France to resume collection of digital tax

France's tax became law in July 2019, despite opposition from the US, which claimed the tax unfairly targets US companies.

The 3% digital services tax applies to 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 applies 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 are expressly excluded from the tax.

French tax expert Valérie Farez of Pinsent Masons, the law firm behind Out-Law, said: "France's 2021 Finance Bill, under discussion in the French parliament, is designed to prepare for economic recovery after the coronavirus pandemic without raising the tax burden for those in economic difficulties".

"The digital tax is expected to contribute at least €350m to the French budget and the French government feels it is legitimate to maintain a tax for digital businesses, which it believes are not suffering as a result of the pandemic," she said.

Last year the US investigated France's introduction of a digital services tax and threatened to impose 100% tariffs on champagne and a number of French luxury goods. France agreed to suspend collection of its digital tax until the end of this year, in return for the US not increasing tariffs and continuing to engage with the Organisation for Economic Cooperation and Development (OECD).

In February 2020, the French tax administration confirmed that companies liable for digital tax could postpone to December 2020 the payment of the instalments due in April and October 2020. These two instalments correspond to the amount of digital tax due in 2019. The final 2020 amount due will be paid in 2021.

The OECD was asked by the G20 to come up with proposals for addressing the tax challenges of the digitalisation of the economy by the end of this year. In June the US paused its involvement in the OECD discussions, with US Treasury secretary Steven Mnuchin warning that discussions had reached an "impasse" and saying the US was unable to agree even on an interim basis on changes to the international tax system.

In October the OECD published detailed proposals for reform, but said that international agreement on the way forward is not now expected until the middle of 2021.

Meanwhile EU Commission President Ursula von der Leyen has confirmed that should no agreement be reached on digital taxation at the OECD by the deadline of mid-2021, the EU will introduce its own digital tax. The EU Commission had proposed an EU wide digital tax in 2018 but this was opposed by countries such as Ireland, Luxembourg and the Nordic countries, who feared it would lead to a reduction in their revenues. EU finance ministers agreed in March 2019 to concentrate on the OECD's project and to leave the EU proposal in reserve should the OECD not manage to secure timely international agreement.

French tax expert Eglantine Lioret of Pinsent Masons said: “By enforcing the collection of the French digital tax despite US threats to retaliate by surtaxing French imported goods, the French government is putting pressure on the EU Commission and the OECD to reach agreement quickly on an international digital tax".

The delay in reaching agreement has meant that a number of countries have introduced or are introducing digital services taxes on the revenue of digital companies. These include the UK, Spain, Italy and Austria. The UK's tax is in force and is due to be collected from April 2021.

"Big digital companies want the certainty of an internationally agreed set of rules, rather than a host of unilateral measures which are likely to result in double taxation," Eglantine Lioret said.

"The major players in the digital economy will undoubtedly test whether the French digital tax complies with international tax treaties and EU law," said Valérie Farez.

"However, two decisions of the Court of Justice of the European Union published in March mean that it will be tricky to challenge the compliance of the digital tax with EU Law," Farez said

The cases, which involved Hungarian companies in the Vodafone and Tesco groups, decided that special taxes levied in Hungary on the turnover of telecommunications operators and retailers were compatible with EU law even though the taxes were mainly borne by foreign owned companies, because these companies had the highest turnover in the Hungarian markets concerned.