French tax authorities have begun demanding millions of euro from US technology groups as they push ahead with a new digital services tax that has enraged Washington.
Facebook and Amazon are among the companies to have received communication from French authorities in recent days demanding payment of the tax for 2020, according to French officials, company executives and advisers.
The collection of the tax, which Washington has said is an example of an unfair trade practice because it largely affects US companies, threatens to reignite the transatlantic trade tensions and trigger new tariffs on Europe weeks ahead of the inauguration of Joe Biden.
The French move is part of ongoing developments on multinational tax which carry dangers for Ireland, where many of the companies concerned have their European or international headquarters. France and other big countries argue that the companies should pay some tax in their big markets rather than funnelling it all back to lower tax locations such as Ireland.
Ireland believes this should be negotiated in one agreement now under discussion at the Organisation for Economic Co-operation and Development (OECD). However, the latest move by France shows impatience at the pace of progress of these talks, and underlines the risk of a damaging tax and trade war .
The US trade representative’s office is now expected to put tariffs of 25 per cent on $1.3 billion (€1.1 billion) worth of French handbags and make-up, having at first threatened to hit champagne and cheeses with import tariffs of 100 per cent.
Several governments have either already introduced or plan to introduce their own digital services tax. They argue that tech companies pay too little tax on the profits they make in many countries, partly because they record them in low-tax jurisdictions such as Ireland.
Paris’s demand to collect the tax represents the end of a truce with Washington. The two sides agreed in January to allow more time for talks on a multilateral taxation framework overseen by the OECD, the Paris-based organisation of rich countries, to play out over the course of the year. As part of that pause, France agreed to temporarily stop collecting its digital tax.
However, the US suspended its talks with the OECD countries in June. No solution is expected until the middle of next year.
"Everybody has been leaning pretty hard on the OECD process and saying we need agreement," said Cathy Schultz, vice-president for tax policy at the National Foreign Trade Council in Washington. "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."
France has said it wants an EU proposal in early 2021 for taxation of digital services across Europe in case the OECD talks continue to make no progress. But its preferred option remains an international solution through the organisation.
“We can’t wait any longer and the tech companies are the big winners of the pandemic,” said one French official, adding that the European plan was “a lever” in the current negotiations. “Their turnover is soaring and they haven’t been paying fair taxes even before the pandemic.”
The demands for collection of the tax and the likely imposition of more tariffs on a US ally pose a difficulty for Mr Biden, who has said he would look to smooth out diplomatic and trade tensions with European capitals.
However, on Capitol Hill there is bipartisan opposition to countries imposing their own digital services taxes rather than negotiating a multilateral deal through the OECD.
Ron Wyden, the top Democrat on the influential Senate finance committee, who has described the French tax as "discriminatory", has said Paris's effort to start collecting the taxes represented "an escalation against American employers" that served to "leave more US industries open to unfair foreign taxes".
Brian Jenn, a former US treasury official, does not expect Washington's position to shift fundamentally.
“Biden’s administration might not be as aggressive about threatening new tariffs, but they can take advantage of tariffs already on the table and use them to negotiate the taxes,” he said. “I wouldn’t expect the Biden administration to just remove them.”
France is the European country with the furthest advanced digital service tax. But several other governments have either proposed or enacted them in law, including the UK, which is scheduled to begin collecting its own levy in April.
Over the summer, the US trade representative Robert Lighthizer announced investigation into a number of countries that are adopting digital services taxes including the UK, Italy, Austria, Brazil, Indonesia and the EU. These could lead to more tariffs before the end of the Trump administration.
“We know that Lighthizer needs to get this stuff done, and is hell-bent on making sure he gets some of the stuff out the door,” said Ms Schultz. “But yes, the Biden administration is going to have to walk in and have to deal with all of this stuff. It’s a complicated problem.”
– Copyright The Financial Times Limited 2020