Trade Groups, Tech Companies Laud US Pressure on France Over Digital Tax

Ten comments documents filed by trade groups and companies that would be affected by a digital services tax imposed in France -- as well as one filing by a European think tank -- describe the problems with the tax and the discriminatory intent against U.S. companies. But three of the groups, and one company, told the Office of the U.S. Trade Representative that tariffs on French imports under Section 301 are not the way to fix the problem, while only two individuals called for tariffs as a way to get France to roll back the law.

In 16 comments submitted ahead of a public hearing Aug. 19, only one individual said the French digital services tax is a good policy, and that USTR should not be trying to influence France to repeal it.

The tax is retroactive to Jan. 1, and applies only to large Internet companies, with a carve-out for one large French online advertising firm. It is a 3 percent tax on revenues derived in France -- not on profits.

The Information Technology Industry Council wrote that the Section 301 statute applies to both unreasonable policy and discriminatory acts. "The French digital services tax appears to meet both of these standards," ITI wrote. "The tax has been widely referred to as the 'GAFA' tax, which stands for Google, Apple, Facebook and Amazon."

ITI concluded, "We support the U.S. government’s efforts to investigate these complex trade issues but urge it to pursue the 301 investigation in a spirit of international cooperation and without using tariffs as a remedy."

The National Foreign Trade Council said that corporate income taxes are based on physical presence and profit allocation rules. "A tax imposed on gross revenue has no relationship to net income or profits, which are the only proper bases for a corporate income tax," the NFTC wrote.

The trade group noted that the French finance minister told a French reporter that at least one French firm would be large enough to face the tax. But it said that French lawmakers passed an amendment that shielded Criteo, the one firm expected to pay.

Even if there were applications to French firms, the U.S. Chamber of Commerce wrote, "the French DST allows VAT to be subtracted from taxable revenue in calculating the base tax rate. Of course, the United States is one of the very few major world economies that does not impose VAT, so this element of the DST has the effect of expanding the tax base for U.S. firms relative to their European competitors. This approach heightens the impact of the discrimination against U.S. firms."

Still, both the NFTC and the Chamber said that if France cannot be convinced to repeal the law, the U.S. should bring a case at the World Trade Organization rather than impose tariffs.

The Tax Foundation also disagrees with the use of tariffs to resolve the problem. "Unfortunately, the harm of the French digital services tax could be compounded if the United States chooses to respond with retaliatory tariffs. The current trade war has already been costly for Americans and could become even more so," its comment said.

The Computing Technology Industry Association noted that originally, France said the DST would only apply until 2021, when it expected the Organization for Economic Cooperation and Development to have arrived at a solution on taxing services across borders, "but the final version that was signed into law removed this stipulation." CompTIA did not explicitly ask USTR not to impose tariffs, but did say: "As USTR considers retaliatory measures against the French government, we ask that the U.S. resolve issues with France in a way that is consistent with international commitments."

The Computer & Communications Industry Association, on the other hand, seemed to give the USTR the green light to levy tariffs, writing: "France’s action warrants a substantial, proportionate response from the United States."

The reason that the French lawmakers imposed the tax is that they believe Facebook, Amazon, Google and Apple are paying lower taxes than they should be.

The European Centre for International Political Economy, a Brussels-based think tank, said that while it makes sense that European countries should be concerned that multinational corporations are doing profit-shifting to avoid taxation, the French tax is based on bad analysis.

"US-based Alphabet (Google), Facebook, Microsoft and Amazon, show relatively high effective corporate tax rates for the period 2012 to 2017, i.e. 26.8%, 27.7%, 28.2% and 28.2% respectively," the think tank wrote, while Renault had an effective corporate tax rate of 17.6% for the same period, and Valeo, a French automotive supplier, paid 19.5% on average. "Notions that certain digital companies are generally undertaxed compared to non-digital companies are therefore highly misleading and seem to be guided by political ideology rather than empirical evidence," the think tank wrote.

Google's trade policy counsel said "Google’s overall global tax rate has been above 23 percent over the past 10 years, in line with the 23.7 percent average statutory rate across the member countries of the OECD. Most of these taxes are due in the U.S., where most of our products and services are developed." He acknowledged that most of that tax was paid domestically, "just as German, British, French, and Japanese firms pay the majority of their corporate taxes in their home markets."

Baker & McKenzie, representing Airbnb, Amazon, Expedia, Facebook, Google, Microsoft, Salesforce, Stripe and Twitter, said the retroactivity to Jan. 1 is "extraordinary," given "the systems changes needed for the intensive user location tracking and data storage that compliance and audit-readiness requires."

In a 26-page paper, the Information Technology and Innovation Foundation took apart the logic behind the tax. "If a car is produced in Germany and then shipped over the border for sale to a French citizen, the German carmaker does not suddenly become subject to the French corporate income tax. All of its corporate profits from French sales will be subject to the German corporate income tax," ITIF wrote.

Senior fellow Joe Kennedy said that France is arguing that "users supposedly create value by producing content for the platform or generating data the companies sell or use to generate ad revenue." While ITIF doesn't agree with that rationale, it argues that even if you agree that posting pictures on Facebook or giving away your data are major components of companies' profits, there is no precedent to tax those actions or passive assent. "Governments normally do not tax the value associated with volunteered labor, whether it is someone posting a picture of a line at an airport or someone washing their clothes," ITIF wrote. "Nor do they count as income the value users get from receiving free services, such as when someone eats dinner at a friend’s house or is given a ride to work."

Many commenters said the OECD negotiations on taxation are a better way to manage a changing economy. A French trade group is asking the Office of the U.S. Trade Representative to curtail retaliatory measures against French products if the OECD is headed toward an agreement on how to tax digital services.

The National Association of Foreign-Trade Zones asks that whatever tariffs on French products are imposed only apply to French inputs imported into FTZs, not all foreign content.

An analyst at the Peterson Institute for International Economics submitted the most direct endorsement of tariffs on France. "President Donald Trump has launched several damaging and counterproductive trade battles since taking office. But on July 10, 2019, he got it right by opening an investigation into France’s newly enacted digital tax, which unfairly targets Google, Facebook, Amazon, and other US technology giants," he wrote. "A trade response against iconic French products, especially wine, seems most likely to galvanize French legislators and citizens to reconsider the illegal and discriminatory tax."