- Why did France unilaterally adopt this tax?
- Which companies are concerned?
- Which services will the tax apply to?
- The way the tax is levied
- What is the relationship between this tax and the corporate tax?
- How will this tax affect consumers?
- Potential impact and flaws of the legislation
- The defense strategies against the tax
Are you the CEO of a large digital company? Tax advisor for a GAFA? CFO? Do you fear the application of this new tax? Do you wonder how to avoid its major consequences? In order to better understand the impact of this tax on your business, it is advisable to be guided by Picovschi Lawyers, a firm composed of experienced tax lawyers for 30 years.
After numerous negotiation failures at the international level, France passed, in July 2019, the law on the taxation of large digital companies.
Why did France unilaterally adopt this tax?
The French government has long challenged the fiscal imbalance between large digital companies and others.
On average, a company located in the European Union is taxed at 23.2% while digital companies in the European Union are taxed at 9.5%. Inequality between companies was also observed as large digital companies developed without any contribution to the public services they use.
Large digital companies contribute 14 tax points less than European SMEs seeing that they practice tax optimization.
The purpose of this law is to restore equality between large digital companies and other companies.
Which companies are concerned?
In order for a digital company to be subject to this tax, two cumulative turnover thresholds must exceed:
• €750 million in global digital sales
• 25 million euros of digital sales nationwide
Approximately 30 companies are planned to be affected by this tax including Google, Amazon, Facebook, Apple, Meetic, Airbnb, Instagram. A return of 500 million euros is expected by the French government.
Nevertheless, this tax is temporary pending a uniform solution from the Organization for Economic Cooperation and Development (OECD).
Which services will the tax apply to?
The Act covers three types of digital services:
• Online advertising
• The intermediation that results in the connection of Internet users by digital platforms
• Selling data from online users for advertising purposes.
The direct sale of goods and services, courier services or payment services will not be covered by this tax.
The way the tax is levied
The 3% rate will be applied on revenues from services targeted by the tax that may be linked to the French territory. Regardless of the means of invoicing, the nature, and the location of the debtor and the service provider, the tax will be imposed on all revenues referred to above.
The tax will be declared and paid in the same way as VAT, subject to certain specific conditions.
The tax statement will be submitted annually at the end of April. It may be paid by two instalments each for half of the amount payable. This tax will be imposed on the previous year’s turnover.
To begin, at the end of April of the previous year, the first instalment will be paid, then the second instalment will take place at the end of October of that year. The tax takes effect in 2019, which means that the tax will be paid exceptionally in the first year, at the end of October 2019, in a single instalment.
The tax will apply retroactively at the end of October 2019. The 3% tax on digital turnover in France will be collected and controlled by the French Center for Public Finance “la direction générale des finances publiques” (DGFIP).
What is the relationship between this tax and the corporate tax?
Companies subject to this tax and liable for the corporate tax in France will be able to deduct the amount of the tax from the corporate tax base.
How will this tax affect consumers?
Consumers will normally not be charged any fees to be paid directly. However, some GAFA are considering raising the prices of their servers, which would mean that the tax would be paid in part by consumers. It is estimated that 55% of the cost of the tax will be paid by consumers. Amazon was the first, as soon as the law came into effect, to increase the prices charged to sellers located in France.
Potential impact and flaws of the legislation
The tax has spread a sense of confusion to affected taxpayers. The tax enactment is flawed:
- The provisions of the law relating to the calculation and the scope of the tax base are unclear. Therefore, in order to provide greater legal certainty for taxpayers, an additional text is needed to better inform the GAFA.
- The legislation also poses difficulties for these large digital companies, in obtaining the necessary data on the number of French users. This will lead to relatively costly discussions between taxpayers and the French tax authorities.
- This tax can potentially jeopardize the future investments of the GAFA and their development projects in France. A tax with such a high level of consequences and ambiguities runs counter to the legal certainty that these economic operators should benefit from.
- The retroactivity of the law, due to the 2019 turnover taxation, is prohibited under the American constitution. The text is therefore discriminatory against American businesses. The territoriality of the tax arouses many objections from the GAFA.
- Double taxation is another problem resulting from this tax. Tax treaties prevent foreign companies, without a physical presence in France, from being taxed in France on profits received. That is why this tax is aimed at taxing turnover, not profits.
- The ambiguity of the text will also result in high administrative expenses for large digital companies that have difficulty applying the text.
Therefore, when a company liable to pay the tax has not made any profit in the tax year, it will still be taxed on its turnover. This could be harmful to its economic situation.
The tax rate was also debated. The tax was originally meant to be progressive between 3 and 5%, and finally for the sake of legal certainty the rate of the tax was fixed at 3%.
The location of the company’s registered office shall not affect its taxation. Regardless of its registered office’s location, the company will be liable for this tax on the turnover of services provided in France in the same way companies located in France are.
The defense strategies against the tax
The large digital companies, along with the Computer and Communications Industry Association, a very powerful lobby in Brussels, have begun to challenge this tax. Thus, the assistance of an experienced international tax lawyer will be helpful for companies affected by this tax.
The French Association of Private Enterprises (AFEP), the lobby of large companies, denounced the tax as being illegal and in violation of tax treaties.
The Association of Community Internet Services (ASIC) has submitted a request to Emmanuel Macron and Edouard Philippe to seize the Constitutional Council to examine the tax.
The tax may also be challenged before the Court of Justice of the European Union because it constitutes an obstacle to the freedom of establishment and/or the freedom to provide services within the EU.
To improve your understanding of the stakes of this new tax on your company do not hesitate to call upon Picovschi Lawyers, located in the 17th arrondissement in Paris. Its attorneys have been accompanying companies for 30 years for all their legal tax needs.