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US-France DST tensions may spark wider EU trade war

The US escalates trade tensions with France after threatening new tariffs following its investigation into the French digital services tax (DST). French officials said the EU is ready to retaliate.

The US Trade Representative (USTR) proposed additional duties of up to 100% on French goods and additional fees and restrictions on French services yesterday on December 2 after determining from its investigation under Section 301 of the US Trade Act that the French DST is discriminatory against US companies.

The Trump administration is threatening to apply 100% duties to French goods and services. The US also announced that it is exploring opening similar Section 301 investigations into Austria, Italy, and Turkey’s DSTs too.

“The USTR is focused on countering the growing protectionism of EU member-states, which unfairly targets US companies, whether through digital services taxes or other efforts that target leading US digital services companies,” said Robert Lighthizer, head of USTR.

Taxpayers, including the leading US tech companies Google, Apple, Facebook, and Amazon (GAFA), have argued that the French DST discriminates against their industry. Such companies expressed concerns following an earlier US public consultation meeting on its investigation on August 19 that a US response could start more trade wars.

Nicholas Bramble, trade policy counsel at Alphabet’s Google, said that other EU countries have been following the French experience to see whether unilateral DSTs can work ahead of a multilateral solution from the OECD.

“This [has been] a concern for international trade and the wider economy [in 2019],” said Bramble about more countries following France in imposing unilateral actions.

A public hearing is scheduled for January 7 2020 at the US International Trade Commission in Washington on the investigation into France’s DST and proposed US actions.

“USTR expects to proceed expeditiously [with proposed actions] thereafter,” said Lighthizer about finalising additional, punitive duties and fees on French goods and services.

This comes as somewhat of a disappointing surprise to taxpayers since the US and France addressed unilateral digital taxes and the US investigation into the French DST at the G7 summit in Biarritz in August 2019. Some EU-based advisers said this may be a political move for both sides where France removes its DST in exchange for the US to align with an OECD unified approach.

Donald Tusk, former president of the European Council, already said at the G7 summit that the EU would ‘respond in kind’ if France were targeted in response to its DST.

French officials issued a public statement on December 3 with Finance Minister Bruno Le Maire calling the US retaliation ‘unacceptable’ and not in anyone’s interest.

One head of tax at a multinational consumer electronics company based in France told ITR that he does not agree with the French DST because it always ran the risk of trade ramifications. He explained that, from a French perspective, the DST approach still makes sense ahead of an OECD global solution.

The French Senate approved its 3% tax on revenue from digital services earned in France in July. The tax ring-fenced targeted online activity, including advertising, intermediary services, digital interfaces, and the sale of personal data.

While the tax was initially introduced as a GAFA tax, it evolved to target large digital companies with a global revenue of at least €750 million ($841 million) and a domestic revenue in France of €25 million or more. The tax applied retroactively to revenue earned starting from January 1 2019.

The Macron government proposed under the US-France trade agreement that companies will have the option to make deductions, but this relies on whether the OECD reaches a multilateral solution to address the digital economy. France proposed granting a tax credit to companies for the amount they paid above what they would pay under an OECD solution.

However, the French DST legislation is missing a sunset clause and this is one reason why US officials claim the tax is discriminatory. The USTR investigation concluded that the French DST is inconsistent with international tax principles because of its retroactivity, application to revenue rather than income, extraterritorial application, and purpose in penalising US technology companies.

“If the US moves forward with punitive tax measures, France and other EU member states would very likely apply counter-retaliatory measures quite broadly. This will have negative effects on a myriad [industry] sectors,” said Christopher Padilla, vice president of government and regulatory affairs at IBM.

Along with the strain that multinational companies face in a possible trade war, the escalating tensions between France and the US over unilateral measures puts more pressure on an OECD solution expected in 2020.

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