The US has proved it can still throw its weight around the international community as French President Emmanuel Macron has taken a softer-stance on the country’s Digital Sales Tax.
Following lunch with President Donald Trump, Macron has stepped-down the aggressive moves against Silicon Valley and the creative accounting practices which has deprived countries around the world of valuable tax revenues. France took the brave step-forward to tackle the suspect status-quo, though it seems the threat of US tariffs was enough to ease the position of Macron.
“We’ve done a lot a work on the bilateral basis, we have a deal to overcome the difficulties between us,” Macron said to reporters following his meeting with Trump at the G7 Summit this weekend.
A lot has been said this weekend, though most of it avoided the technology, media and telco industry. This is perhaps the biggest news to emerge for our niche, though it does demonstrate the US still has some national leaders under the strain.
President Trump and I agree that Iran should never have nuclear weapons. Nothing is certain, but the conditions are such that a meeting between President @HassanRouhani and President @realDonaldTrump could take place – and so that an agreement could be reached. #G7Biarritz
— Emmanuel Macron (@EmmanuelMacron) August 26, 2019
The 3% digital sales tax on companies which report more than €750 million worldwide, and also €25 million in revenue in France, will still be applied, though US companies could be entitled to a deduction when the OECD releases its own rules.
Following the G20 Summit in March, the OECD kicked-off a public consultation to address the tackle challenges in an increasingly digitally-defined society. After renewing the mandate of the Task Force on the Digital Economy (TFDE), the OECD has promised a draft proposal of the rules in 2020.
Should there be a difference in the definition of taxable monies or the amount which is due to France, the internet players will be granted to opportunity to deduct from the amount paid to the French Government. France’s 3% sales tax is to be applied from January 1 2019, though the question which remains is when the OECD will actually be able to propose a tax regime which all states can get on-board with.
This is the challenge which the OECD will face. There will not only be lobbyists in place from the internet giants, but also from the nation states which have an interest in maintaining the status quo. Ireland, for example, has benefitted from undercutting other countries, and without a surge of interest from the technology industry, who knows what state its economy would be in today.
One does have to wonder what Trump to Macron over Le Big Mac this weekend.
Alongside the UK, France was the first to take a tough stance against the creative accounting strategies of the internet giants. Few in Silicon Valley would have been happy with developments, as it would have held them accountable to fair and reasonable tax payments. The vast majority have been managing to avoid paying back the societies which have fuelled such extravagant bonus cheques for years.
Silicon Valley has been promising to help the development of society for years, though apparently this only counts when the revenues are directed towards its own bank accounts. When it comes to helping to build hospitals, buy school books, care for the elderly, fund fire departments and fill in pot-holes on roads, it has little interest.
Prior to the discussions over lunch, Trump had promised to hit back against France.
“France just put a digital tax on our great American technology companies. If anybody taxes them, it should be their home Country, the USA,” Trump tweeted in July. “We will announce a substantial reciprocal action on Macron’s foolishness shortly. I’ve always said American wine is better than French wine.”
Firstly, each country around the world should be entitled to tax companies when they reap financial benefits from its citizens; this is fair and reasonable, but Silicon Valley was better than most traditional industries of hiding profits from the tax man. Secondly, this tweet gave us some insight into the retaliation from the White House.
Following the tweet, the United States Trade Representative (USTR) opened an investigation under Section 301 of the Trade Act of 1974. This is the same first-step of the strategy which kicked-off tariffs against the Chinese and the subsequent trade-war. Wine, cheese and striped t-shirts were presumably being eyed-up, and it seems this was too much for Macron.
Although the digital taxation remains in place, this is a softened stance from the French President. The White House will certainly be happy with this outcome, although not completely satisfied, as it proves it can still act as a bully in international politics, throwing its monstrous weight around.
However, it is not as satisfactory an outcome as many in Silicon Valley would have wanted; they will still have to pay tax in France.
“Unfortunately, the enactment of France’s Digital Services Tax threatens to undermine the OECD process,” Google said in a statement to the USTR during the early stages of its investigation. “It is a sharp departure from long-established tax rules and uniquely targets a subset of businesses.”
The current tax rules are dated and allow the internet players to abuse the grey areas which are present in the law, or language which does not account for digital services. Of course, these companies are not happy, they will have to pay more tax.
As mentioned above, the companies will still have to pay the French tax. If Macron has been persuaded to drop the tax completely, there would have been plenty of time to bank an extra couple of hundred million and delay the implementation of the OECD rules. It would have been additional grace period.
What remains to be seen is what impact this will have on the approach to digital tax across the rest of the bloc. France was leading the charge, and this might well dent the confidence of other nations to follow suit, especially smaller ones which might be more susceptible to threats from the White House.
The tax is still going ahead, though Trump has proved he can still flex and make the French flinch.