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The French Digital Tax and the US Digital Giants: Deal between Paris and Washington at the G7 in Biarritz. [UPDATE]

UPDATE: Paris - January 25, 2020

On January 22, 2020 at the Davos World Economic Forum, the French and the US government have reached a temporary agreement under which, on the one hand, the US will temporarily hold off from applying higher tariffs on imported French products and, on the other hand, France will temporarily postpone the request for payment of the installments of the French Digital Tax (“Taxe GAFA”) until December 2020.

This provisional deal is aimed at taking time to find an internationally-agreed solution over the year 2020, as pledged by the OECD countries.

The Digital Tax is one of the most important current topics in the International Tax arena.

American digital enterprises like Google, Amazon, Facebook and Apple (also known as GAFA) generate profits in most of the world’s countries without needing to be physically present in those countries.

According to the current domestic and international tax rules, this means that they do not pay any taxes in the countries where the value they sell is generated and this creates a significant imbalance with regard to local enterprises.

The OECD – the Organization for Economic Cooperation and Development based in Paris that advises the world’s biggest economies on economic policy topics – has been working on this matter over the last few years in order to propose several measures for a more equitable taxation of the digital enterprises; however, no comprehensive agreement has been reached internationally so far.

European countries like Italy have passed legislation (Budget Law for 2019 – Dec 30th 2018 n. 145 - “Web Tax”) introducing a 3%-rate digital tax rate meant to hit the biggest digital enterprises’ profits generated in Italy by activities like the sale of advertising space, hosting services on commercial, multi-sided digital platforms, sale of users’ data; nonetheless, the Italian government never implemented this legislation mainly because of the uncertainty over the long-term international solution.

France has also been working on a similar legislation and has recently taken a step forward by passing the Law n° 2019-759 – July 24th 2019 introducing a tax on the digital services. Like Italy’s, this legislation aims at levying the tax on the profits made by digital giants with more than 750 million Euros profits worldwide at a rate of 3%; unlike Italy’s, the French Digital Tax would only hit enterprises with over 25 M Euros profits generated in France.

During summer 2019, the U.S. government expressed its concerns about the discriminatory character of this piece of legislation which, in its view, is aimed at hitting “a few of its best multinationals”.

As a result, the U.S. President Trump announced that new tariffs on the import of French products would be introduced in response to the French Digital Tax.

In view of this potential dispute, the French and U.S. governments discussed and finally reached a deal at the G7 that was held in Biarritz (France) on August 2019.

Under this deal, the U.S. waived to introduce higher tariffs on French products and France agreed to grant a tax credit to the U.S. digital giants in case the current French digital tax is higher than any future French digital tax that will be introduced in France under an OECD-sponsored international tax agreement.

Nonetheless, this deal has recently taken a major twist.

Last December, the US administration backtracked on the August 2019 deal and threatened to impose tariffs up to 100% on French products.

The Trump administration states that France is “taking advantage of American companies” and that the French Digital Tax is “unreasonable, protectionist and discriminatory”.

The US Trade Representative Office (USTR) is currently collecting public comments until January 14th 2020 on the proposed new tariffs list on French products as well as the option of imposing restrictions or fees on the supply of services by French enterprises.

In response to the Trump administration position, the French government took a firm stance stating that it “will not give up” on the taxation of the Big Four Tech Companies who make profits in France without a physical presence.

Further developments are expected in the upcoming months.

Unilateral measures like France’s GAFA Digital Tax are being taken by other countries and this is expected to occur until an international solution is found.

It is worth to point out that these unilateral decisions may affect countries’ commercial relationships, have an impact on their internal revenue and potentially breach international tax agreements and EU legislation already in force.

For these reasons, an internationally-agreed solution on this matter would be highly desirable and the G20 finance ministers have pledged to propose a multilateral solution by 2020.

Andrea Catasti