French President Emmanuel Macron said the US and France had reached an agreement to settle their differences over France’s digital services tax, but US President Donald Trump may still retaliate with tariffs. (AP: Francois Mori)
Forget the US-China trade war for just a minute; we are entering a period of global tax wars.
- France has introduced a tax on tech giant sales, but Australia is waiting for a global plan before it acts
- The United States is not happy, warning it may retaliate and impose tariffs on French wine
- There are fears taxing digital company sales could lead to double taxation and spark more tax fights and trade disputes
Australia is looking to follow Europe’s lead in imposing a tax on digital companies’ turnover but is waiting to see what other countries do before it acts.
Taxing companies’ sales, rather than their profits, is a huge departure from long-standing tax principles, and there are fears it could create greater cross-border disputes.
Tax experts have long been warning that if Australia takes unilateral action to tax overseas companies, including American and Chinese multinationals, those countries may, in turn, try to collect more tax from Australia’s mining giants.
Prime Minister Scott Morrison recently said the Federal Government had, “concerns about proposals that are basically a souped-up sales tax and the potential for that to lead to retaliatory taxation in Australia”.
Treasurer Josh Frydenberg told ABC News the Government would wait for a multilateral plan on taxing the digital economy — being led by the OECD and the G20 — before introducing any measures.
The OECD is expected to hand down its plan next year, but it could take years to implement.
This is why France has already moved, and a number of other European countries are considering their own unilateral moves.
France’s Digital Services Tax
In July the French Senate approved a 3-per-cent levy that will apply to revenue from digital services earned in France by companies with more than 25 million euros in French revenue and 750 million euros worldwide.
The tax has been widely referred to as the GAFA tax, which stands for Google, Apple, Facebook, and Amazon.
France has argued the levy is needed because multinational tech giants book profits in low-tax countries, regardless of where the revenue is generated.
The levy will apply to about 30 companies, most of which are US-based tech firms.
The tax paid is deductible against French corporate income tax.
And the policy is retrospective — its application will date back to the beginning of 2019.
France’s Finance Ministry estimates the tax will raise 500 million euros a year.
US launches probe over proposed tax
But US President Donald Trump is not happy.
He threatened, in a tweet in July, the US would retaliate against the French tax and impose tariffs on French wine.
And US Trade Representative Robert Lighthizer has said the US was “very concerned” the French tax unfairly targeted American companies.
The US has since launched a 301 probe — the same kind that led to tariffs on China.
Under Section 301 of the Trade Act, the US may impose trade sanctions, including tariffs, on foreign countries that either violate trade agreements or engage in other unfair trade practices.
Daniel Bunn, director of global projects at the Tax Foundation, told a hearing held last month before the US Trade Representative’s office and other government officials, that the French tax could lead to double taxation and spark more tax fights and trade disputes.
“As a tax on gross revenue rather than income, the tax will function very much like a tariff, and discriminate between domestic and foreign firms,” he said.
Foreign firms will attract the tax on gross revenues at the point which they hit a French IP address.
Mr Bunn warned companies would likely pass this tax onto French consumers in the form of higher prices.
He said the French policy was creating additional uncertainty around the OECD’s efforts.
“Such uncertainty can lead to delayed investment decisions and be a drag on economic growth,” he said.
“The current trade war has already been costly for Americans and could become even more so,” Mr Bunn said.
Google calls it ‘sharp departure’ from global rules
French President Emmanuel Macron said at the G7 summit last week the US and France had reached an agreement to settle their differences over the tax.
He said France would withdraw the tax as soon as the OECD reached a multilateral agreement.
But there are fears the US may still hit back.
Aside from the Section 301 investigation, there could also be scope for the US to adopt a never-before-used measure that was first written into its law in the 1930s.
Section 891 allows the US to double the tax rate on any French company or citizen who pays taxes in the US, if that foreign country is subjecting US citizens or businesses to discriminatory taxation.
Major US tech giants including Amazon, Facebook and Google, and trade associations, have testified this is exactly what the French tax does.
At the August hearing, the tech giants detailed how the French tax was not only discriminatory, but ultimately harmed global tax reform.
Google’s trade policy counsel, Nicholas Bramble, said 130 countries, including France, had signed up to the OECD plan.
He said France’s unilateral move put that at risk, and may also create new barriers to trade, and hamper economic growth.
“It’s a sharp departure from long-established rules, and uniquely targets a subset of businesses,” he said.
Mr Bramble questioned the logic in targeting digital companies alone, given all sectors of the economy were becoming digital.
“The DST [digital services tax] will result in unpredictable extraterritorial impact and is likely to generate disputes on whether specific digital activities were supplied in France or in another region,” he said.
Amazon warns cost be passed on
The tech giants also argued the tax created additional compliance and audit costs, and that they may be forced to pass these additional costs onto consumers.
The French tax is being applied based on a user’s location.
Facebook’s global head of tax policy, Alan Lee, told the hearing while the company — which currently has about 2 billion users — generates more than 98 per cent of its global revenue by providing advertising to its users, advertising could reach a customer based on a number of factors besides location.
These included age, interests and hobbies, Mr Lee said.
Capturing this data was time consuming, he said. And put together with the fact the tax was being applied retrospectively, it could increase business and audit costs.
Amazon’s international tax policy director, Peter Hiltz, said more than 10,000 French-based businesses were selling via Amazon’s online stores and the company had already notified them certain fees would increase by 3 per cent for Amazon French sales starting October 1.
“The tax has the potential to impede the efforts of US small- and medium-sized businesses to grow and sell into France,” he said.
“It increases their cost of doing business, forcing them to choose between increasing their prices, reducing their other costs, or ceasing to sell to French customers.”