France may become the next ally to end up in a trade dispute with the U.S. over its proposed tax on the revenue of some of the world’s biggest tech companies, most of them American.

The proposed 3 percent tax on digital activities appears to be “highly discriminatory” to U.S. firms, Lafayette G. “Chip” Harter, deputy assistant secretary for international tax affairs at the Treasury Department’s Office of Tax Policy, said March 12 at an event in Paris. He said Treasury, the U.S. Trade Representative’s office, and lawmakers are “studying whether the discriminatory impact would give us rights under trade agreements, WTO, treaties.”

France hasn’t yet passed the tax into law, though it would apply retroactively to Jan. 1, 2019. Treasury officials have repeatedly said the U.S. hopes the Organization for Economic Cooperation and Development’s work to rewrite tax rules with a global consensus would take the place of such unilateral measures, and France has said it would unwind its digital levy once the OECD solution is in place.

But if the French tax does go into effect, it could lead to a tax treaty dispute, a World Trade Organization challenge, retaliatory tariffs, or the U.S. invoking a never-used section of the tax code to raise taxes on French companies’ U.S. subsidiaries.

“You’re seeing an appropriate American response to something that is clearly designed to be discriminatory against U.S. companies,” said Jake Colvin, vice president for global trade issues at the National Foreign Trade Council.

Bring a Challenge at the WTO

France’s tax would apply to digital activities like selling targeted online advertising based on user data. The tax would affect companies with more than 750 million euros ($848 million) of worldwide revenue—in total, about 30 companies including Alphabet Inc. and Facebook Inc.—and bring in about 500 million euros yearly, the French government said.

The Treasury Department has in the past spoken out strongly against taxes targeted at digital companies. The U.S. could bring a challenge at the WTO, arguing that the tax violates France’s agreement under the General Agreement on Trade and Services not to impose measures that discriminate against certain companies—as in, non-French ones.

“I think a WTO case in inevitable,” if France does pass the law and the U.S. responds, said William Alan Reinsch, senior adviser and Scholl Chair in International Business at the Center for Strategic and International Studies. “You always do that, even if it’s not the only thing you do.”

To succeed, the U.S. would have to successfully argue that the tax treats French companies different from foreign ones, Reinsch said. The French government has said that of the 30 companies the tax would apply to, one is French and several are French companies owned by foreign companies.

“The case would probably turn on whether the French action applies equally across the board or whether it is designed to discriminate against the U.S.,” Reinsch wrote in a March 12 email to Bloomberg Tax.

Once a country opens a WTO case, it typically takes over a year for a panel to reach a verdict, which can then be appealed, Reinsch said. If the U.S. eventually won, France could either retract the law or pay the U.S.—and if it does neither, the U.S. could impose tariffs.

“You’re talking after the term of the Trump administration before you’d get a decision from the WTO,” said Gary Clyde Hufbauer, a nonresident senior fellow at the Peterson Institute for International Economics.

Meanwhile, the OECD is working on reaching a global consensus, with a 2020 deadline, for rewriting tax rules that would obviate the need for unilateral digital taxes, potentially by giving more revenue to the countries clamoring for it.

Respond With Tariffs

Another likely U.S. response would be to start an investigation under the same trade provision the Trump administration used last year to impose tariffs on China, Hufbauer said.

Under Section 301 of the U.S. Trade Expansion Act of 1974, the government can set up a task force to investigate whether another country’s measure is discriminatory against U.S. businesses. If the task force finds the French digital tax is discriminatory, it could design a tariff to specifically hit French goods, like wine, cheese, or perfume, Hufbauer said.

A Section 301 investigation has the advantage of letting the U.S. directly target its response to the industries or companies it wants to hit, Hufbauer said.

But this option has drawbacks: The country targeted by such tariffs could respond with its own WTO case against the U.S., Reinsch said.

Retaliatory Taxes

Buried in the Internal Revenue Code is a never-used provision, Section 891, which allows the government to increase taxes on citizens or companies from a particular country. In this case, the U.S. could increase taxes on the U.S. subsidiaries of French companies as a way to punish France.

Section 891 had a moment of fame in 2016 when the Treasury Department acknowledged the possibility of invoking it in retaliation for the EU pursuing U.S. companies over tax arrangements with European countries. But there’s a good reason it’s never been used before, Hufbauer said: It’s so harsh it would end up hurting the U.S., too.

“It’s a pretty heavy instrument if invoked,” he said. The measure could put U.S. multinationals at risk of similar countermeasures around the world if other countries respond in kind, and punitive taxes on foreign companies doing business in the U.S. could cause economic harm.

Waiting on OECD

Companies are hoping France and other countries considering similar measures will wait for the OECD solution.

“The best outcome is France decides to step back from the brink, and we all participate in good faith in the OECD process, which leads to a multilateral resolution of issues of shared interest,” Colvin said.

But if France and other countries move ahead with their own digital tax regimes, “You will see a strong effort by the business community to push back against those actions” and encourage the U.S. government to respond, he said.

Senate Finance Committee ranking member Ron Wyden (D-Ore.) during a March 12 committee hearing called European efforts to tax digital services “discriminatory, anti-American” and asked Trade Representative Robert E. Lighthizer about his office’s intended response.

“This is one of those areas where we can go down the tax, OECD approach, and that’s fine,” he said. “But I think this is so important we may find ourselves having to be somewhat more creative.”