France and UK tax authorities
The UK is among the first to propose a tax on digital services, while France is one of the first countries to implement legislation (with retroactive effect). Other countries have begun to follow France’s lead, including Canada, Italy and Turkey. The 3% French tax targets internet and technology providers that have revenue in excess of €750 million globally and €25 million in France. It specifically targets two types of companies: those that have a platform allowing users to interact with other users (like dating apps, app stores and online marketplaces) and those that provide services for targeted advertising. The portion of revenue connected with France is determined using a digital presence ratio based on the number of French users actively using the service. The focus on gross revenue instead of net profit makes this tax regime particularly unique and distortive. The UK’s law may go into effect in 2020 (depending on Brexit) and has similar provisions (but with a slightly narrower scope and a lower tax rate at 2%).
The Organisation for Economic Co-operation and Development (OECD), operating under a G20 mandate, is leading efforts for an international solution. It aims to reach an agreed plan by the end of 2020 on a new taxing right that’s based on the amount of profit made in the markets where customers or users are. That the OECD’s project has gained the support of G20 nations, including the US, to carry on means that there is policymaker consensus on the view that current rules dating back to the 1920s may no longer be sufficient.
The OECD Secretariat’s proposal released in October 2019 would reallocate some residual profits and taxing rights to countries with large markets. A second proposal seeks a global minimum corporate income tax on profits generated by multinational companies. There is significant complexity in each of the proposals, and in their interaction with each other. Reaching agreement with over 130 economically-diverse countries is always difficult and could stall the OECD’s progress.
The Treasury Department has lent support to the OECD’s digitalization project. Amid concerns that a unilateral tax will fall disproportionately on large US technology and internet firms, Treasury Secretary Steven Mnuchin laid out the US point of view in September 2018, namely that “tax should be based on income, not sales, and should not single out a specific industry for taxation under a different standard.”
In addition to the OECD-led project, negotiations with French officials are currently underway regarding the US response to the digital services tax, and Treasury is conducting listening sessions with US companies and others to gain more perspectives on impacts.