France’s Tech Tax: What to Know

French lawmakers just voted for a digital services tax that takes aim at two dozen large tech companies, including several high-profile U.S. brands. The move caused bipartisan dismay in Washington, and the White House has threatened retaliatory tariffs. But more countries could soon follow France’s lead.

What’s in the tax?

On July 11, France’s Senate passed what’s come to be known as the “GAFA tax”—so called because it is seemingly designed to target Google, Apple, Facebook, and Amazon. It slaps a 3 percent tax on revenues earned by digital services firms that have total yearly revenues of more than $845 million and yearly sales in France of more than $28 million.

Few such French companies exist, leading to U.S. complaints of unfair treatment.

What was the U.S. response?

The White House immediately pushed back. The U.S. trade representative opened an investigation under Section 301 of the Trade Act of 1974, which allows retaliation against discriminatory actions.

It’s the same legal rationale President Donald J. Trump has used to impose tariffs on hundreds of billions of dollars’ worth of Chinese imports into the United States, and observers expect Trump could soon levy tariffs on France too.

The investigation won support from both Democratic and Republican lawmakers, who say the tax is meant to penalize U.S. companies while leaving European firms unscathed.

Is Europe targeting U.S. tech?

U.S. leaders have long complained about the European Union targeting American tech champions. The EU counters that regulation is needed to protect consumers’ privacy, avoid monopolies, and make sure Silicon Valley giants pay their fair share of taxes.  

However, the bloc has so far failed to agree to EU-wide rules for taxing them. The problem is that tech companies can put their offices in low-tax jurisdictions, such as Ireland or Luxembourg, and pay little in taxes, even as their revenues have surged across the EU. Brussels says that these companies end up paying taxes at less than half the rate of traditional businesses. But opponents of an EU tax, including Denmark, Finland, and Sweden, say that taxes on revenues rather than profits are unfair and would make the EU economy less competitive.

Rather than wait for a consensus, Paris decided to go it alone. It is expected to collect some $560 million annually from the new tax, which President Emmanuel Macron may need more than ever after ceding to demands by Yellow Vest protesters to increase public spending.

What’s next in the global tax battle?

Macron has yet to sign the bill, but he is expected to do so in the coming days.

If the Section 301 investigation finds that France is unfairly targeting U.S. firms, Trump could decide to place tariffs on French imports into the United States. It would be another chapter in Trump’s confrontational approach to the EU. After the bloc levied large fines against Amazon, Apple, and Google, Trump said it treats the United States “worse than China,” and he has repeatedly threatened tariffs against EU auto imports.

Meanwhile, other countries could soon follow France’s lead. The United Kingdom has already drafted its own bill, to go into effect in April 2020, and politicians in Austria, the Czech Republic, Germany, Italy, Poland, and Spain have proposed similar digital taxes.

Some experts hope these efforts will push the United States to cooperate in ongoing efforts to create a global digital tax regime. The Organization of Economic Cooperation and Development, a group of industrialized countries, aims to reach a consensus on the issue by the end of 2020.