September 2019

By Mathilde Defarges, with contribution from Étienne Soula

At last August’s G7 gathering, the issue of taxation was somewhat overshadowed by high-profile developments regarding Iran and climate change. Yet the compromise reached by Trump and Macron at the end of the two-day summit was a win for multilateralism. In addition, the compromise is now incentivizing the OECD to double down on a reform bound to impact the bottom line of tech giants and the way all large multinational groups structure their operations in coming years.

For almost a decade, France has floated the idea of a digital tax, domestically as well as at the European Union and the Organization for Economic Co-operation and Development (OECD). Multinational corporations have long structured their operations so as to minimize their physical—and thus taxable—footprint in high tax jurisdictions. However, tech companies have been able to use the dematerialized nature of their services to shift a large part of their taxable activities to low tax jurisdictions. Paris’ ambition was to create a new framework for taxation to ensure that companies deriving benefits from digital services deployed in France would also pay taxes there.

However, to avoid putting itself at a disadvantage by being the only country to pass a tax on these companies, the Macron administration lobbied its European partners intensely to convince them to tackle the issue at the European level. In the end, despite the best efforts of the French minister for the economy, talks of an EU-wide measure broke down in March 2019 after several member states objected that such a tax would place the EU at a competitive disadvantage globally.

Instead, these member states placed their faith in the OECD. Countries such as Ireland, Denmark, and Sweden felt that the organization’s 36 member states, including economic heavy weights Japan and the United States, were better positioned to harmonize fiscal practice globally. However, it quickly became apparent that reaching consensus among OECD members was just as challenging as among EU countries, if not more so. By the summer of 2019, French officials were already warning that the EU may want to re-seize the initiative should the OECD process reach a dead end.

The United States is understandably cautious on this issue. Most tech giants operating in Europe are American companies. So, when France announced in July 2019 that it was passing its own 3% tax on certain digital activities, a move expected to net French authorities €500 million a year, part of the Trump administration saw the announcement as singling out the United States. However, that interpretation misreads Paris’ true intentions.

Instead, France's decision to pass a new digital tax must be seen in the light of the OECD's failure to deliver actionable measures in a timely manner. Indeed, the compromise Macron put forward at the end of the G7—France will retroactively reimburse tech companies should a prospective OECD tax be less onerous than the French one—shows that France's real objective is not to single out this or that country, but rather to jump-start stalling OECD negotiations. And it now seems that Paris’ move has successfully prompted renewed interest in the multilateral process. After the French minister for the economy traveled to Washington, DC last week, U.S. Secretary of the Treasury Steven Mnuchin released a statement supporting a rapid OECD-level solution, possibly as soon as early-2020.

In a sign that tech companies are getting used to the idea of this new tax, Google has just agreed to to pay $1 billion to settle a French fiscal probe. Nevertheless, the OECD proposal may very well land on a lower number than France’s national tax. However, Paris considers that reimbursing excess tax to a few tech companies is a small price to pay to achieve an international digital tax. In addition, if the OECD recognizes that a state can tax companies generating revenue within its borders, irrespective of those companies’ physical location, the international organization will create a precedent that could in time affect all multinational companies, regardless of their involvement with, or use of, a digitalized business model.

Stay tuned as we continue to track these developments.