U.S. tech giants may face costs in the millions of dollars to get their systems ready to pay a 3% tax on their digital revenue in France.
The amount could include the price of rebuilding IT systems to identify French users from previously captured data. The measure was passed in July, but applies from January 2019—a factor companies have started flagging as a compliance problem.
The compliance problem could get more serious for companies if other countries implement digital measures of their own. The U.K., Austria, and other nations are eyeing similar taxes.
Facebook Inc., which reported 2018 global revenue of $56 billion, has already warned that it will have to invest in revamping its data collection to calculate how much it owes to France. The first payment is due in November.
The French measure targets 3% of tech giants’ revenue from digital advertising, sale of user data, and intermediation platforms. It aims at large tech companies such as Facebook, Amazon.com Inc., and Alphabet Inc.'s Google.
“We already know that the compliance expenses and the IT cost will be very high,” Giuseppe de Martino, head of the French internet services industry group ASIC, wrote in an Aug. 12 email. “Some members confessed they have no idea about the possible amount of their tax base because their system is not relevant to evaluate the due amount.”
ASIC’s members include Amazon, Facebook, and Google.
The problem is that the tax asks companies to calculate what they owe in November based on records they might not have been keeping before the tax was passed. To comply, they’ll have to spend time and money reworking their past records, and redeveloping their record-keeping systems going forward. That could cost some companies up to millions, de Martino said.
A spokesperson for the French Finance Ministry said the tax wasn’t retroactive because it applies to the same year in which it was passed.
“There is no retroactivity for the tax on digital services. In fact, the law was adopted in 2019 and thus can apply to the year underway,” the spokesperson said in an Aug. 9 email. “Furthermore, that is the case for taxes that are paid on revenues from the previous year, such as the corporate tax.”
Retroactive Record Keeping
The compliance burden adds to the cost of the tax itself—which will likely be in the millions of euros. France has said the tax will affect roughly 30 companies. It applies to companies with worldwide revenue of at least 750 million euros and French revenue of 25 million euros from relevant digital business.
Compliance issues associated with retroactivity were raised in several statements, including one from Google and one authored by Baker & McKenzie partner Gary Sprague, on behalf of companies including Amazon, Airbnb Inc., Expedia Inc., and Microsoft Corp. The statements were released Aug. 12 in response to the U.S. Trade Representative’s investigation into the tax.
The new law asks companies in-scope of the tax to calculate how much they owe by looking at how much of their relevant digital activity comes from French users. That requires them to tap into data like users’ IP addresses to track their location.
“You can easily collect information on a going-forward basis, but if it’s not info you’ve ever had to collect, trying to do it retroactively is really hard,” said Cathy Schultz, vice president of tax policy at the National Foreign Trade Council. “How do you track something backwards you never had to track before?”
Facebook would have to rework its internal systems to capture the data the tax calls for, the company’s global tax policy head, Alan Lee, said in a statement submitted to the USTR. For example, companies must calculate the revenue they earned from showing ads to users located in France. But “Facebook’s revenue is generated directly from advertisers, not users,” Lee said.
The retroactive application date could also create issues with “the systems changes needed for the intensive user location tracking and data storage that compliance and audit-readiness requires,” Sprague said in his statement.
Compounding the headache is the fact that the tax could disappear in a few years. The French government has said it will unwind the measure once there’s a global digital tax solution in place. The Organization for Economic Cooperation and Development is working to reach agreement by the end of 2020, but it could take years to implement a solution.
“This is ultimately expected to be temporary and actually applying it is going to require companies to collect data that they may not collect for normal business purposes, and maintain records they may not have reason to record, in order to comply with the tax,” said Jesse Eggert, a principal at KPMG LLP in Washington. “And doing all of that ends up being something that requires significant effort and cost.”
The compliance burden caused by the law’s retroactive provision could support justification of a U.S. trade response, said Grant Aldonas, executive director of Georgetown University’s Institute of International Economic Law and principal managing director of the firm Split Rock International Inc. That’s because companies will face additional compliance costs as well as the tax itself, making it more difficult and expensive for in-scope foreign firms to do business in France.
The USTR is investigating the French tax under Section 301 of the Trade Act of 1974, as it considers tariffs or other responses. The investigation is looking at whether the French tax burdens U.S. commerce and discriminates against U.S. companies.
—With assistance from Rick Mitchell in Paris.