France’s digital tariff – disguised as a tax – is flawed

France has just approved a controversial new tax on revenues generated by large digital companies in its territory, sparking strong condemnation and threatened retaliation from the US.

Trade and taxation policies therefore must be smart.  Placing unfair tax burdens on tech companies discourages innovation and deprives countries and citizens of the productivity and other gains afforded by digital efficiencies.

France, along with its counterparts in the OECD, is correct in recognizing that the digitalization of the economy has created challenges for tax policies and revealed inadequacies in current approaches. There are entirely legitimate questions on where taxes should be paid, on what basis they should be paid, and what portion of profits should be paid in jurisdictions where the users reside.  All of these are valid policy questions which need to be addressed.

France’s digital tax is however deeply flawed.  Several problems are immediately evident:

The tax is a punitive tariff on US companies

The tax is unambiguously directed at several large US tech companies, and essentially functions as a punitive tariff on US companies.

The recently approved tax would slap a 3 percent levy on large digital companies in French territory with global revenues of EUR 750 million, of which EUR 25 million must be generated in France.  Interestingly, these thresholds would happen to exclude almost all French tech firms, and would instead hit roughly 30 predominantly US companies, with tech giants Google, Facebook and Amazon near the top of the list.

The US has pushed for new tax rules to cover all intangible-related income which would expand the coverage beyond just the US tech giants, but France has demurred.  Such an approach would capture important French firms as well.

The US National Foreign Trade Council has summed-up the situation well, stating that the tax is “tailored specifically to impose a financial burden on successful US companies”.[2]

The tax will miss its mark

Although large US tech firms are clearly the target, indications are that the tax will miss its mark – by a wide margin.

According to a recent study by Deloitte,[3] the consumer will ultimately end up paying about 55 percent of the tax in the form of higher prices. Businesses that utilize digital platforms will absorb about 40 percent as, for example, Amazon would likely increase the commission it charges merchants on its platform.  Ultimately, according to Deloitte, the targeted tech giants will only pay about 5 percent of the cost of the tax.

The tax is strategically foolish

Setting aside any policy debates on the justification for the tax, it is strategically foolish.  The current US administration has demonstrated its affinity for applying unilateral tariffs in response to unfair trade practices. The French digital tax – so transparently aimed at US companies – practically invites US retaliation.

The Office of the US Trade Representative has already announced a Section 301 investigation into the tax, which could ultimately result in tariffs being applied on French products entering the US – France’s third largest export market.  It is hard to envision any scenario under which the US will not strike back.

Multilateral solution required

Few issues are more in need of a multilateral – rather than unilateral – response than taxation of digital activities. It is ironic to note that, in this case, the US has pressed for concerted multilateral action in the OECD, while France has opted for a “go-it-alone” approach.

Over the longer term however, France has professed its desire for a multilateral resolution and has pledged to remove its tax once one is achieved. Greater fragmentation seems the more likely outcome though, as the UK and other countries are now following France’s lead and unveiling or considering plans for their own digital taxes, potentially setting up an inefficient patchwork of differing regimes.  The ultimate result will be less innovation, lower efficiencies and higher prices.

The goal should be to achieve fair, transparent, and effective taxation policies that accurately reflect the realities of increasingly digital economies. France’s punitive tariff on US companies, thinly disguised as a digital tax, is all wrong.

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