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French-U.S. Digital Tax Accord Fraught With Pitfalls, Firms Warn

Posted on Aug. 28, 2019

As France cheered an agreement with the United States to resolve tensions over its controversial digital services tax, trade groups warned it could lead to more pain than gain for companies and tax authorities alike.

Appearing on French news channel LCI (La Chaîne Info) August 27, French Finance Minister Bruno Le Maire said that the G-7 leaders' summit in Biarritz, France, where the United States and France reached the agreement the day before, proved that France’s strategy on digital taxation was paying off.

Both countries had agreed in principle that France would effectively give a tax credit to companies that pay the DST once an internationally agreed approach on taxing the digital economy is found. The OECD is leading efforts to find an approach by the end of 2020, which will likely involve changes to profit allocation and nexus rules and global minimum taxation. The OECD secretariat is working on a proposed unified approach and plans to publish it in late September or early October, with a view to reaching an agreement in 2020.  G-20 finance ministers are expected to discuss the proposal at their next meeting on the sidelines of the IMF/World Bank meetings October 17.

The Franco-American agreement was expected to ease tensions between the two nations over the DST, a 3 percent revenue-based tax applied to large companies engaged in specific digital activities. The United States, which has long argued that the tax discriminates against U.S. multinationals, is investigating the tax under section 301 of the Trade Act of 1974, which could lead to new tariffs or other punitive measures against France. President Trump has also threatened to impose retaliatory tariffs on French wine imports.

While Le Maire said the agreement means retaliatory tariffs are less likely to be imposed and he expressed optimism that Trump would leave French wines alone, it is unclear whether the threat has completely dissipated. Following his August 26 joint press conference with Macron, Trump dodged a question about whether the agreement would mean the United States would completely drop its tariff threats, saying only that first lady Melania Trump enjoyed French wines.

Le Maire also doubled down on France’s pledge to withdraw the DST and replace it with measures contained in any global agreement on taxation of the digital economy.

However, that pledge was cold comfort to various EU trade organizations, which told Tax Notes that the DST, and France’s plan to reimburse companies under its scope, would likely lead to greater tax uncertainty and heavy administrative burdens on the business sector.

It's undesirable for companies to have to deal with a "Byzantine French tax," then be obliged to recalculate the tax again under other rules and claim relief, according to Sune Hein Bertelsen, tax policy adviser for Dansk Industri. “Danish business regrets that some countries adopt unilateral measures without putting more effort into reaching a multilateral agreement,” he said.

The agreement confirms what companies have been saying for months, which is that only an OECD solution on digital taxation is acceptable, according to Giuseppe de Martino, president of ASIC (L’Association des Services Internet Communautaires). He added that G-7 members had reaffirmed their trust in a global solution and want to avoid commercial tensions.

“However, the original negative aspects of the tax remain,” de Martino said, noting that the determination of the tax’s basis is unclear and that there are concerns about how the tax credit would be calculated.

“Furthermore, the OECD solution could come into effect even before the possible litigations related to the Le Maire text would be judged,” de Martino said. "This could be a waste of time and money for companies and for the administration.”

Krister Andersson, chair of the tax policy group of BusinessEurope, agreed that business compliance burdens will surely increase. “Companies now will in addition have to ask for a refund years into the future at a time when business models and ownership structures may have changed,” he said.

It is difficult to understand why France couldn't wait for a solution to emerge from the OECD, Andersson said. “It will cost the French tax administration considerable amounts, and it must be very hard to justify these costs to the French workers,” he said.

Businesses are still worried about a tax levied on turnover and profits, according to Andersson. “The French government would be well advised to abstain from unilateral measures and instead promote principle-based free trade and a non-distortive tax system, both domestically and for international businesses,” he said.

Information about the France-U.S. agreement “is so vague that it is impossible to say how it would actually work,” Maria Volanen, head of taxation policy at Tech Finland, said. “Thus, there are plenty of questions left unanswered at the moment.”

More new tax models will increase the chances of tax disputes and double taxation, according to Volanen. Finland’s tax administration also agrees that interim measures like the DST are costly because a system would have to be built to efficiently and accurately collect the tax, she added. “A tax for two years is still open for interpretation and tax audits for many years to come, so taxation regarding year 2019, levied in 2020, can be subject to tax disputes until 2025,” Volanen said. “This does not enhance tax certainty."

A spokesperson for Amazon France, which recently announced it would pass on the costs of the DSTs to vendors selling in France, said the company can’t speculate on a “future scenario” under the agreement because the French government hasn’t made any final announcements.

French DST guidance should be published soon, and the French Finance Ministry will meet with all affected companies in the coming weeks, a ministry spokesperson told Tax Notes.

The Ministry of Finance must work with businesses and give time to the OECD to reach a long-term solution, according to Volanen. “Taxation should support, not hinder, digitalization of the economy,” she said.

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