France’s decision this month to levy a tax on big technology firms—dubbed the “Google tax”—has sparked another trade fight with Washington and prompted U.S. President Donald Trump to threaten retaliatory tariffs against French products. So far, Paris is all alone—but it may not be for long. Other European countries, including the United Kingdom and Spain, are preparing their own versions of the digital tax, and other big tech countries such as India are considering similar measures. The once-arcane question of tax liability for digital firms is sure to play a big part in the upcoming G-7 summit next month in France, where French President Emmanuel Macron hopes to forge a global solution to an increasingly thorny problem.
What exactly is the Google tax?
France just passed new legislation that went into effect this week that levies a 3 percent tax on the revenues—not profits—that technology firms earn inside the country. The measure is meant to close loopholes in existing international tax law that lets firms earn money in one place—say, France—while having their headquarters and tax liability somewhere else.
Its impact on the French Treasury is likely to be modest, with estimates of annual receipts on the order of $450 million to $550 million, though the political symbolism is huge—Macron cut taxes in response to “yellow vest” protesters and needs to find a way to curb the looming budget deficit.
And France, like many countries in Europe, has spent years trying to come to grips with the tax and competition implications of (largely foreign) technology firms. Outgoing European Union Competition Commissioner Margrethe Vestager famously targeted big tech firms, especially Google and Amazon, for more antitrust scrutiny, and the epitaph for the departing European Commission is basically one of struggling to shoehorn new economic models into existing regulatory frameworks.
Why is France going it alone?
France and other European countries tried to forge an EU-wide solution to the digital-tax dilemma, but as with so many issues inside the EU, consensus was elusive. A bloc of mostly Nordic countries and Ireland, which have big tech sectors, scuppered the idea.
But France, while first out of the gate, isn’t likely to remain alone for long. The U.K. is planning to implement a very similar digital tax measure in 2020. Spain and Italy are also close to introducing their own measures, as is New Zealand. India is taking a different route to achieve the same goal, proposing a change in tax rules to apply the same tax treatment to technology firms as to physical concerns.
The move didn’t go down well in Washington.
The French measure, unsurprisingly, has sparked threats of reprisal in Washington. Even before the French law had passed, the United States opened a trade investigation under so-called Section 301 authorities—the same authority used to start the trade war with China.
Trump himself lambasted what he called “Macron’s foolishness” and threatened to raise U.S. tariffs on French wines, which the teetotaler said were inferior to American vintages. (He later clarified that, as a nondrinker, he just knows that U.S. wines “look” better, though any tariffs on foreign wines could only helphis own Virginia-based vineyard.) The French agriculture minister replied in kind, labeling the president’s comments “completely moronic.”
From the U.S. point of view, the French measure unfairly targets U.S. firms, since American companies dominate the technology space. In fact, in many countries, the digital tax is known informally as the GAFA tax—short for Google, Apple, Facebook, and Amazon. France counters that European and Chinese firms will also be on the hook, and that the measure is meant to modernize the tax code, not single out one country for harsher treatment.
The upshot is that France’s unilateral move adds more fuel to the dumpster fire that is trans-Atlantic trade relations, which have been in an uneasy standoff for the past year. The two sides have been unable to even start real negotiations on a trade deal, as they have wildly different starting points. The United States wants to pry open all of Europe for U.S. agricultural exports, to which the French and others have repeatedly said no. Hanging over it all is the continued threat of U.S. tariffs on imports of European cars and car parts, which would be a huge blow to France and especially to Germany.
France’s digital tax just adds one more irritant to a relationship already estranged by bitter disagreements over defense, climate change, Iran, the China challenge, and more.
So what’s next?
The G-7 summit late next month in France will be a first chance for France and the United States to grapple with the issue and see if they can build momentum for some sort of global solution. Paris says it hopes to reach some sort of understanding with Washington and other big economies that will allow it to eventually substitute its unilateral measure for a global one.
The problem is that unilateral consensus is hard to find. The EU, the OECD, the G-7, and the G-20 have all wrestled for years with the question of how to bring early 20th-century tax rules in line with the 21st-century economy, where companies don’t need a big physical presence in a country to rake in revenue and profits. France is hoping its opening move may be just enough pressure to break the years-long deadlock.
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