French Digital Service Tax: A model for Brexiters? Part 2

French Digital Service Tax: A model for Brexiters? Part 2

Emmanuelle Deglaire, Associate Professor & Member of the Legal EDHEC research centre and Marie-Charlotte Alary, LL.M. EDHEC Business School/EBS Universität, look at the French Digital Service Tax, and how it compares to the equivalent system proposed in the UK.

French Digital Service Tax: A model for Brexiters? Part 2

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 second part of this two-part series, Emmanuelle and Marie-Charlotte assess the scope of the tax threshold, whether the DST will be an interim tax, France’s tax creativity and legal framework and the agenda behind the DST.

Read the first part of the article here. 


French senators approved the DST on 11 July 2019.

Scope of the tax threshold and targeted companies: an important political decision

As in the European proposal, the French law has set revenue thresholds above which companies have to pay the tax. Those thresholds are of €750 million revenues realised worldwide and €25 million in France against £25 (around €28) of domestic revenues and £500 (around €580) of worldwide revenues in the UK.

The underlying rationale is that platforms need to reach a certain size to generate the network effects that make them economically viable and profitable over the long run. This is the idea of ‘economic power’ according to which value less derives from single isolated user data than from aggregate data of users. If the concept of ‘economic power’ is perfectly defendable, transposing it into numbers and thresholds is less obvious.

The French tax seeks not to impede smaller digital players. In that respect, the frontier between an objective economic difference justifying a difference of treatment and a measure relying on discriminatory criterion is subtle and fuels political tensions. Indeed, few companies in total will be affected by the tax, very few French companies not even that many European companies.

The majority of the small number of taxpayers will be foreign and namely American companies, raising the idea that the tax is de facto ring-fencing foreign digital businesses. The UK should take care at identifying the thresholds that would make sense from a competition point of view, both between small and giant digitals actors and between UK and American companies.

To be or not to be an interim tax

Imitating the EU directive philosophy, the French government has already announced that the French DST is an interim tax that would disappear as soon as soon as a consensus-based solution level on the taxation of the profits of the digital economy is reached at OECD level. Thus, the legislative efforts seem disproportionate when compared with the declared temporary nature of the tax, while noting that the French law clearly stipulates it. This permits questioning if this tax is really deemed to be temporary… Many examples show that in France the tax meaning of ‘temporary’ is ‘testing period’.

The UK tax does not mention either any sunset clause. Because it is not in place yet, and because the OECD answer is supposed to be given soon, the legislative process will be a waste of the time and money if the tax was to be only temporary. Is the tax thus supposed to be temporary? Is the UK having more ambition than France in forecasting a permanent DST? This is an important point for the UK, whose consequences need to carefully worked out.

French tax creativity under constrained legal framework

The French tax freedom is squeezed into a very tight legal corset that directly impacts the nature of the tax.

First, France has more than 120 double taxation conventions signed with other tax sovereignties all around the world. Should the tax fall under the application scope of the tax conventions, it would have no impact. Some consider that the tax is a new kind of corporate tax precisely because of its interim nature: it has been created as a temporary measure to tackle income that is not falling into the scope of the traditional CIT.

As such the tax would be a tax ‘similar to a corporate tax’ and fall under the application scope of the double tax conventions. The definition of corporate tax in the OECD model convention is indeed purposely very large and designed to include all taxes complementary or potentially substituting the CIT. A tax that is not literally an income tax could thus be considered as such. The overarching goal of this formulation is to avoid double taxation while enabling states to amend and adapt their tax systems along with economic developments.

Flag of the Organisation for Economic Co-operation and Development (or OECD).

One can deplore that the French tax recreates double taxation after decades of reflexion and negotiations of the international community to remove it. According to France, this is not a corporate tax because of two important reasons.

First, it does not take at all into consideration the economic capacity of corporations. This is less true for the UK tax which has introduced a special provision for loss-making or low-margins corporations. Could the UK tax be considered as a kind of corporate tax because of this provision? This would infer that double taxation conventions would apply and limit the DST economic impact. The UK should be cautious about that possible impact.

Second, and probably the most important justification for the French and the UK DST is not to be a kind of corporate tax, that it is calculated not on profits but on sales.

Focusing now on the taxation of sales, France has little power in field of VAT. This taxing power now belongs to the European Union and is strictly framed by the EU directives. Would the tax be considered as a new VAT, and would it fall out of French tax sovereignty? Calculated on sales and not on profit, can the French DST be considered as close to VAT?

