The French Tea Party

Last Thursday, French lawmakers approved a bill that would impose a new tax on services provided by large Internet companies. In the modern, digital era, an overhaul of how companies are taxed has long been overdue.

The French measure would take effect retroactively starting in January 2019, and would levy a 3% tax on revenue earned by large Internet companies doing business in France. It’s expected to affect about 30 companies: US-based giants including Alphabet, Amazon, Apple, Facebook and Microsoft, along with British, Chinese, German, Spanish and businesses. The tax would apply to companies with global revenue of more than €750 million and €25 million in French revenue.

The EU has tried to put together a more unified digital tax plan covering the 28-nation bloc, but leaders couldn’t reach an agreement, prompting France to act on its own. The UK announced in October 2018 that it would apply a 2% levy on digital services, on companies that are profitable and with annual global revenue of at least £500 million, to be implemented in April 2020.

In June, G20 finance ministers broadly supported a plan developed by the Organisation for Economic Co-operation and Development to revamp global corporate tax rules and address challenges in taxing digital companies. But more work is needed on the proposal, which is designed with digital companies in mind but also has major implications for traditional multinational corporations.

As the US feels the new French tax is discriminatory, it has authorized its trade representative to open an investigation to be carried out under Section 301 of the Trade Act of 1974, a legal provision that gives the president broad authority to retaliate against trading partners. The investigation launched by the Trump administration on French taxes is similar to that on Chinese products that led to US tariffs on $250 billion worth of Chinese goods. That inquiry lasted seven months before President Trump decided to move ahead with the first round of tariffs.

The large Internet players have been well known for their elaborate tax-minimization schemes over many years. While running strategies with names like “a double-Irish with a Dutch sandwich”, they’ve faced growing scrutiny on their tax affairs on both sides of the Atlantic. Those companies have piously stated that they don’t break any laws, and that the right response for countries that are unhappy, is not to criticize them on moral or legal grounds but to change the law. This is what the French and others have started to do. It’s worth remembering that, with the Tax Cuts and Jobs Act of 2017, President Trump made a significant change to US tax laws, handing those companies a large tax break.

However, changing the law immediately raises political tensions. The French tax on digital services will open yet another front in a global trade fight that the Trump administration says it has undertaken to level the playing field with allies and adversaries. In his dealings with China, the EU, Mexico, Canada, Japan and other countries, President Trump has repeatedly turned to tariffs, viewing them as the best way to push trading partners to change their practices. He’s threatening to impose a tariff as high as 25% on European car imports. The global trade fight is taking an ugly turn affecting the global economy. Initially confined to China and the US, it’s spreading to several countries. Consensus is needed soon to end it before it engulfs the world order.

President Emmanuel Macron has two weeks to sign off or seek changes to the law. French presidents rarely modify laws once they’re passed by parliament. But the bigger picture here is the long and challenging future about large numbers of countries coordinating on tax reform for multinational corporations, especially those with revenues comparable with the size of countries.