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U.S. Sanctions Won’t Make France Drop Digital Tax, Le Maire Says

Posted on Jan. 15, 2020

Punitive U.S. tariffs on French goods won’t convince France to abandon its digital services tax, but agreement on a global tax deal at the OECD will, French Finance Minister Bruno Le Maire said.

In a January 14 op-ed in The Wall Street Journal, Le Maire again defended the DST, calling it “a matter of fairness and efficiency.” Such a measure was necessary for France to adapt to a new digital economy that has not only transformed consumer habits but also challenged international tax norms, he added.

While there is growing consensus that a better way is necessary to tax the digital economy, many countries, including Austria and Italy, introduced their own versions of a DST on January 1, and several others may follow suit, Le Maire wrote. “This trend is unstoppable,” he added.

The 3 percent revenue-based DST, which took retroactive effect January 1, 2019, has long been a bone of contention with the United States, which has said the tax unfairly targets American business interests. In a December 2 announcement, the Office of the U.S. Trade Representative (USTR) said that its investigation into France’s DST found that the tax discriminates against U.S. companies. As a result, the United States is considering imposing tariffs of up to 100 percent on $2.4 billion worth of French goods. The USTR also signaled potential investigations into the digital taxes of Austria, Italy, and Turkey.

The USTR recently held a public hearing to gather input about the proposed tariffs, and January 14 was the last day for post-hearing rebuttal comments. The USTR said in the announcement that it “expects to proceed expeditiously thereafter.”

The French DST applies to turnover from online advertising, the sale of data for advertising purposes, and fees derived from linking users to online sales platforms. It covers companies with €750 million in global digital sales and more than €25 million in sales in France.

The tax, which was created after efforts to introduce an EU-wide digital tax failed, is one of many similar unilateral measures that have cropped up in the EU and beyond pending the outcome of intergovernmental negotiations through the OECD framework.

Those talks are aimed at finding consensus by the end of 2020 on a global agreement to modernize international corporate tax rules, which would involve two pillars: revisions to nexus and profit allocation rules (the so-called unified approach) and the introduction of global minimum taxation.

Introducing national taxes aren’t the answer to solving the tax challenges of the digitalization of the economy, Le Maire said. “The best solution is an international system that captures the profits created by digital activities and allows countries to tax a reasonable share of those profits,” he wrote.

The unified approach calls for new nexus rules and a hybrid formulary transfer pricing system. It is mostly based on U.S. proposals, Le Maire wrote, adding that it would give countries the ability to tax a portion of the profits that large tech companies make in their domestic markets, despite their lack of physical presence.

“This will create more tax certainty,” Le Maire said. “We don’t doubt that the U.S. will live up to its responsibilities and accept this deal. France has committed to withdrawing its digital tax once an agreement is reached at the OECD.” France publicly endorsed the pillar 1 unified approach on November 26 and called on the United States to do the same.

Le Maire rebutted the USTR’s decision that the DST discriminates against U.S. tech firms, saying that the tax also hits French, European, and Chinese companies. U.S. threats to impose heavy tariffs on French goods such as sparkling wines and kitchenware are ineffective, according to Le Maire. “France won’t withdraw its national tax because of sanctions — only an international deal will produce that result,” he said.

“There is a simple way out,” Le Maire added. “Our American allies can suspend their proceedings and continue working toward an agreement on an international digital tax.”

We Can Work It Out

In a January 14 interview on French news channel CNews, Le Maire said he could not understand why the United States doesn’t approve of pillar 1, which it had supported for weeks and months, and which France supported for the sake of compromise.

In a December 3 letter to OECD Secretary-General Angel Gurría, U.S. Treasury Secretary Steven Mnuchin unexpectedly flagged concerns about the unified approach, and called for pillar 1 to be a safe harbor regime that companies could opt into. However, Le Maire on December 6 rejected the U.S. proposals, calling them unacceptable.

Lafayette G. “Chip” Harter IIITreasury deputy assistant secretary for international tax affairs, on December 19 indicated that the United States is willing to help build out pillar 1 first and later deal with the question of whether it would be implemented on an optional or mandatory basis.

Le Maire recently said he and Mnuchin had given themselves 15 days in which to nail down an agreement on digital taxation through the OECD framework and tamp down trade tensions over the French DST. On CNews, he confirmed that he and Mnuchin would soon discuss the matter further to see if they could make progress on an agreement, without specifying the date.

Both officials are set to meet on the sidelines of the World Economic Forum in Davos Klosters, Switzerland, which begins January 21.

The issue of taxation of the digital economy must be solved through the OECD, Le Maire said, adding that it’s not worth a trade war between the United States and Europe. But should U.S. tariffs move forward, Le Maire said the EU would respond in kind.

Neither the USTR nor Treasury responded to Tax Notes' request for comment by press time.

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