory punitive tariffs by US against France.

The French digital tax will apply to large technology multinational companies with global sales of over £674m (€750m) and making more than £22.5m (€25m) a year in France. 3% will be levied on such companies’ local revenues, i.e. their total sales in France, not their profits. The tax will target companies’ sales to customers (e.g. Amazon), digital advertising or the sale of data for advertising purposes and will be retroactively applied from 1 January 2019.

It is estimated by French Finance Minister Bruno Le Maire that about 30, mostly US-based companies, some Indian, British and Chinese firms and just one French company, will be affected by the new tax which is expected to raise £360m (€400m) for the French government in 2019.

However, some have argued that such tax is not an effective tax measure because it could be hard to collect in practice since the tax is meant to apply to income generated from French customers, but relevant data are not centrally stored and readily available.

Where do big tech companies pay tax at the moment?

Currently, big technology companies -in line with international tax rules- declare and pay tax on their profits in countries where they are headquartered, rather than where they make their sales. Thus, in EU, they have headquarter offices often in countries such as Ireland or Luxembourg (e.g. Amazon), with low tax rates. This enables such firms to pay little tax in countries such as France or the UK where make lots of online sales to lots of customers there. For example, Amazon’s UK 2017 tax bill totalled £1.7m, i.e. less than 0.1% of its £2bn UK’s turnover. The European Commission estimates that on average traditional businesses pay 23% tax on their profits within the EU, while digital companies typically pay 8% or 9%.

EU or international digital tax?

Also other EU countries such as United Kingdom, Spain, Austria and Italy are considering introducing their own national digital tax. In the UK, digital companies will be taxed 2% of their revenues from April 2020 and the UK digital tax will apply to companies with revenues of £500m worldwide and is expected to raise about £400m a year.

On EU level, in early 2018 the European Commission introduced proposals for a 3% tax on the revenues of large digital companies with global revenues above €750m (£675m) a year. However, such EU digital tax needs consensus and approval of all EU member states to become law. Ireland, the Czech Republic, Sweden and Finland raised objections and EU-wide efforts stalled.

Some also fear that EU-wide digital tax could breach international rules on equal treatment for companies around the world and that a wider global agreement is needed for such tax. The French government says its new digital tax will indeed end if a similar measure is agreed internationally.

Thus, the Organisation of Economic Development and Co-operation (OECD) is hoping to come up with a global digital tax solution reportedly by the end of 2019.

In the meantime, Japan, Singapore and India are planning similar versions of their own digital tax and most probably any national digital taxes introduced by individual countries will stay in place until a global agreement is indeed reached.

There is a growing consensus that in our modern, digital economy, the overhaul of how companies are taxed is long overdue and calls for a multilateral agreement on how digital firms should be taxed globally. On one side, the big technology companies argue they are fully complying with national and international tax laws. On the other side, France and other mostly developed countries (e.g. the UK) argue that these digital firms currently exploit global tax loopholes and accuse them of avoiding tax e.g. by locating their headquarters in low-tax countries where they declare most of their profits, thereby minimising their tax exposure.

International tax law firm.
Offshore & Onshore