Paris, Hours before the United States President Donald Trump landed in Biarritz, the buzz was that the weekend would see the outbreak of a new trade war unleashed by Trump. This time with France and indeed the entire European Union.
Trump has already criticised roundly and sharply the tax that the French government introduced in July, but put into effect retrospectively from January 1 on tech companies.
The tax covers sales within France generated by companies that are headquartered elsewhere. The tax of three per cent on total sales will be imposed on companies with a minimum global turnover of 750 million euros that generate at least 25 million euro sales in France this year.
For now, the tax concerns a total of 28 companies, many of them tech giants from the United States, such as Alphabet, Facebook, Uber and Amazon, but there are also Chinese and some European companies, including a French one as well.
Before leaving for Biarritz, Trump threatened to impose additional levies on French wines imported into the US as a counter measure against the French tech tax. The news is worrying for the French as the US is the largest market in the world for French and indeed European wine makers. It accounted for 32 percent of the Euro 11.3 bn that the European vineyards earned in exports last year.
Thus any riposte by Trump would impact the entire EU. However, the EU leaders have come to back Macron strongly and said that they were ready for a bruising battle with the US on the tech tax, an issue that has been an irritant in the EU-US affairs for the past several years.
France denies that the tax unfairly targets US businesses and is protectionist. It says that time has come for the international community to modify the tax regimes to take into account the evolution of the global economy and the emergence of technology companies that do not need a physical presence and yet conduct business all around the globe.
Indeed, the European Union has long accused the new tech companies, most of them based in the Silicon Valley, of tax evasion across the EU, even though they raise a significant proportion of their global sales on the continent.
Led by France and Germany, last year the EU had indeed begun pushing for new norms of EU-wide taxes to net these companies as well. However, the measure stalled as some of the EU members, themselves low-tax or no-tax havens, felt their own interests threatened by the move and opposed the tax.
Nevertheless, the French argument does carry weight. The technology companies have benefitted for long, one could argue, for too long and too much, riding on the back of nearly no taxes in several key markets. They have also by-passed key regulations that add to the costs of doing business, such as taxi licences that Uber or its drivers dont need to buy. A study by the European Commission says that on an average the tech firms pay as little as 8 per cent of tax on their total sales within the EU, while the standard bricks and mortar companies pay nearly 23-25 per cent.
This lopsided tax rate and playing with the regulations of the countries perhaps could have been justified about two decades ago when these tech firms were yet nascent. But today, they account for a sizeable chunk of the global economy, have turned their founders in multi-billionaires and their shareholders have also made a killing on their investments.
The only ones that have not reaped any financial benefits from this wealth are perhaps the governments and more broadly the society. This may indeed be the time for a review of the global taxation system and the special treatment meted out to the techies.
In many ways, the French tax could be viewed as another attempt by the government in Paris to push for a global discussion on this key issue. France has said that it will withdraw its tax the moment an EU-wide measure takes place or another global tax that would be seen as fair both the technology and innovation as well as the ‘old economy’ or traditional businesses.
Getting into a very high profile and public spat over taxing hi-tech at a time when France is trying to position itself as the innovation capital of EU, if not the world, is a very risky strategy. Yet, the French government believes that the two are not contradictory. It says it has and will continue to make the business environment more innovation and technology friendly and provide all sorts of incentives and assistance to start-ups and entrepreneurs, but also points at the duty of the rather ‘mature’ technology firms such as Alphabet or Facebook to turn in a part of their profits to the country where they make money.
The environment at G7 meeting is likely to be tense over this tax battle and indeed it could spiral out of control, especially if Trump feels that he has been cornered by other G7 leaders. This may suit the hosts as France wants to put the issue right in the eyes of global community in a manner that few can turn a blind eye to an issue which indeed is a burning question today, not just here in Paris, but also in the United States where the tech firms could soon become as easy targets as the banks had been in the last decade when they were seen as creaming off the society without any payback. Though Trump may launch counter measures to attack French products, the tech companies are unlikely to be able to escape the tax net anymore.
India would also do well to study the French tax and indeed think of bringing in something similar to ensure that the rapidly growing digital economy in the country benefits not just the corporate behemoths behind it, but also the consumers and the government by boosting the tax net a bit.
It may be worthwhile for the tech giants themselves to mend their ways and begin paying at least nominal taxes in countries where they do sizeable business. This would definitely ease the pressure and could in a way head off other countries adopting French-style taxes, else they may find themselves at the receiving end of rather stiff one-sided measures not too far down the road.