Daily Tax Report: International

French Digital Tax Deal Fails to Win Over Detractors (1)

Aug. 27, 2019, 6:01 AMUpdated: Aug. 27, 2019, 5:11 PM

A new French-U.S. digital tax deal did little to allay concerns that U.S. tech giants aren’t ready to make their first tax payment in November.

French President Emmanuel Macron said Aug. 26 that his government plans to unwind the new 3% tax on digital revenue once there’s an international solution for taxing digital companies. The Organization for Economic Cooperation and Development is hoping to have such a deal ready by 2020.

Under the deal, France would credit companies for the amount they paid above what they would have under a global digital tax solution, Macron said during a joint news conference with President Donald Trump. The two spoke at the end of a Group of Seven summit in Biarritz, France.

“I say this clearly: The day we have an international solution, France will eliminate its tax,” Macron said.

France will implement the OECD agreement before it is implemented internationally, a press officer in the economy ministry said.

That doesn’t let tech companies off the hook. Some will face steep costs to re-engineer their systems to calculate what they owe under the tax—for example, linking user location data to revenue. An Amazon.com Inc. tax official said during an Aug. 19 U.S. Trade Representative hearing on the French digital services tax that the company’s compliance costs could be in the millions.

“I think it’s probably fair to say that while refunding some or all of the DST is a welcome development, there’s still going to be a compliance burden” in the short term, said Jesse Eggert, a principal at KPMG LLP in Washington.

The announcement was a “positive step” but not a complete fix for companies hit by the French measure, Eggert said.

“The challenge of this tax isn’t necessarily just the payment. You’re asking companies to figure out how to pay the tax, establish tax payments, go through compliance for however many years, then just get that money back or offset future corporate income tax payments,” said Daniel Bunn, director of global projects at the Tax Foundation. “There’s a huge cost to companies beyond the actual payment of the tax.”

Macron has said companies will be reimbursed for the French tax once OECD’s plans take effect.

Companies will get back the difference between the French digital tax they have paid, and the yet-to-be-agreed-upon international digital tax, a press officer in the economy ministry said.

For example, if a company pays the French tax in 2019 and again in 2020, and the international tax is implemented in 2021, it will get a refund for the years of 2019 and 2020 equivalent to the value of the French tax minus the international tax, the press officer said.

Trade Response

It also remains to be seen if the agreement achieves one of the U.S.'s key goals when it initiated trade action against France: deterring countries considering their own unilateral digital measures. The U.K., Italy, Austria, and others are pursuing their own plans.

The U.S. opened a trade investigation into the French tax in July, and Trump has publicly considered imposing tariffs on French wine in retaliation. French officials said the U.S. would back off the trade response, under Section 301 of the Trade Act of 1974, as part of the deal.

“It is obvious when we have a formal and definitive deal we withdraw what was the issue, the section 301, that is the heart of the deal, ” Finance Minister Bruno Le Maire told Bloomberg Aug. 26.

The U.S. Trade Representative didn’t return a request for comment. The Treasury Department said Secretary Steven Mnuchin and LeMaire met Aug. 24 to discuss tax and security issues.

‘Vague Promises’

Critics said the U.S. position was too soft.

“We should not support a compromise that would green-light discriminatory taxes against US tech companies for some vague promise of possible partial reimbursement years later,” Ed Black, president and CEO of the Computer & Communications Industry Association, said in a statement Aug. 27.

“The Trump Administration should reject any deal that allows France and other countries to move ahead with discriminatory taxes on U.S. technology companies, in exchange for vague promises down the line,” said Senate Finance Committee ranking member Ron Wyden (D-Ore.). “If Donald Trump gives France a pass now, then it will be open season for foreign governments to go after major American employers.”

The Trump administration hasn’t briefed Finance Committee Chairman Chuck Grassley (R-Iowa) about a deal, said Michael Zona, a spokesperson for Grassley.

As Grassley and Wyden “have urged the Administration multiple times this year, any agreement must provide a solution that is fair, non-discriminatory and avoids any new transatlantic barriers to trade,” he said in an email.

Political Pressure

Domestic political considerations may also play a role in other countries’ decisions to implement digital measures, said Rick Minor, senior counsel at Womble Bond Dickinson in Raleigh, N.C., and a former fiscal adviser to the Luxembourg government of Jean-Claude Juncker.

“The other countries will have to pause and consider if they are able to do what France apparently has just done before their electorate,” Minor said.

“There could be some public backlash if the French route is taken without a thoughtful justification because the politicians have favored the DST as a way to advance the OECD timeline and placate public outcry over the lack of ‘fairness’ in the tax advantages of the digital business models,” he said. “This may not be as straightforward as presented today.”

Macron’s announcement also lacked details about when France would lift its tax. The French government has previously said it was only imposing the digital tax until an international solution agreed to at the OECD is implemented—but that could be years down the road.

OECD Outlook

“Full implementation will take time,” said Pascal Saint-Amans, director of the OECD’s Center for Tax Policy and Administration, especially as it will likely entail a multilateral convention between the 134 countries that are members of the OECD’s Inclusive Framework.

The OECD aims to release details of a unified approach to the digital tax project—distilling multiple proposals and comments submitted by countries, companies, and the public—by October. The organization will present it to Group of 20 finance ministers at their fall meeting. Following G-20 approval, the full body could approve the plan in January 2020, he said.

The French-U.S. agreement raises the stakes even higher for the OECD process—and signals political support from France and the U.S., Saint-Amans said.

“It’s very positive that when you have an agreement at the G-7 that’s largely bilateral, but endorsed by other countries, that there’s a reference to the OECD as a place to be,” he said.

—With assistance from Colin Wilhelm and Rick Mitchell (Bloomberg Tax), and Josh Wingrove (Bloomberg).

(Updated with tax details beginning in fourth paragraph and comment from industry association. )

To contact the reporter on this story: Isabel Gottlieb in Washington at igottlieb@bloombergtax.com (Bloomberg Tax)

To contact the editors responsible for this story: Meg Shreve at mshreve@bloombergtax.com, Karen Saunders at ksaunders@bloombergtax.com (Bloomberg Tax)

To read more articles log in. To learn more about a subscription click here.