Why Digital Taxes Are the New Trade War Flashpoint

(Bloomberg) -- Big internet companies have long been the target of complaints that they don’t pay enough in taxes. Fed up, France imposed a 3% levy on the digital revenue of companies that make their sales primarily in cyberspace, such as Facebook Inc. and Alphabet Inc.’s Google. Other countries also are targeting companies, many of which are American, that have multinational earnings that often escape the taxman’s grip. The U.S. isn’t taking this sitting down.

1. How does a digital tax work?

The French law imposes the 3% levy on companies with at least 750 million euros ($845 million) in global revenue and digital sales of 25 million euros in France. Of about 30 businesses affected, most are American, but the list also includes Chinese, German, British and even French firms. The idea is to focus taxation where users of online services are located, rather than on where companies base their European headquarters or book their earnings. Targeting revenue rather than profit gets around techniques many companies use to shift their earnings to lower-tax jurisdictions.

2. Who else is imposing a digital tax?

Italy enacted a tax similar to France’s; it took effect on Jan. 1. Turkey’s government has proposed a digital tax of 7.5%. Legislation proposed in the U.K. last July would impose a 2% levy on the revenues of search engines, social media platforms and online marketplaces that “derive value from U.K. users.” Austria, Spain and Belgium are also considering digital levies. Plans being floated would generally emulate the French model by taxing sales of electronic data, online advertising and the services of intermediaries such as Uber Technologies Inc. and Airbnb Inc. that connect users to products.

3. How is the U.S. fighting back?

The U.S. government, saying France’s tax discriminates against American companies, proposed tariffs on roughly $2.4 billion in French products and says it’s exploring whether to open investigations into the digital taxes proposed in Austria, Italy and Turkey. The U.S. is relying on Section 301 of the U.S. Trade Act of 1974 -- the same tool President Donald Trump used to impose tariffs on Chinese goods due to alleged theft of intellectual property. France says the European Union will retaliate against any U.S. sanctions.

4. Could this be amicably resolved?

France’s finance minister, Bruno Le Maire, said on Jan. 7 that he and U.S. Treasury Secretary Steven Mnuchin had resolved “to try to find a compromise.” France had said it would drop its tax if the U.S. and others agree to a global effort for a uniform approach under the stewardship of the Paris-based Organization for Economic Cooperation and Development. Long before adopting its digital tax, France had pushed for a European Union-wide digital levy that was scrapped when four countries -- Sweden, Finland, Denmark and Ireland -- declined to sign off on it. Resolving the dispute without escalating trade tensions is a goal of Phil Hogan, the EU’s new trade commissioner.

5. What’s the case for a digital tax?

Because they’re often domiciled in other countries -- including low-tax jurisdictions such as Ireland or Bermuda -- and shift money seamlessly across borders, companies that sell online can easily avoid paying taxes in countries where they nevertheless make significant sales. More fundamentally, France argues that the structure of the global economy has shifted to one based on data, rendering 20th century tax systems archaic. According to 2018 figures from the European Commission, global tech companies pay a 9.5% average tax rate compared with 23.2% for traditional firms.

6. Why tax revenue instead of profit?

The short answer is that it’s simpler to tax revenue. Taxing profits requires establishing where earnings actually accrue, which is hard enough for any global company but even more so in the digital sector; you might book a taxi in London, for instance, but your payment could be settled in Amsterdam. Politicians also argue that taxing revenue may be the best way to squeeze money out of companies like Amazon.com Inc. that report large sales but paltry earnings. Still, it’s not straightforward to work out which revenue is linked to a specific country. To do that, French tax collectors propose to tax internet companies proportionally to their “digital presence” in the country relative to the rest of the world.

7. How did this become an issue?

Transatlantic tax wars aren’t new. Apple Inc. was slapped with a 13 billion-euro bill for back taxes by the European Commission three years ago, which Chief Executive Officer Tim Cook called “political crap.” The U.S. Treasury tried and failed to sway the EU’s Apple investigation, which alleged that the company got an illegal subsidy in Ireland due to rules there governing the transfer of sales booked elsewhere in Europe. The Commission has also probed Google’s Irish tax arrangements and ordered Amazon to pay 250 million euros in back taxes to Luxembourg. Other U.S. companies, including non-technology firms such as Starbucks Corp. and Nike Inc., have also been targeted in tax probes. The EU insists that the common thread isn’t that they’re American but that they’ve used complex legal structures and intellectual property licensing to limit their tax payments.

8. How are tech firms responding?

Tax is only part of a bigger EU backlash against big tech. Internet firms have been put on notice over issues ranging from privacy to market dominance -- and they’re fighting back with lobbying and court cases. Google won a legal fight against a $1.2 billion French tax bill in April. Apple and Amazon are contesting their respective European tax decisions in EU courts, and a legal victory could halt that part of the bloc’s crusade. Some companies may be changing their tax structures or moving income outside of the EU to stay ahead of the curve, as some European lawmakers alleged about Apple.

The Reference Shelf

• QuickTakes on the U.K.’s digital taxscheme, the failed EU-wide effort and new questions about big tech in the U.S.
• The editors of Bloomberg Opinion say France’s tax is wrong, and so is Trump’s response.
• Bloomberg Opinion’s Lionel Laurent: “Trump Throws a Tax Bomb at Emmanuel Macron” and “Google and Apple See the Ghost of Future Taxes.”
• OECD report from 2018 on tax challenges arising from digitalization.

--With assistance from Viktoria Dendrinou.

To contact the reporters on this story: William Horobin in Paris at whorobin@bloomberg.net;Aoife White in Brussels at awhite62@bloomberg.net

To contact the editors responsible for this story: Anthony Aarons at aaarons@bloomberg.net, Laurence Arnold, Andy Reinhardt

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