France and the digital service tax: are US tariffs justified?
The Trump administration has threatened to introduce 100% tariffs on French goods in yet another episode of the Trump administration’s aggressive trade policy. The tariffs on consumer goods follow previous examples of a similar strategy to assert power in foreign diplomacy, including 156 billion dollars’ worth of tariffs on China in addition to recent reintroductions of tariffs against Argentinian and Brazilian metals.
Prefacing Trump’s threats are a few key developments. France imposed a 3% Digital Service Tax on the gross revenues of all digital companies operating within France. The eligible digital companies must have over 750 million Euros in yearly global sales and a revenue exceeding 25 million Euros from their operations in France. This is an incredibly bold initiative from the French finance minister Bruno Le Maire and is intended to function as a stopgap until more permanent measures are instituted by the OECD in 2020.
Like with any bold move, the French have been criticised heavily for this one. Jennifer McCloskey, Vice President for policy at the Information Technology Industry Council, opined that the United States Trade Representative recognised the discriminatory aspects of France’s digital services tax and intended to prepare a strong trade response should the measure remain in place. Further attitudes, expressed by two leading senators in the finance committee of the upper chamber of Congress, expressed that the digital service tax is “unreasonable, protectionist and discriminatory”. However, it is unclear whether such support for Trump’s decision to tax French consumer goods imported into the US is merely a glint political opinion or if it reflects sound economic analysis.
The question is that on what basis is the French tax reform unreasonable and discriminatory? The law does not apply specifically to US digital service firms, it applies to all firms meeting certain revenue criteria and providing specific digital services, including ‘intermediary services’, which is the ‘provision of digital interface enabling users to enter into contacts and to interact with others’, and ‘advertising services based on users’ data’, which is essentially the provision of services to advertises to conduct targeted advertising. The scope covers a broad number of digital services companies and cannot be said to be particularly discriminatory to US firms just because the largest tech firms happen to be American.
Further, even if it is protectionist, the tax is saving France’s coffers by holding tech multinationals accountable for their dues. This is hardly an unwelcome reform and should be implemented on a European level to stunt the exploitation of company law and tax havens. An article by Joseph Stiglitz and Erika Siu exposes that the transfer price system, under which corporations can “artificially segment their activities into infinite numbers of subsidiaries which are taxed as separate businesses, giving corporations wide latitude to move profits into low-tax jurisdictions like Ireland using mythical internal prices”. The article highlights that in Apple’s case, Ireland allowed Apple to move their profits to subsidiaries that exist in cyberspace and have no employees. Secrecy laws hide the beneficial owners of shell companies, making it very difficult for tax authorities to enforce tax obligations.
It is exactly this type of behaviour that the digital service tax bars against. Setting a threshold on the size of tech companies by revenue is useful because it is only these large tech companies, like Apple, that can segment their profits to tactfully avoid taxation. Small and medium sized companies still must pay full tax because they do not have the global reach to segment profits to avoid liability. This goes to show that the true discrimination would be in not regulating activities of the tech multinationals. France’s reform could not be more welcome.
