On 11 July 2019, French senators approved the country’s Digital Service Tax (DST) bill. On the same day, HMRC laid out its parameters for an equivalent bill in the UK. What can we learn from the French system, and how does it compare to that which has been proposed by HMRC?
To explore these questions, French academics Emmanuelle Deglaire, Associate Professor & Member of the Legal EDHEC research centre, and Marie-Charlotte Alary, LL.M. EDHEC Business School/EBS Universität, have written the following article for Accountancy Age.
In the first part of this two-part series, Emmanuelle and Marie-Charlotte compare the two national systems, concerns about tax system efficiencies and the political context within which this issue is framed.
A short comparison of the two national initiatives of DST
According to the law promulgated in France, companies providing targeted advertisement services and those operating a platform connecting people will have to pay 3% on the sales generated out of the web activity of internet users based in France tracing them through their IP address. The UK proposal prefers a 2% rate.
The French tax only focuses on two types of services: the intermediation services and the services around digital targeted advertisements, while the proposed EU directive was also including the companies selling data. The sale of user data is included to a lesser extent in the French tax since it only covers the sale of data for advertising purposes. Conversely, the UK proposal has a broader scope since it also directly targets the search engine.
In France, the taxable basis corresponds to a theoretical amount of sales allocated to France obtained through a ratio between the number of French users (or transactions) on the number of worldwide users (or transactions) multiplied by the worldwide sales. Depending on the nature of the platform, the number of users’ accounts opened in France or the number of transactions realised in France will be taken as an indicator of the volume of business made on the French territory that generates the tax.
The economic accuracy of this simple apportionment formula has widely been challenged in the literature. In the UK tax, no such formula can be found. The tax is triggered by the direct or indirect action of a ‘UK user’. The notion of ‘UK user’ is extensively defined in the bill: the user can both have a passive attitude such as viewing an advertisement or a more active one such as clicking on it. If the UK tax is exempted from any critics about approximation as the French formula is, its practical application still poses some questions such as to know how to allocate the tax where revenues arise simultaneously from UK and non-UK users.
The French tax is to be paid by November 15 when the UK ambition is for 2020.
A common concern about the tax system inefficiency
Global thinking around the taxation of digital services is at the heart of today’s political and economic debates. In 2010, France launched its first digital tax initiative: a 1% tax on any advertisement displayed on the internet, this proposal being shortly ended for technical reasons. As far as 2012, the UK also adopted a proactive behaviour.
A Committee of MPs’ headed by Margaret Hodge initiated an important investigation on tax avoidance. They interviewed giant companies famous for not paying taxes to question their tax practice and shared those interviews with UK citizens on public social media. In the UK still, journalists also investigated the importance of the tax avoidance strategy and shared their findings, which led to some massive boycotts. In parallel, in 2013, France was issuing a report on the taxation of the digital economy written by Collin and Colin.
English version of the Collin and Colin report (PDF download).
Both the UK and France have been proactive on the inefficiency of the taxation of the digital economy, ending with Google paying $130 million pounds to the UK in 2016 and one billion euros to France in September 2019. The French and the UK DST show that the two states are still going in the same direction. Understanding details of the French DST, and the many questions it raises, is particularly interesting at the moment, when the UK DST is currently being designed. For an even better understanding, it is important to point out that France and UK’s initiatives are not isolated.
The current and past international emulation around the taxation of the digital economy
The reflexion around the taxation of digital services has been initiated by the world financial crisis of 2008 when the States’ budgets were at stake. It has turned into a long and slow international awareness of the tax incidence of the digitalisation of the economy. In 2012 the OECD initiated the Base Erosion and Profits Shifting project (‘BEPS’), a collective brainstorming to renew the well-established rules of international taxation. Its Action 1 specifically targets the challenges of the taxation of the digital economy.
By the end of this year, the OECD is expected to deliver a global and efficient solution to tax the profits generated by global digital companies.
According to recently released information, the main idea is to implement the transfer pricing philosophy even when a permanent establishment is not qualified to allocate a share of taxable profit to the market territory. The unified approach of Pillar 1 suggests introducing a split formula to distinguish routine or standard profits that would be attributed to the state of operation and the non-routine or residual profits that would be attributed to the market state. Pillar 2 should be discussed just after and envisions the introduction of a global minimum tax.
Alongside this international initiative, some countries have also acted on a unilateral basis. This is the case of India that introduced a 6% equalisation levy in 2016. And several other EU States such as Italy, Austria or the Czech Republic are also in the process of implementing a digital service tax on their territory.
A fragmented European context
Indeed, those EU members States got their inspiration from the proposal for a directive issued by the EU Council last year. On March 21, 2018, the EU actually presented two proposals: The Directive 2018/0072 was ambitioning to adapt the territoriality of the corporate tax by introducing the concept of ‘significant digital presence’, when the old criteria of the permanent establishment is referring to a time of brick and mortar businesses. Aside from this deep changing proposal, a proposal for a directive 2018/0073 suggesting a digital service tax focussing on the turnover generated by the delivery of certain digital services: the former targeting the taxation of profit, the latter taxing sales.
This is this former proposal that France and the UK are now implementing on their own. Indeed, the EU directives’ proposals are pending since the end of 2018 to leave the floor for a more global solution to be adopted at the OECD level. This suspension has precisely shed light on this profound divergence between EU member states and the tension existing between jurisdictions where digital services are consumed and jurisdictions that are hosting digital giants thanks to tax incentives.
The UK or France can be seen as consumption markets while Ireland or the Netherlands are more likely to attract digital companies. This perfectly illustrates the debate taking place at a worldwide scale between market and residence countries around profit allocation. This has left the EU members states split into two different teams: the impatient ones pushing for a tax on digital services on a unilateral basis, and the other ones wishing for changes to be as slow as possible. In between, an interesting case: Germany.
The complex political context
France and Germany have headed the EU DST proposal of March 2018. Due to the Brexit procedure, the UK stayed out of it. But things changed in fall 2018 when Donald Trump publicly declared that French wines and German cars sold on the US territory would have to be impacted the way American companies would be by an EU DST. In front of the US pressure and the fear of its car manufacturers, Germany eventually demonstrated some reluctance. France decided to implement the tax on a unilateral basis and faces its fate.
The UK shared with France a certain kind of sensitiveness towards tax unfairness, but in a process of isolation from the EU, will it be a good idea to arouse Trump‘s wrath?
Indeed, taxing digital companies is synonymous with taxing American businesses: the majority of the taxpayers of the French tax will be American companies. The US have already launched their own investigation under Section 301 of the Trade Act 1974 considering that it breaches international trade agreements and could justify tariff retaliation.
