15 Jan 2019
French Minister Announces Implementation of a Digital Services Tax
Towards the end of 2018, Bruno Le Maire, the French Minister for the Economy and Finance, announced that France would be implementing a national digital services tax (“DST”) as of 1 January 2019, to the extent that it would apply to all income generated in the year 2019. This national tax was due to be voted upon in the French Parliament at the beginning of January. It comes amid the persisting disagreement among EU finance ministers on an EU-wide taxation scheme proposed by the European Commission.
Hong Kong traders may recall that on 21 March 2018, the European Commission presented its proposal for two Council Directives aimed at ensuring that digital business activities are taxed in a fair and growth-friendly way in the EU. In essence, the Commission proposed a 3% tax on revenues of large internet companies with global revenues above €750 million a year, and taxable EU revenue above €50 million. The Commission also proposed to set new rules defining “significant digital presence” to enable the Member States to tax profits made in their territory, even if a company does not have any physical presence there. Designed to apply to companies such as Google, Apple, Facebook, and Amazon (the so-called “GAFAs”), the tax - according to estimates - would, if implemented, generate yearly revenues of up to 5 billion euros at EU level.
The Commission’s proposal has been supported by the European Parliament, which recently called upon the Commission to strengthen its proposal by increasing the tax rate to 5% and lowering the taxable EU revenue threshold to €40 million. However, it must be emphasised that, when it comes to the adoption of rules on taxation issues, only the Council of Ministers (comprising ministers from all the Member States) – acting unanimously - has a binding say. Despite efforts from the Council’s Presidency, and coordination between the French and German governments to put forward a compromise proposal, there has not yet been any agreement among ministers. To the contrary, it has been reported that within the Council, the Czech Republic, Denmark, Finland, Greece, Ireland, Luxembourg and Sweden are actively opposing the Commission’s proposal.
Beyond officially asserting that they are working towards achieving a consensus within the Council, some EU Member States have already announced that they will implement their own DST schemes. Since December 2018, France has added its name to the growing list of such Member States that already includes Spain and the UK. However, there is little coordination between these countries. For example, the UK is working on a national DST rate of 2%, while France has already announced it will apply a rate of 3% and go further than the plans currently debated in the Council by extending the scope of the tax to advertising revenues, platforms, and the resale of personal data. Thus, from this point onwards, the fragmentation of the Single Market on this important matter seems unavoidable. This will most probably lead to legal uncertainties and deprive national DST schemes of their efficiency; especially so if the Member States where most of the GAFAs have their European seat (e.g., Ireland or Luxembourg) do not implement any DST.
The announcement made by Bruno Le Maire in December last year does not clarify any of the above issues. On the contrary, it raises a lot of questions. First, there is a question on the legal instrument to be used under French Law to implement such a tax. The Minister has stated that one of the options he is seriously considering is to introduce an amendment in a Bill (known as PACTE) currently under discussion in the Senate. This Bill is set to be debated in the (opposition-controlled) Senate during January without further information being available.
Second, a Law must be agreed under the same terms by the French National Assembly (the lower chamber of the French Parliament) and the Senate (the upper chamber) during the two first readings; otherwise and to simplify, the French National Assembly’s vote is ultimately dominant.
This process takes time, and it is rather optimistic that such Law/Amendment will be agreed by both chambers in January. Third and lastly, the date of entry into force of the DST was announced to be “1 January 2019”. However, this date, which has already past, is prior to the entry into force of the Law establishing the DST. The Minister seems to argue this shouldn’t be a problem because the DST will be calculated on all income generated in 2019 and paid after the entry into force of the Law. Nonetheless, it is unsure whether constitutionally the DST could apply retroactively, i.e., for the period between 1 January 2019 and the date of entry into force of the Law.
To conclude, beyond the political announcement made by the Minister, it is still unsure what a French DST would in practice look like. We may even consider whether it wasn’t opportunistic for the Minister to make such an announcement in the middle of France’s disruptive “yellow vest” crisis, which is rooted in the contestation of high and unfair taxes.