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France Releases Framework of Proposed Tax on Digital Companies

Robert Sledz  

Robert Sledz  

On March 6, 2019, following several announcements over the past three months on a proposed digital services tax (DST), the French Minister of Economy and Finance, Bruno Le Maire, released the framework of a proposed DST (the “Bill on the Taxation of Large Digital Companies”). Even though Mr. Le Marie recently floated a five percent DST, the framework contains a three percent rate, which would apply – retroactively from January 1, 2019 – to multinationals whose annual global revenue is at least €750 million, and €25 million or more in France each year, until a global solution is reached by the OECD.

Despite its joint proposal with Germany during the monthly ECOFIN meeting on December 4, 2018 to water down the DST proposed by the European Commission (EC) on March 21, 2018 to cover only online advertising revenues, the March 6th French framework would target all of the EC’s proposed activities:

  • The sale of online advertising space.
  • Online intermediary services.
  • Transfers of user-related data gathered from digital platforms.

During his March 6th press conference on the French framework, Mr. Le Maire said that he intends to seek a joint position with other EU finance ministers during the March 12, 2019 ECOFIN meeting on taxing digital companies.

Editor’s Note: The ECOFIN contains economics and finance ministers from all 28 EU members states, which meets several times a year, as needed, to discuss EU tax policy.

The following activities would be excluded from the French tax:

  • The direct sale of goods and services, including digital content.
  • Messaging or payment services.
  • Advertising services, for which advertising messages are determined solely based on the content of the website and are the same for all online users.
  • The sale of data that is not collected online, or that is collected for non-advertising purposes.
  • Regulated financial services.

The French framework expects the new tax to generate €500 million each year in tax revenue, which would be “… declared and paid on the same terms as the [French] VAT…” each April. Companies subject to French corporate income tax could deduct the new tax from their corporate tax base.

OECD Proposals

On February 13, 2019, the OECD released a highly-anticipated consultation document on several proposals to better address the tax challenges of the digitalization of the economy. The purpose of the consultation is for members of the Task Force on the Digital Economy (TFDE) to obtain feedback from the public, which had to be submitted in writing (Word format) to the OECD by March 6, 2019. The TFDE will then hold a public hearing on the consultation proposals on March 13-14th at the OECD headquarters in Paris.

The consultation document reflects – at a high level – the work done by the TFDE since early 2017, and reflects several proposals revolving around two pillars: (1) the need for revised profit allocation and nexus rules; and (2) global anti-base erosion rules. The second pillar involves a global anti base erosion proposal which is modelled off the U.S. global intangible low tax income (GILTI) and base erosion anti-abuse tax (BEAT) rules, an approach favored by France and Germany based on recent EU digital tax negotiations.

The second pillar would include two related rules: an income inclusion rule; and a tax on base eroding payments. The income inclusion rule would tax income of a foreign branch or controlled entity, when it is subject to a low effective tax rate. According to paragraph 96 of the OECD consultation document, the income inclusion rule “would supplement rather than replace a jurisdiction’s [controlled foreign company] rules,” as with the U.S. GILTI rules. The tax on base eroding payments would protect source jurisdictions from the risk of such payments. This would be broken down into two rules: an (1) undertaxed payments rule to deny deductions for payments to related parties; and a (2) subject to tax rule to deny tax treaty benefits when the applicable income is not sufficiently taxed in the other treaty jurisdiction. (Para. 101 of consultation)

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