The French economic impact report considers the new tax as a sui generis tax different from VAT since it does not rely on the VAT input and output mechanism. As opposed to VAT, the tax’s payers are the companies and not the end-users: the tax is not supposed to be neutral for the taxpayers.

The tax must, however, in common with VAT, measure consumption since it is applicable on sales revenues. This is indeed the activity of users and their consumption of digital services whether they are free or chargeable, which triggers the tax. The tax is thus more comparable to a direct tax that is however not a corporate tax, but a sales tax.

Finally, according to the US, this tax is nothing but a custom duty aiming to protect the local market that contravenes to the Trade agreement signed between the United States of America and the European Union. Indeed, in the field of customs duties, France has no taxing power, this power belonging to the EU.

According to France, this is not a custom duty because it applies to digital services even if provided by a company established in France.  It is thus not a protective measure that would infringe any Trade commitment towards the US, nor fall under the scope of Article 49 of the Treaty of the Functioning of the European Union (TFEU) protecting the freedom of establishment and the right to take up and pursue activities.

The European and international tax frameworks obliged France to express its national tax sovereignty through the design of a tax with hybrid features. It ends up with a sui generis tax, aiming to differentiate from corporate tax, VAT and custom duties: the Digital Service Tax.

The UK is not tied by so many double taxation treaties as France is.  And Brexit can be seen as an opportunity for the UK to reshape its tax system without being hampered by EU constraints. Brexit may be a real technical opportunity for a UK DST, but not for sure a good diplomatic opportunity.

Does Brexit present an opportunity for a DST in the UK?

Diplomatic activism versus economic realism

The French tax appears as an ambitious initiative whose economic efficiency can nevertheless be questioned. The tax is expected to bring less than €200 million to the tax administration according to a report of the French Senate. This modest gross return has to be balanced with the legislative cost of its implementation and the administrative burden engendered by its collection both for states and companies.

It also has to be balanced with the real economic impact of the tax. GAFAs and other giant digital companies are the official target. But their monopolistic situation enables them to raise prices towards their economic partners. This has been recently observed with Amazon charging its merchants with higher fees.

The targeted businesses may not be in the end the ones really bearing the economic cost of the DST that would be shared among small retailers and final consumers. The legal tax payers and the economic tax payers would probably be different, and this would be a real mismatch with the initial ambition of the tax.

Another important cost is the diplomatic one. The relationship between France and the US has indeed been intensively conflictual during the past months. The real diplomatic impact will only be measurable if or when an agreement is reached in the temple of international tax diplomacy: the OECD. 

A symbolic gesture of a tax militant

Taxing digital services has a political essence signalling to the international community the obsolescence of the current tax system and the urgency to find a consensus on the taxation of digital services. In France and in other countries, DST has become the expression of tax sovereignty to demonstrate the states’ proactiveness in adapting to digital transformation.

The French tax is also the expression of a certain entrepreneurship culture of the French Tax Administration. Back in the early 60’s, the VAT system as put in place by France seemed completely revolutionary and even unrealistic.

Today this tax has been adopted in a large number of countries worldwide. The current French version may be imperfect. Time and lawsuits will tell. It may also be a real tax innovation, opening a new tax era. But for now, it is in place and has to be paid by November 15.

The French tax obliges a reflection on the raison d’être of the UK tax. More than raising money for the state, the very first objective of the French government is to introduce more tax fairness. This can be analysed as a political response to digital gigantism more than an economic one. This tax aims to appease the concerns of French citizens and non-digital businesses.

Gilets jaunes (“yellow vests”), anti-government protesters, have called for fair tax on businesses in France.

Doing so, the French Government shows that it is in line with the concerns of the UK parliament in its 2012 search for tax fairness. But in the current period, for sure, the UK Government has bigger fish to fry to please the UK citizens. For sure it is not a good time for the UK government to allocate resources to the implementation of a DST.

If the pioneering character of the French law is surely laudable, the political aspect of this tax should not be under-estimated. And, on that ground, the UK and France are very different: the UK is in a sensitive diplomatic period and an historical political ally and economic partner of the US.

So even if Brexit enables the UK to get its tax liberty back, the DST may not be a good tax idea. The political opportunity may be to let it go by for now, to build up on the best practice of the OECD with regards to the taxation of the profits of the digital economy and, possibly later on, on the French experience on taxation of its generated sales.


Authors Emmanuelle Deglaire (L), Associate Professor & Member of the Legal EDHEC research centre, and Marie-Charlotte Alary, LL.M. EDHEC Business School/EBS Universität.

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