Is the Macron-Trump Bromance Back On?

By Teri Sprackland

As the world's elite gather in Davos, Switzerland, a flurry of speculation has erupted over whether France and the U.S. can agree to stop whacking at each other on how to tax the digital economy. For now, the talking points are that the U.S. will not proceed with threatened tariffs and France will not attempt to actually collect its controversial digital services tax (DST) levied against American digital leviathans known in Europe as GAFA--Google, Apple, Facebook and Amazon (although other companies have been caught in the net.)

However, this concession extended by the French may well be founded on the likelihood that the French government could have serious problems collecting those revenues anyway. In addition to promised legal challenges within a national context, there were expectations that the thorny issue of "state aid" might bring the French government's plans into conflict with European Union treaty law. Many American companies' tax strategies have been shot down over the issue of whether special deals offered national governments in tax-friendly jurisdictions such as Ireland, Malta, and Luxembourg constituted state aid, which is illegal under the treaties that bind together the 27 member states. Apple tops the list with a multibillion-dollar tax bill for its Irish deals.

However, in this case, the "state aid" shoe may be on the other foot. As member states are not supposed to offer special treatment to companies, it is possible the EU courts would see the French DST tax as also illegal, in that it especially penalizes a certain subset of international companies and thus gives advantages to those not affected. (European governments are supposed to refrain from the kind of bidding wars seen among the U.S. state governments eager to land new businesses and jobs with reduced tax rates, such as the benefits accruing to Amazon with its planned headquarters in Northern Virginia.)

The French tax authorities were supposed to start collecting those DST taxes by the end of 2019, through a mechanism that was linked to the existing Value Added Tax (VAT) payment process. Lack of clarity over how the tax was to be calculated had even seasoned corporate tax professionals taking a "wait and see" approach. Especially onerous was the retroactive nature of the tax, which requires companies to establish turnover figures (not profits) from the beginning of 2019, long before the tax received the enthusiastic blessing of the French legislature and was signed into law by President Emmanuel Macron.

If the French DST tax fails to pass muster with the EU courts, the French government would have to refund taxes collected, just as Apple and others are now on the hook for what the European Commission has said is vastly underpaid tax. That kind of outcome might really cause problems for the French state budget, which is now in a more precarious position after Macron was forced last year by the widespread "yellow vest" protests to abandon plans for increasing taxes on diesel fuels as well as authorize an untaxed end-of-year bonus program. France is no longer in quite the comfortable position of being in compliance with another important EU treaty obligation to keep budget deficits under control, bringing it closer to the problems associated with Italy and Greece.

Rather than risk that outcome, the French may have parlayed a rather weak hand into a good negotiating position, by offering to not collect taxes they may not really want to collect--for both pragmatic administrative reasons and for fear of having to pay them back.

Finance Minister Bruno Le Maire has said all along that the goal is to ensure the swift implementation of an international agreement created by the OECD, a Paris-based multilateral group that is generally seen as shaping policy by consensus among the biggest economies of the world. The French DST, as well as similar proposals from the U.K., Austria and other countries, is intended to be a temporary, stopgap measure until the OECD pulls together an acceptable alternative.

That being the case, postponing the collection of a temporary tax could simply be a reasonable solution that also keeps French luxury goods and wines out of the range of a Trump tariff while maintaining the pressure on the OECD to produce results.