The Row over France’s Digital Tax Signals a New Chapter in US-EU Trade Bargaining

The introduction of a revenue-based tax on digital giants by the French government has sparked condemnation on the part of the U.S. administration, and threats of trade retaliation, starting with an official investigation. European divisions had already led to the abandonment of an EU-wide digital tax. While EU-US tensions had so far centred on German exports, how will this new episode affect the political dynamic in Europe on trade issues? An interview with Rémi Bourgeot, economist and associate fellow at IRIS.

While the US administration threatens to retaliate against countries that would put in place a digital tax harmful to its tech giants, Donald Trump seems to also have in mind trade negotiations with the EU in general and a reform of international taxation. Is the procedure against France’s digital tax part of that broader strategy?

So far, US trade tensions with the EU had centred on Germany’s car exports and its trade surplus in general. Against this background, Donald Trump has also accused the ECB of excessively weakening the euro’s exchange rate, through its unconventional policies. Although the digital tax appeared to be a minor topic in EU-US relations compared with the dispute over the euro’s exchange rate and the trade surplus, the US administration has nevertheless been critical of European plans to implement a digital tax on revenue since the debate was initiated among EU member states.

While those vocally opposing the digital tax in Europe were mostly smaller northern member states, the US stance seemed to find a particular echo in Berlin, where the government, despite adhering to a plan devised with France, showed caution in order to avoid escalating trade tensions with the Trump administration over car exports. Since EU-wide plans for a digital tax have been ditched, it is not surprising to see Donald Trump oppose similar plans at the national level, notably in France.

Until last year, whenever the US president criticized Germany for its trade surplus, French ministers were among the first to reply and rebuke the accusations. Meanwhile, Franco-German relations entered a delicate phase when it became clearer that French-led plans for a deeper integration of the Eurozone were being rejected by Berlin. A show of European cohesion against Donald Trump’s attacks on France’s digital tax is therefore unlikely. Similarly, Emmanuel Macron’s government will probably be less inclined in the coming months to defend Germany’s trade surplus. Europe’s increased divisions could give the US administration more room to try and accelerate trade talks with the EU, the idea of which Emmanuel Macron however rejected three months ago, arguing that the US would first have to re-join the Paris climate accord.

The digital tax, whether at the EU or national level, has been criticized as it targets revenues rather than profits and raises issues of double taxation. Although it has turned into a political symbol, it was designed as a mere intermediate step until a broader and more sustainable deal is reached in order to reform international taxation. While the introduction of a digital tax by various governments is intended as a levy in these talks, Donald Trump’s attacks are similarly meant to neutralize this possible advantage, having in mind negotiations both on trade and taxation.

His administration has shown some willingness to open a negotiation on international taxation which promises to focus, at least initially, on US companies like Amazon. While tackling the French and European projects to tax digital revenues, Donald Trump however often appears critical of digital giants in the US.  The strategy seems to consist in accepting the principle of these negotiations in order to quickly extend their scope beyond the issue of the digital economy, arguing that the borders between economic sectors are now very porous, and thus to engage in a much broader bargaining, on the taxation of international economic exchanges in general.

Talks on taxation and trade are therefore closely related. The US administration has raised the idea, in order to indirectly take into account the commercial activities of international companies in a given country, of developing a tax dependent on marketing expenditure for that country. This idea evokes more a transitional mechanism, like digital taxes introduced elsewhere, than a long-term model at the global level. From a European perspective, while this approach naturally frustrates major exporting countries such as Germany, targeting marketing spending could also be problematic for other countries and sectors, particularly for French and Italian luxury goods.

The OECD, which has a clear authority in the study of tax evasion, has succeeded in involving a very large number of countries in the process of initiating negotiations on international taxation. However, it is necessary to appreciate the complexity of the negotiations on this issue, especially since it is coupled with trade. While governments finally share a common will to preserve their tax base, with sometimes similar concerns, the very definition of the scope of the negotiation is still far from being resolved.

The EU had previously suspended the project for a European digital tax, leading instead to a series of national initiatives. How much divided are EU member States on this issue?

Four northern European countries (Denmark, Sweden, Finland, Ireland) expressed their strong opposition to the proposed European tax on the turnover of large companies in the digital sector. On the other hand, a majority of member states, the largest ones in particular, supported this tax. However, they were less united than at first sight, which made it all the more difficult to achieve the unanimity required in fiscal matters. The tax plan that was rejected in March was already a reduced version of the scheme that had already been discussed at the end of last year. Despite retaining the 3% rate, this version excluded from the tax base revenues from data sale and platform fees and focused on advertising revenues alone.

The four countries opposed to the digital tax have a small domestic market and are highly dependent on exports or international revenues more generally, which, under the current system, overshadow the very limited revenues that the European digital tax would have offered them. Sweden also sought to defend the success of its national digital companies, based on the model of music streaming companies like Spotify, while pointing to the general risk of double taxation. As for Ireland, it was a matter of preserving its model consisting in hosting the European headquarters of large international groups by means of a low corporate tax rate, which encourages companies to declare a significant portion of their profits in Ireland rather than in the European countries where the gain is generated.

Several countries such as France, the United Kingdom, but also Italy and Spain have worked on the introduction of a digital tax at the national level. What are the different approaches to this issue?

The European countries which have at some point made preparations for a national digital tax (France, Italy, Spain, United Kingdom, Austria) have considered variants relatively close to what had been discussed at the EU level in the months before the development of what appeared, before its rejection, to be a short-term consensus solution. These governments have considered thresholds similar to those of the European initiative and a broader set of services than advertising revenues alone, including data sales and platform fees in particular. The French government, which intends to make the tax retroactive to the start of the year, expects tax revenues of around 400 million euros this year and just over 600 million by 2021. These estimates, however modest the figures might already be, are often considered overoptimistic.

Governments embarking on this type of taxation naturally seek to engage in a negotiation both with the global companies concerned, and with other governments, against the backdrop of the negotiations that will take place within the OECD framework. A diverse group of countries in the world are following this path, whether the EU member states mentioned above, Australia, New Zealand, India, or Singapore – which indicates the general nature of the concerns behind digital taxation.

The difficulties and then the confirmation of the failure of the intermediate stage in Europe led to a preference for a global negotiation at the OECD rather than a new European initiative. In any case, the ultimate aim is to redefine the distribution of digital-related tax revenues among governments, but according to a model that should probably continue to be based on profits, or at least to take them into account. Despite the idea of trigger thresholds in current digital tax projects, the concept of revenue-based taxation raises fundamental problems that led most governments to set it aside at some point in their economic history. The current tax should therefore be considered as no more than a temporary tool.

On the one hand, digital tax projects have an important political dimension, in that, despite the relatively small amounts at stake at this stage, governments can find an opportunity to send an equalitarian message to the public. On the other hand, policy makers must address a longer-term economic question about fiscal models in a context of upheaval in commercial activities and their geographical anchoring. In this perspective, the digital tax represents the beginning of a more general debate. The current superposition of digital tax plans and the more general ambition to review international tax models in the longer term does, however, create a great deal of confusion.