In a move likely to re-ignite trade tensions between the US and the EU, France’s National Assembly has voted to increase its digital services tax on large American tech companies. While the proposal isn’t final, we cannot stress enough how short-sighted and counterproductive it would be.
The new tax proposal, which the Parliamentarians have called a “GAFAM” tax – that acronym stands for Google, Apple, Facebook, Amazon, and Microsoft – would double France’s digital services tax (DST) from 3% to 6%. To ensure that this DST doesn’t hurt French companies, the French National Assembly proposes that the new GAFAM tax would kick in only for companies with more than €2 billion in global revenue. This means, for example, that the French advertising company Criteo, with €1.9 billion in global revenue, will see its DST go from 3% to zero, while its competitors may see their rate double to 6%.
If the French parliament approves this measure, the impacts will be significant and far reaching. Imposing this new measure would lead to an effective tax rate of up to 120% on some companies, more on companies with low profit margins. Some of these companies may choose to exit the French market. French residents, businesses, and government agencies that rely on these companies’ services will in many cases be left with no ready alternatives. As the Draghi report found last year, for example, European cloud services providers account for just 2% of the EU market. Moreover, digital services, regardless of their national origin, are an extraordinary driver of jobs, innovation, and economic growth. Even a marginal reduction in services available to France will hurt the nation’s efforts to shore up its technological progress and provide workers and consumers with resources necessary in today’s digital world.
The proposed GAFAM tax also represents a departure from France’s commitment, as part of the OECD framework agreed in October 2021 to “remove all Digital Services Taxes and other relevant similar measures with respect to all companies, and . . . commit not to introduce such measures in the future.”
Yet the effect of adopting this new DST would have effects well beyond France. France’s adoption of the original DST in 2019 created something of a contagion effect, with over a dozen jurisdictions following France’s lead. Were other nations to follow this new example – one which departs from a global consensus – it would have similarly disastrous effects. Poland is among the countries considering an increase in the DST similar to what France has proposed. Notably, many other countries, including India, Canada, Pakistan, and New Zealand, have reversed course and opted against imposing a DST.
From the perspective of the United States, discriminatory treatment of U.S. companies is cause for concern. It threatens to undermine the comparative advantages that U.S. firms have established by investing in innovation and outcompeting foreign counterparts. This extends beyond cloud services to include search engines, social media platforms, e-commerce marketplaces, and more. Back in 2019, an investigation by the Office of the U.S. Trade Representative (USTR) found the original 3% tax to be unreasonable and discriminatory. What France is threatening to do now would have an exponentially larger impact on U.S. companies, hurting their ability to advance U.S. innovation abroad, compete with rivals from China, and advance a pro-democratic approach to the digital economy. Should France continue down this path, USTR should revisit its prior investigation into the discriminatory practice, as several leaders on the House Ways & Means Committee have already suggested.
Leaders in the European Union should also be concerned. One of the EU’s core objectives in the recently agreed US-EU Framework Agreement was to reestablish stability and predictability in the transatlantic trade partnership. That goal, however, would be threatened by France doubling its domestic DST. Because the EU has a single commercial policy and acts as a bloc in international trade matters, such a unilateral move by the French would almost certainly force the US government to further increase tariffs on the EU as a whole, which would impact not just France but the broader European economy.
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