December 3, 2019 / 1:02 PM / 3 days ago

Explainer: Macron's quest for an international tax on digital services

PARIS (Reuters) - The United States has threatened punitive duties of up to 100% on $2.4 billion in imports from France of champagne, handbags, cheese and other products, after concluding that France’s new digital services tax would harm U.S. technology companies.

FILE PHOTO: French President Emmanuel Macron is pictured through a piece of cheese as he attends the annual May Day ceremony during which French food products are displayed at the Elysee Palace, in Paris, France, May 1, 2019. Christophe Ena/Pool via REUTERS/File Photo

French President Emmanuel Macron pressed ahead with the digital tax in the summer, defying U.S. anger at a levy Washington says unfairly targets American companies.

The French leader is keen to reach an international agreement on taxing big tech companies and has urged the Trump administration to help reform global corporate taxes.

Here is a guide to the digital tax debate.

WHAT IS A DIGITAL TAX?

The governments of a growing number of countries have been vexed by their inability to tax profits of multinational tech companies that they believe are derived in their jurisdictions.

Internet giants such as Facebook (FB.O), Alphabet Inc.’s Google (GOOGL.O) and Amazon (AMZN.O) are currently able to book profits in low-tax countries like Ireland and Luxembourg, no matter where the revenue originates.

Macron says taxing big tech more is a matter of social justice.

The French leader pushed hard for a digital tax to cover European Union member states, but ran up against resistance from Ireland, Denmark, Sweden and Finland.

WHAT HAS FRANCE DONE?

After talks on an EU digital tax foundered, Macron’s government imposed its own unilateral tax in July. It applied retroactively to Jan. 1, 2019.

The 3% levy applies to revenue from digital services earned by firms with more than 25 million euros in revenue from France and 750 million euros ($826.65 million) worldwide.

Paris is not alone among European capitals in proposing a tax on big tech. Britain, Spain, Italy, Austria, Mexico and Canada have also announced plans for their own digital levies.

WHAT DOES MACRON WANT TO ACHIEVE?

Macron’s goal is to secure a broader agreement on digital taxation under the auspices of the Organisation for Economic Cooperation and Development (OECD).

At a G20 meeting in June, finance ministers agreed to compile common rules to close tax loopholes and promised to “redouble efforts” for a consensus-based solution to be found by 2020.

The following month, G7 finance ministers agreed there should be a minimum level of tax to discourage countries from competing in a “race to the bottom”.

Washington originally pushed for the new international tax system to cover a wide range of companies but officials say it has got cold feet in recent months after being lobbied by traditional companies that realized they would be hit too.

WHAT OBSTACLES LIE IN THE WAY?

Trump. The U.S. president has already lambasted Macron’s “foolishness” for pursuing a French digital levy.

Digital taxation has opened up a new front in the trade spat between Washington and the EU as economic relations between the two appear to sour.

FILE PHOTO: A cheesemonger removes cheese at Beaufils affineur in Paris as France celebrates national Fromage day to protect real raw milk cheese, France, March 27, 2019. REUTERS/Charles Platiau/File Photo

French Finance Minister Bruno Le Maire says Paris would drop the French digital tax as soon as an agreement is found at the OECD to overhaul decades-old international tax rules.

“If the U.S. do the same, then it’s the end of the issue,” Le Maire said on Tuesday.

Low-tax jurisdictions also have misgivings about Macron’s tax plan because it would make it harder for them to attract foreign direct investment with the promise of ultra-low corporate taxes.

Reporting by Richard Lough; Editing by Leigh Thomas and Catherine Evans

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