Blog

A new trade war between the US and the European Union (EU) is all the more likely after France passed a digital services tax that would hit American tech firms while the UK confirmed it’s still on course to do the same.

The French government has given the go ahead to a three percent levy on digital revenues generated within the country by multi-nationals such as Apple, Amazon, Facebook and other digital services providers.

The tax will be applied retroactively from the beginning of 2019 and will apply to firms with more than €25 million in French revenues and €750 million in global revenues.

While not exclusively the case, the levy is most likely to impact US firms which have been accused of avoiding paying their dues commensurate with national revenues.

Hostile to the US?

Inevitably the move is being interpreted as hostile to the US back in Washington and presented as such to the electorate as the run-up to the 2020 Presidential Election gets underway. The Trump administration, which already categorises the EU as anti-American, has ordered a probe into how the new tax will hurt US companies.

US trade representative Robert Lighthizer set the tone for what’s to come when he said:

The United States is very concerned that the digital services tax…unfairly targets American companies.

He added:

The services covered are ones where US firms are global leaders.  The structure of the proposed new tax as well as statements by officials suggest that France is unfairly targeting the tax at certain US-based technology companies.

For its part, the Macron government in France is in no mood to buckle, especially when the Finance Ministry estimates that it’s on track to collect €400 million in 2019 and €650 million in 2020. Finance Minister Bruno Le Maire said:

France is a sovereign country. Its decisions on tax matters are sovereign and will continue to be sovereign..Between allies, we can and should solve our disputes not by threats but through other ways.

He added:

Each of us is seeing the emergence of economic giants with monopolistic attributes and who not only want to control a maximum amount of data and make money with this data, but also go further than that by, in the absence of rules, escaping taxes and putting into place instruments that could, tomorrow, become a sovereign currency…We are merely re-establishing fiscal justice. We want to create taxation for the 21st century that is fair and efficient. We want to impose on these new business models the same rules that apply to all other economic activities.

France was the prime mover behind a push to impose an EU-wide digital services tax last year, an effort which was abandoned when dissenting nations, including Ireland and Germany, weren’t prepared to put pressure on their inward investment prospects by tech firms and their automotive industry respectively.

And as if the diplomatic crisis between Washington and London hadn’t strained the so-called ‘Special Relationship’ enough this week, the UK Treasury chose yesterday to publish its own plans for its own digital levy as part of the next Finance Bill.

This was first announced by the UK Chancellor of the Exchequer Philip Hammond last year as a basic plan. The more detailed version in the Finance Bill confirms that from next April a digital services tax of two percent will be imposed on companies that generate £25 million in UK revenues and £500 million in global revenues. Treasury Financial Secretary Jesse Norman says:

This targeted and proportionate digital services tax is designed to keep our tax system in this area both fair and competitive, pending a longer term international settlement.

Both the UK and France have said that they will replace their local taxation with a global regime if/when that emerges from the Organisation for Economic Co-operation and Development (OECD).

Reaction

In what’s likely to be the party line in the US tech sector, Amazon told the Washington Post that it was on Trump’s side on this issue:

We applaud the Trump Administration for taking decisive action against France and for signalling to all of America’s trading partners that the US government will not acquiesce to tax and trade policies that discriminate against American businesses.

This is the same Amazon that last year settled with the French tax authorities which had been pursuing €200 million in unpaid back taxes. In 2017 Amazon’s estimated UK revenues were £1.98 billion, up 33% year-on-year from 2016. But it only paid £4.5 million in corporation tax, down from £7.4 million in 2016.

That said, the UK tech trade association techUK has its concerns about the actions of the UK. Associate Director for Policy Giles Derrington says:

There is no doubt that the system for international taxation needs to evolve to deal with a digitising economy. To do that we need smart and innovative solutions developed at a global level. As a revenue tax targeted on a narrowly defined set of companies, the Digital Services Tax is not one of those smart measures. It risks making investing in the UK less attractive, increasing costs for consumers and will likely hinder progress towards a long term global solution.

It is also deeply concerning that the UK Government has chosen to press ahead with this proposal after just today the US Government announced an investigation into France for a similar digital tax plan. The US Government has said that this proposal risks creating new non-tariff barriers to trade, and there is a real risk that the Government is putting the UK at risk of retaliation from the US Government that would hurt British businesses and consumers. The proposal runs resolutely counter to the visions for a Global Britain championing free trade.

The planned investigation also won cross-the-aisle support in Congress. Republican Chuck Grassley of Iowa, Chairman of the Senate Finance Committee, and Democrat Ron Wyden of Oregon said in a joint statement:

The digital services tax that France and other European countries are pursuing is clearly protectionist and unfairly targets American companies in a way that will cost US jobs and harm American workers.

My take

It’s time to open up another front in the trade wars between the US and, well, the rest of the world.

There’s a meeting of G7 Finance Ministers scheduled for later this month and – at time of writing – the US is planning to attend. In the current volatile climate, that could change, but assuming it doesn’t, clearly the UK and France’s moves will be on the agenda. But the US will have to recognise that the two countries are not alone. Other EU nations are also teeing up their own local taxation laws.

What’s likely to aggravate this conflict is that both sides have political points to score on the home front. President Macron first announced the unilateral French action as the gilets jaunes rioters were burning down parts of Paris. A bit of saber-rattling at the Yanks never does any harm in French political circles.  Meanwhile a President who’s up for re-election on a MAGA ticket is going to milk the ‘stealing money from great US firms’ message for all its worth.

France will hold its nerve and expect backing from other EU states in so doing.  The UK situation is a bit more complicated. The digital tax there was launched by Chancellor Hammond. But if Boris Johnson becomes Prime Minister before the end of this month – as the polls currently suggest – then the chances of Hammond still being in his job the day after that are…well, non-existent.

On the campaign trail, Johnson has talked tough on the subject of a digital services tax:

I think it’s deeply unfair that high street businesses are paying tax through the nose whereas the internet giants, the FANGs — Facebook, Amazon, Netflix and Google — are paying virtually nothing. We’ve got to find a way of taxing the internet giants on their income, because at the moment it is simply unfair.

Of course that’s a pretty generic ‘something must be done’ soundbite. Whether it stands up to a call from Johnson’s big fan in the Oval Office remains to be seen. With a new PM, ongoing Brexit chaos and a possible General Election before the end of the year, everything could be up for grabs. That said, a Labour government would certainly pursue the digital tax idea and most likely considerably more aggressively, as would the Liberal Democrats.

Meanwhile digital services providers will inevitably need to consider their own positions around which markets in which they intend to operate and – more importantly for a post-Brexit Britain – invest.

The best outcome for everyone would be an international deal. The OECD said it hoped to have a first draft of a global agreement in place by June. Unfortunately it’s now mid-July…