French plans to tax online giants face real-world obstacles


France is spearheading a plan to tax the turnover of internet giants that manage to avoid paying corporate taxes on profits in European countries where they operate. But despite its bold appearance, and the backing of seven other countries, the plan is beset by political and highly technical problems. And even at this embryonic stage it has little chance of succeeding, writes Romaric Godin.

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France has put forward a proposal for an 'equalisation tax' that aims to make internet giants contribute to the public purse in proportion to their size. French finance minister Bruno Le Maire took the proposal, outlined in a letter co-signed by his German, Spanish and Italian counterparts to the Ecofin meeting of finance ministers in Tallinn, Estonia on September 14th-15th and won agreement to consider it.

The plan, which France sees as a way to speed up existing efforts to end the internet giants' fiscal impunity, also has official support from Slovenia, Greece, Austria and Bulgaria. But in the event the discussion did not go very far. In its final declaration from the meeting, the European Commission said it would take the proposal into account in its deliberations on devising a fair taxation system for the digital economy. It is due to report back on these deliberations around the end of the year.

The principle of an equalisation tax is simple on paper. The so-called GAFA companies – Google, Amazon, Facebook and Apple, but also Uber,, Airbnb and Twitter – use fiscal optimisation to keep their tax liabilities out of the reach of corporate tax in countries where they operate. They pay tax primarily in their fiscal bases, which are located in countries where they benefit from very low corporate tax rates – or, as with Apple in Ireland, rates negotiated with the government that are even lower than the country's own corporate tax rate. The equalisation tax would be levied on their turnover in a given country, to make up for the corporate tax on profits that these groups avoid paying in that country.

The man behind the initiative: Bruno Le Maire, France's minister for the economy and finances. © Reuters The man behind the initiative: Bruno Le Maire, France's minister for the economy and finances. © Reuters
For Paris, this proposal is not out of step with the other tax reforms being considered at European and international level. The European Commission is currently working on two initiatives, one for harmonising the rules for calculating taxable profits (known as the Common Consolidated Corporate Tax Base or CCCTB) across the European Union, and another for resolving double taxation disputes within the Union.

For the moment only the former is seeing some progress, and it is important because of its highly complex definition of 'permanent establishment'. Many internet giants avoid tax by claiming that they are not permanently established in a country, even when they have significant business there. This has led to lengthy deliberations on how to define 'digital presence'.

In parallel, the Organisation for Economic Cooperation and Development (OECD) has been working on the same issues and is due to make proposals of its own on the subject from November this year. But officials at the French Finance Ministry say this is all too slow, and that is why taxing turnover is necessary before more permanent solutions can be found.

The French plan certainly reflects growing awareness of the problem. It has been welcomed officially almost everywhere, including by Pierre Moscovici, European Commissioner for Economic and Financial Affairs, Taxation and Customs – and a former French finance minister - in an interview with financial daily Les Echos. But he remained cautious, saying: “We will put various options on the table and weigh the pros and cons.”

Manon Aubry, who follows the subject at Oxfam France, welcomes the plan but cautions that even if it brings the question of taxing multinationals to centre stage again, “it will not in itself be able to solve the problem”. Émilie Cariou, a Member of Parliament for President Emmanuel Macron's La République En Marche (LREM) movement and a member of the National Assembly's finance committee, expresses doubts about the plan. For it actually raises more questions than it answers.

Firstly, there is the definition of turnover. The companies it targets are based in countries that are very attractive from a tax point of view, and they register their sales in those countries. For example, a Uber invoice is registered in the Netherlands. Hence the difficulty of defining sales on a given territory before having resolved the question of digital presence. “We will find ourselves facing the same problem as for calculating profits,” Aubry remarked.

French Finance Ministry officials explain that there is already a system of redistribution for Value Added Tax (VAT) purposes for digital services, which would allow turnover to be calculated. But several internet giants, such as Facebook or Google, do not pay VAT. “ and Google do not have the same business and it appears difficult to create the same tax for such different businesses,” said Cariou.

Google's headquarters in Dublin. © Reuters Google's headquarters in Dublin. © Reuters
Another problem: how to define the scope of an equalisation tax. The Finance Ministry says it does not seek to tax other companies besides those targeted. But how can such a measure be limited to companies that are in fact very different, without including others on the way? “The problem is that there is no digital economy, but a digitalisation of the economy,” said Cariou. So setting apart certain groups as a target for the equalisation tax is far from simple.

The Finance Ministry intends to get round this by saying that the tax is designed to equalise corporate tax. In other words, there will be a form of complementarity between this tax and corporate tax that would exempt companies that pay corporate tax. But this also poses problems.

Several groups that are not normally considered as belonging to the GAFA-style economy do in fact pay corporate tax in France, but use fiscal optimisation to reduce their liability. Will they be exempt from the equalisation tax, and if so, on what basis? Nor is it clear what rate will be applied if the equalisation tax is set in relation to a representative corporate tax rate. The current nominal rate in France is 33.3%, but this is due to fall to 25% in 2022, and big corporations in fact mostly pay under 10%.

And above all, how can the representative corporate tax rate be defined before it is known how to calculate corporate tax, in other words before the question of defining digital presence is resolved and before the discussions in Brussels and at the OECD on the subject are concluded? “This proposal shows that the corporate tax system is no longer working today, it is no longer appropriate, but it does not yet bring a real response to the problem,” Aubry said.

Cariou is unhappy with the method behind the equalisation tax, saying the point is to tax profits, while a tax on turnover could end up taxing companies making losses. “If we continue with this logic, we run the risk of finding ourselves faced with a risk of offshoring services, which would leave Europe and stop paying corporate tax completely,” she warns. In any case, taking only turnover into account could lead to new types of tax avoidance, facilitated by technology.

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