The boom of the digital economy is challenging the traditional rules of taxation: the ability of existing corporate tax rules to tackle the issues of this new side of the economy, which does not require having a physical presence in a country to derive profits in relation to such country, has been regularly questioned over the last few years.
The Organization for Economic Co-operation Development (OECD) took up this issue in 2015 within the framework of the its base erosion and profit shifting (BEPS) project.
However, in 2017, faced with a lack of concrete progress, 10 EU member states requested the European Commission to explore a new way of taxing the major digital companies. On March 21, 2018, the European Commission presented a proposal for a Council Directive (COM (2018) 148) to implement an interim tax on certain digital services (intermediation services, targeted advertising services and sale of users’ data), but no consensus could be reached.
On March 1, 2019, the Council of the European Union published a new proposal for a Council Directive on the common system of a tax on revenues from the provision of digital advertising services, with a significantly reduced scope as it only covers “targeted” advertising services, and intended to enter into force in 2021 or 2022.
To overcome the lack of consensus at the European level, the French government issued a draft bill on March 6, 2019 to introduce a 3 percent tax on certain services provided in France by digital multinationals (MNEs), with retroactive effect from January 1, 2019.
The French digital services tax, which is expected to affect about 30 groups, has been designed to target digital giants as, according to the French Minister of the Economy, “no one can accept that the world’s largest digital companies pay 14 tax points less than other companies in Europe and elsewhere.” The government expects to raise 500 million euros ($563 million) per year from this tax.
The French digital services tax would be of a temporary nature and would be repealed once a global solution was found between OECD countries (the OECD final report on the impact of digitalization on nexus and profit allocation rules is expected in 2020).
Digital Services Targeted
The digital services targeted are those whose value creation is viewed as largely based on the activity of internet users, as outlined in the work of the OECD and European Commission.
Two categories of digital services are covered by the draft provisions, when provided in France and between third parties:
- intermediation services, i.e. the provision, through electronic means, of a digital interface which enables users, whether professional or not, to contact and interact with other users notably for the purpose of delivering goods or services directly between them—this is viewed as including marketplaces business models;
- targeted advertising services and users’ data related services (including sale of users’ data).
The following digital activities are explicitly excluded from the scope of the digital services tax:
- online sales;
- the provision of digital content;
- communication services (including e-mail services);
- payment services;
- certain financial services; and
- certain services provided by platforms in relation to the purchase of advertising space (e.g. ad exchanges services).
Taxable companies are, irrespective of their country of establishment, those whose worldwide turnover on services within the scope (assessed at consolidated group level) exceeds 750 million euros and whose turnover on such services provided in France exceeds 25 million euros.
The rationale for referring to a worldwide turnover threshold lies in the fact that digital MNEs are viewed as benefiting from network effects due to the size of their activity—which appears debatable.
Territorial Scope and Tax Base
Digital services are taxable as soon as they are provided in France. The criteria to assess the connection of the service to French territory vary according to the nature of the service in question.
Intermediation services on a digital interface are considered to be provided in France when at least one of the users concluding a transaction is located in France or, in the absence of a transaction, when one of the users has an account that has been opened from France allowing him/her to access these services.
Targeted advertising services are considered to be provided in France when the digital interface displaying the targeted advertising is consulted using a terminal located in France. This can be deduced from the IP address but also from other indicators such as customer account data.
Finally, the sale of data for advertising purposes is considered to be provided in France when the data has been generated by a user from France.
The draft bill aims at subjecting to tax the income derived from the provision of the services for the part allegedly generated by French users. The taxable basis, which must be calculated by the taxpayer, is obtained by applying a ratio representative of the proportion of users located in France in relation to the total number of users to the amounts received (value-added tax excluded) in consideration for the supply of taxable services.
For example, for intermediation services enabling the supply of goods or services, this ratio would be the proportion of transactions involving the supply of goods or services for which one of the users of the digital interface is located in France; whereas, for data sales services, this factor would be the proportion of users for whom all or part of the data sold was generated or collected during the consultation of a digital interface from a French location.
This digital services tax would be deductible for corporate income tax purposes.
Tax Collection Mechanism
For taxpayers filing value-added tax (VAT) returns in France, the tax would be paid on the form dedicated to turnover taxes which is an appendix to the VAT return. For taxpayers who do not file VAT returns in France (e.g. a foreign company not liable for French VAT or using the mini one stop shop to pay the French VAT due on electronic services), the tax would also be declared and paid through this appendix filed on a stand-alone basis.
Taxpayers not established within the EU would have to appoint a French tax representative to pay the tax.
The tax due in respect of year Y would be subject to the payment of two installments in Y and be regularized in the same form filed in April of Y+1.
In addition, the draft bill provides for the possibility for a taxpayer to declare and pay the tax for all the taxpayers in its group. The declaration thus filed should specify the amounts due by each taxpayer in the group. Consequently, a French subsidiary of a group of companies liable to the tax could declare and pay the tax for all the liable members of the group.
Finally, the draft bill also provides specific audit powers for the French tax authorities and an ex officio taxation procedure in case the taxpayer does not respond or responds insufficiently to a request for information.
A government report would be submitted to the French Parliament within three months of the enactment of the bill, developing proposals for a fairer tax framework between physical and e-commerce companies.
The French current draft digital services tax raises issues both from a theoretical standpoint and from a practical standpoint. Indeed, there are doubts as to its compatibility with higher levels (i.e. double tax treaties, the French Constitution and European law). In addition, several issues relating to its practical application for taxpayers can be identified (e.g., calculation and substantiation of the tax base).
There is also some doubt about the efficacy of the French tax authorities’ audit powers on taxpayers established outside the EU.
Whether some of these issues will be discussed or settled by the French Parliament, which began examining the draft bill on April 8, remains to be seen.