France passes digital services tax despite US opposition

The 1974 US Trade Act gives the department broad authority to investigate and respond to the "unfair trade practices" of another country, including by imposing additional tariffs on imports from that country.

In a statement, the USTR said that the services covered by the proposed tax are "ones where US firms are global leaders".

"The structure of the proposed new tax as well as statements by officials suggest that France is unfairly targeting the tax at certain US-based technology companies," the department said.

France intends to introduce a 3% tax on revenues deemed to have been generated in France by digital companies, wherever they are established, which make annual supplies of taxable services of more than €25 million in France and €750m worldwide. The tax, which was announced in December last year, will be backdated to 1 January 2019 with the first payment due in October 2019.

"In implementing this tax the French government is trying to adapt the tax system to the evolution of the economy, but this should be done in concert with other countries, rather than unilaterally, said Valérie Farez, an expert on French tax law at Pinsent Masons, the law firm behind Out-Law. 

"France is being criticised because this tax mainly covers foreign tech companies and could be seen as a way of protecting its domestic tech companies," Farez said.

The tax will be applied to advertising revenues from services that rely on data collected from internet users, revenues from the provision of a linking service between internet users and the sale of user data for advertising purposes. However, online sales and the digital provision of digital content for buying or selling would be expressly excluded from the tax.

The European Commission published plans for an interim digital tax last year, with the intention that it would apply until comprehensive changes could be made to the corporate tax framework at a global level. However, member states including Ireland, Luxembourg and the Nordic countries objected to the proposals as drafted, preventing the Commission from moving forward.

The Organisation for Economic Cooperation and Development (OECD), which coordinates global tax policy, has said that it will try to come up with an agreed approach to taxing the digital economy by 2020, following the publication of its interim report on the tax challenges arising from digitalisation in March 2018. In its statement, the USTR said that it would "continue its efforts with other countries at the OECD to reach a multilateral agreement" on the tax challenges posed by the digital economy.

The UK has also confirmed this week that it is going ahead with a digital services tax from April 2020. Its proposal is for a 2% tax on advertising revenue, commissions generated by digital marketplaces and social media advertising which is linked to the participation of UK users, where that revenue is above certain thresholds to be set at a level designed to exclude small businesses from the scope of the tax. Austria, Spain and Italy are also investigating their own taxes on digital revenue.

"The UK tax looks to be wider than the taxes proposed by France and Italy," said Eglantine Lioret, another expert on French tax law at Pinsent Masons. "It is clear that digital taxes are spreading quickly among European countries. The question is no longer how to stop these taxes but how to anticipate any negative impact for businesses."