France halted collection of the tax earlier this year after backlash from the U.S. government and threats of increased trade tariffs by the Trump administration. The matter went to the Organization for Economic Cooperation and Development. No deal was reached. In July, Treasury Secretary Steve Mnuchin requested that the negotiations be delayed during the novel coronavirus pandemic, but European officials interpreted that as a stalling tactic designed to blow up whatever agreements had been reached so far. Donald Trump’s administration then nuked the talks. French tax authorities had set a deadline of December for the tax to go into effect if negotiations proved fruitless.
At issue is the current global tax system, where companies usually only pay taxes in the countries they book profits. This is particularly contentious when it comes to tech, an industry ripe with tax avoidance and where it is easy for companies to route profits generated in one tax jurisdiction through tax havens like Ireland. The 3% tax applies to all digital services, but is clearly targeted mainly at tech giants, as it applies to companies with revenue of 25 million Euros (about $29.8 million) within France and 750 million Euros (about $894 million) worldwide. According to Reuters, ministers hoped that the tax would score around 500 million Euros (about $596 million) this year.
“Companies subject to the tax have received their notice to pay the 2020 installment,” the French finance ministry told Reuters in a statement.
French Finance Minister Bruno Le Maire told Bloomberg on Monday that he hoped Joe Biden’s inbound administration would move quickly to reach an agreement averting a prolonged trade standoff, as U.S. retaliatory tariffs are set to activate in January. The tariffs, set by the Trump administration in an effort to scare France into backing down, would be set at 25% on $1.3 billion in French goods including cosmetics, soap, and handbags, but not cheese, wine, or cookware. (Trump had previously threatened to impose 100% tariffs on $2.4 billion dollars in French goods, but backed down after U.S. businesses protested that the administration did not understand this would hurt them far more than France.)
“We will not spare our efforts to convince the new Biden administration to join the consensus which is currently the case in the OECD on global digital taxation,” Le Maire told Bloomberg.
Per CNN, that could put the Biden administration in a tough position, as opposition to the tax in the U.S. wasn’t limited to Trump—Democrats were sour on the prospect as well, seeing the digital service taxes as an attack on the U.S. tech industry as well as a way to siphon U.S. tax dollars overseas. However, an OECD agreement applying to digital service taxes and other multinationals could also allow the U.S. to make up for the shortfall by taxing foreign companies doing business stateside. If a deal isn’t reached, France may propose a European Union-wide digital services tax in early 2021.
“Democrats have been as opposed to the digital services taxes as Republicans,” former U.S. Treasury Department official Brian Jenn told Bloomberg in February 2020. “While very few Democrats are a fan of tariffs, it looks like the tariff approach at least bought a temporary victory in the case of France.”
“Everybody has been leaning pretty hard on the OECD process and saying we need agreement,” Cathy Schultz, the vice-president for tax policy at the National Foreign Trade Council in Washington, told the Financial Times. “But if we don’t reach an agreement, these things are just going to run rampant and we’re going to have more of the trade war.”
Other countries are preparing to roll out their own equivalents, such as the UK, which plans to start collecting a digital services tax in April 2021. According to the Times, this summer U.S. trade representative Robert Lighthizer announced “probes into a number of countries that are adopting digital services taxes including the UK, Italy, Austria, Brazil, Indonesia and the [European Union],” which could trigger more retaliatory tariffs before Trump leaves office.
French officials have threatened that any retaliatory U.S. tariffs would not be well received.
“Trade sanctions threats are not acceptable, and the EU would react swiftly and decisively in case they were to materialize,” a spokeswoman for the tax ministry told Bloomberg last week.