France leads the way on taxing tech more fairly

France leads the way on taxing tech more fairly

The corporate tax system is increasingly unfit for purpose in the digital era. The fact that companies can structure themselves so that they pay much of their tax in low-tax jurisdictions, regardless of where sales take place, is a particular problem. France’s digital services tax, which the French upper house passed on Thursday, aims to change that. It will impose a levy on turnover for the largest digital companies operating in the country.

The French plan will apply a 3 per cent charge on turnover to companies with revenues of more than €750m globally and €25m in France. The model and levy are the same as those in a draft EU digital services tax which — unfortunately — collapsed in December amid opposition from Germany and the Nordic countries. The UK chose Thursday to publish its own draft legislation for a 2 per cent digital sales tax, first flagged last October, from April 2020 if no international agreement on the issue is reached before then. Spain is doing something similar.

It is regrettable that France, Britain, and others are having to take unilateral steps when co-ordinated multilateral action would be preferable. But the failure, so far, of the global community to reach a satisfactory accord leaves them with little choice. The French and British moves should inject new urgency into the debate within the G7 large advanced economies — due to be renewed at a meeting next week — over whether to endorse OECD proposals for a digital services tax.

Such measures are well warranted. It is unfair for companies to enjoy tax advantages simply because they are transnational. The ability of some of the world’s most profitable companies to escape paying fair levels of tax is fuelling a popular backlash against globalisation and western-style capitalism.

Resentment is understandable when digital companies can reduce tax bills to paltry levels by domiciling in jurisdictions such as Ireland or Luxembourg. Among the culprits is Amazon, which paid only £1.7m in UK corporation taxes in 2017 even as its British profits soared to £72.3m. Such practices are unfair both to other businesses which do not trade internationally and to governments, which lose substantial revenue.

France’s move has provoked a backlash of its own — from Washington. At President Donald Trump’s prompting, trade representative Robert Lighthizer said on Wednesday the US would conduct a so-called Section 301 investigation into whether the French digital tax unfairly targets US companies such as Facebook, Google and Amazon. The probe could open the way to retaliatory tariffs on French wine or cars, although both sides would have to seek a negotiated settlement first.

By going it alone, France and the UK might face accusations of using a Trumpian approach. The turnover taxes, however, would be compliant with existing international codes, not an attempt to break them. More importantly, their end goal is not to splinter international policies but to increase pressure for a multilateral solution.

International consensus is badly needed over deeper structural reforms to tax regimes, notably over where companies realise profits and are taxed on them. Countries such as France are restricted to targeting revenues to avoid violating existing tax codes. The French and coming British moves could nonetheless be a turning point. They are not an attack on US companies, but an attempt to push Big Tech towards paying fair taxes globally. They carry a risk of fragmentation — but should be a spur to achieve the final goal of a multilateral accord.

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