US digital giants worried about domino effect from French DST
The Office of US Trade Representative (USTR) opened an investigation into France’s DST in July on the basis that it was unfairly targeting a subset of US-based companies, which included Facebook and Google’s parent company Alphabet. Companies that provided comments ahead of a public hearing to assess the DST argued that France’s approach undermines jurisdictional taxing rights and the international tax framework.
"Unfortunately, the enactment of France’s digital services tax threatens to undermine the OECD process," said Nicholas Bramble, Google’s trade policy counsel, about wider-scoped proposals to address the tax challenges of the digital economy. "It is a sharp departure from long-established tax rules and uniquely targets a subset of businesses."
"It is inconsistent with international tax policy principles," agreed Gary Sprague, tax partner at Baker McKenzie. "If the French DST goes unchallenged, it will provide political cover for a dozen or so countries considering similar measures."
US technology giants, including Facebook, will testify on August 19 at a public hearing organised by the USTR against France’s DST and the ramifications to their business operations. More input is expected from the companies before the post-hearing comment period closes on August 26.
Layering on the complexity
The French Senate approved in July the 3% tax on revenue from digital services earned in France, which targets advertising, intermediary services, digital interfaces, and the sale of personal data. It targets large companies with global revenue of at least €750 million ($841 million) and revenue in France of €25 million or more. The tax applies to revenue gained from January 1 2019.
Advisors and researchers said that the tax infringes on the US-France tax treaty and the Convention of Establishment between the two countries, which creates fair trade and market opportunities for French and US companies without imposing burdensome taxes on one another.
Daniel Bunn, director of global projects at the Tax Foundation, said that the French DST is similar to a tariff and discriminates between domestic and foreign companies. Additionally, France’s approach to tax digital activity is inconsistent with international tax principles because the tax targets revenue instead of profit and goes against the G20 commitment to global tax certainty.
The tax adds another layer of complexity for digital companies as it applies retroactively to 2019 revenue, and digital companies will have to overhaul new and existing resources in order to comply.
The system changes need to account for intensive user location tracking and data storage operations in order to make digital companies compliant and audit ready.
"The French, and other DSTs, apply the tax to a new tax base focused on user location. For a company like Facebook, this presents issues as Facebook’s revenue is generated directly from advertisers, not users," said Alan Lee, head of global tax policy at Facebook.
"While we may have the necessary data to calculate the tax, it would require additional time and resources to capture this data and maintain it for these new tax and audit procedures. We estimate additional tax, compliance, audit, engineering and maintenance costs," added Lee.
While French policymakers have mentioned that the tax is temporary and the earlier drafts of the proposal allowed the tax to expire, France’s final proposal did not include such a sunset clause. Companies have taken this as a sign that the tax may be permanent.
This can show other tax jurisdictions considering DSTs such as the UK, Spain and Italy that they do not have to agree to an OECD multilateral solution by 2020. Taxpayers are worried that such sentiments will stall investment decisions and have other setbacks for global economic growth.
Passing along the cost
Companies will likely pass the tax down their supply chains if they can.
Peter Hiltz, international tax policy director at Amazon, said that Amazon notified French platform sellers that certain fees will rise by 3% from October 1 because of the DST, which will hike up prices for French consumers too.
However, multinational companies can be harmed further if the US chooses to retaliate against France and other countries with DSTs through tariffs of their own. The USTR can issue new tariffs on French goods or other trade restrictions after the public comment period closes on August 26.
Corporate taxpayers are worried about unilateral DSTs leading to other trade wars that can slow the pace of growth of the digital economy. Such actions will come at a bad time because the US trade war with China is already harming multinationals’ supply chain operations.
Corporate taxpayers that submitted comments to the USTR call for a complete stop to unilateral actions from countries considering similar measures and redouble efforts to reach a consensus solution at the OECD.
The above article was published on www.internationaltaxreview.com on August 16 2019 and has been republished with the approval of the Publisher.