France Becomes First Country to Enact Digital Services Tax

On July 24, 2019, French President Emmanuel Macron signed into law a three percent digital services tax (“DST”). The tax was published in France’s official gazette on July 25, 2019 and will retroactively apply to income generated after January 1, 2019, with the first payments under the regime coming due in October 2019. 

The tax is intended to apply to certain digital services provided to, or aimed at, French users (e.g., providing an internet platform for the purpose of targeted advertising or the connection of buyers and sellers). In order to qualify for the tax, companies must have total annual revenues from the covered digital services of at least €750 million globally and €25 million in France. 

The tax legislation has been met with strong opposition from the U.S. Government due to its anticipated disproportionate impact on U.S.-based firms. Approximately 30 companies worldwide are expected to qualify for the tax in 2019, most of which are headquartered in the U.S. and include the likes of Facebook Inc., Alphabet Inc., Amazon.com Inc., and Apple Inc. In response, the U.S. Trade Representative on July 10, 2019 launched an investigation under Section 301 of the Trade Act to determine whether the new French tax discriminates against U.S. companies and burdens or restricts U.S. commerce. Depending on its outcome, the investigation could result in new tariffs against French goods and services sold in the U.S., or other retaliatory measures directed at the French economy. 

The tax law is also facing controversy over its protectionist design. French Finance Minister Bruno Le Maire has estimated the tax will impact only one French company in 2019. Furthermore, the law provides that DST payments will be deductible expenses against French corporate income tax. This is likely to lessen the burden of DST payments on French taxpayers and cause the DST to function much like a tariff on foreign companies who are providing covered digital services in France. On July 25, 2019, a lobbying group whose members include some of the U.S.-based multinational companies affected by the DST announced plans to file complaints with the European Commission on the grounds that the tax legislation provides unlawful state aid and breaches the rules of the European Union’s internal market.

The enactment of the DST comes as the Organization for Economic Cooperation and Development (“OECD”) continues to push for a global consensus on the establishment of new global tax rules addressing the rapid digitalization of the economy. The OECD’s program to achieve this effort was discussed in detail in our Transfer Pricing Times June 2019 Edition. The OECD has committed to working towards a final report intended to provide a consensus-based long-term solution by 2020. 

Read Transfer Pricing Times – July 2019