France’s new digital services tax faces scrutiny as the U.S. takes the next step toward possible tariffs or other trade retaliation.
The U.S. is trying to determine whether the French measure burdens commerce by discriminating against or imposing an unreasonable burden on its companies—and how to respond.
The U.S. Trade Representative’s office has scheduled an Aug. 19 hearing to solicit feedback from companies, industry groups, tax and trade practitioners, and the public.
Why Is France Taxing Tech Companies?
Long-standing global norms give taxing authority to countries where companies are headquartered and perform functions like developing intellectual property. Digital companies can do business in countries without being physically present, so profits aren’t taxed there. France, like a number of other countries, argues that it should be able to tax the businesses because French users create value by viewing ads, making purchases, and the like.
The 3% tax applies to large digital companies, targeting revenue from online advertising, user data, and intermediation platforms. The tax, signed into law in July, applies retroactively to the start of the year.
The Organization for Economic Cooperation and Development is trying to find agreement on a global digital tax solution among more than 130 countries, but the process is moving too slowly for France.
“If the international community has been able to pave the way for decisions, we will never have adopted national taxation,” French Finance Minister Bruno Le Maire told Bloomberg Television July 18. “We decided to move on because the international community was not moving on.”
What Does the U.S. Want?
Most of the companies hit by the tax will likely be American, including Amazon.com Inc., Alphabet Inc.'s Google, and Facebook Inc. France has said roughly 30 companies will fall in the tax’s scope.
The measure could subject companies to double taxation because they probably won’t be able to get credits for it, as they usually do for foreign income taxes, said Cathy Schultz, vice president of tax policy at the National Foreign Trade Council. It’s unclear whether the French tax is eligible for foreign tax credits, because it’s a tax on revenue rather than profits.
The measure could also fall outside the standard dispute resolution mechanisms in income tax treaties because it’s a revenue tax, she said.
“If there are problems, the question is, how are they going to be resolved? Because it’s outside of the treaty, it puts us in a bind,” Schultz said.
The U.S. administration has warned France that it views the measure as discriminating against U.S. companies, and the USTR on July 10 opened an investigation under Section 301 of the Trade Act of 1974—the same process used to impose tariffs on China.
Besides stopping France, the U.S. is also anxious to deter a growing number of countries planning similar measures. The U.K., Austria, and other nations are weighing digital taxes of their own.
“If the French DST goes unchallenged, it will provide political cover for a dozen or so countries considering similar measures,” Gary Sprague, a partner at Baker & McKenzie LLP in Palo Alto, Calif., said in a statement to the USTR released Aug. 12. Sprague said he was speaking on behalf of a group including Airbnb Inc., Amazon, Expedia Inc., Facebook, Google, Microsoft Corp., Salesforce.com Inc., Stripe, and Twitter Inc.
What Could the U.S. Do?
The USTR is looking for public feedback on how the French tax discriminates against U.S. companies, burdens or restricts U.S. commerce, or violates France’s obligations under the World Trade Organization’s General Agreement on Trade in Services.
A Section 301 investigation is meant to act as leverage on the other country, said Grant Aldonas, executive director of Georgetown University’s Institute of International Economic Law.
“They’re trying to build a case on the basis of which they can then bring someone to the table and then negotiate a resolution,” said Aldonas, the principal managing director of Split Rock International Inc., a trade and investment consulting firm in Washington. “I’d expect they’re really trying to establish a record that allows them not only to trigger a 301, but also to make the case for what the problems are with the individual tax so they can frame a solution with the EU.”
Although the tax was imposed by France, the U.S. may pursue trade discussions about it with the European Union, because the EU conducts trade negotiations on behalf of member states.
If the trade investigation finds the tax to be discriminatory or unreasonable, the U.S. could impose retaliatory tariffs on France. President Donald Trump said July 26 that he was considering tariffs on French wine.
The U.S. could pursue dispute settlement at the WTO instead of, or in addition to trade retaliation. Numerous comment letters from industry groups, including from the U.S. Chamber of Commerce, the NFTC, and the Information Technology Industry Council, asked the USTR to turn to the WTO rather than tariffs.
The U.S. may have yet another tool available: A June 24 letter from Senate Finance Committee leaders asked the Treasury Department to consider tax code Section 891, a never-before-used measure that allows the U.S. to double the tax rate on any French company or citizen who pays taxes in the U.S.