The World vs the Web – France Creates New Digital Tax

The internet allows for international commerce at speeds and volumes that weren’t possible in the past. Increased global trade is generally a good thing, but the internet has dramatically changed international commerce in ways that countries are still adapting to. Since an effort in the European Union to introduce a digital tax stalled, France announced a new digital tax that will go into effect on January 1st.

In what will be a major shakeup to the international status quo on internet taxes, France is moving forward with plans to start taxing Google, Apple, Facebook, and Amazon, which are collectively known in the region as GAFA. “The tax will be introduced whatever happens on 1 January and it will be for the whole of 2019 for an amount that we estimate at €500m,” Le Maire said at a press conference in Paris, the Guardian reported in late December.

France’s new tax could be the first shots in a new battlefront of the world vs. the web. After failing to reach an international consensus, France decided to go alone in taxing American internet giants. Whether other countries follow their actions or if their plan can stand against international legal standards are issues that will shape 2019 and beyond.

Why France Believes a Digital Tax is Necessary

Before criticizing attempts to tax the internet, it’s important to recognize that the issues they are trying to address are real. The global nature of the internet has negative impacts for many industries that were once sources for domestic revenue and jobs. For example, businesses around the world are spending more of their advertising budgets on Google and Facebook ads. This takes money out of local advertising firms and sends it abroad. Similarly, the availability of online content has led to a huge decrease in the number of local print newspapers and magazines.

The loss of local sources of revenue due to a global internet creates a variety of issues for countries. Money is essentially leaving the country and the local economy via the internet. This can mean higher unemployment in industries affected by the internet, such as jobs in print journalism and advertising. This can also mean there is less tax revenue for planned infrastructure improvements or to fund programs that could alleviate the negative effects of a global internet on local economies.

Given these factors, one would think that taxing the internet would be something countries around the world could agree on. However, attempts to gain a consensus on a plan to tax internet giants has stalled on multiple occasions. Earlier this year, the European Union was considering a digital tax, but it fell apart due to objections from some members. Since tech giants shelter their money in countries in the EU that give them the best tax advantage, these few countries will scuttle any international attempt to spread the tax revenue from internet giants more evenly.

Following this setback, Germany and France said they would consider going forward with their own internet tax. Germany since abandoned it’s plan, but France announced in December 2018 that they would introduce a new digital tax in 2019.

Issues the New Digital Tax in France Will Create

Though taxes would seem like an obvious weapon for countries that are battling the web, it’s a problematic approach. Since many consumers and businesses rely on the services they get from internet giants, governments need to be careful not to inconvenience their own citizens with measures designed to tame the internet. Also, while they want to get more money from internet giants in America, they don’t want to stifle the growth of internet companies in their own country.

Trying to tax the entire internet is like using a sledgehammer to fix a nail. You’re sure to hit the nail, but you’ll damage everything around it. This is why France’s digital tax is written in a way that it should only affect Google, Apple, Facebook and Amazon, but not providers like AirBNB or Spotify. The problem with this is that it may violate international standards for parity in taxation.

Laws (including tax laws) are supposed to be evenly applied to everyone in a jurisdiction. It ensures that there is a level playing field for all companies, whether they are foreign or domestic. But what the new digital tax from France is written in a way that boils down to a tax for companies that start with the letter “G” and rhyme with “oogle”. The law is so narrowly written that it would only apply to a few companies, which just so happen to be American tech giants.

What may be more worrisome to tech giants is the fear that other countries will start doing the same thing. If France’s new digital tax is able to survive legal challenge, there’s nothing to stop every country in the world from writing their own version of a “Rich American Companies Must Give Us Money” tax. At the very least, tech giants could find themselves spending a lot of time and money on court challenges. At the worst, it could lead to a significant loss of profits as they pay more taxes to an increasing number of countries.

The risk of other countries adopting similar taxes is not just a theoretical issues. Back in October, the United Kingdom’s Chancellor Philip Hammond announced in the Budget in October that he plans to introduce a digital services tax from April 2020 following a consultation. How well France fairs in their experiment will likely influence what other countries will try in the near future.

The global nature of the internet also makes it hard to avoid these taxes. For example, if Google or Apple decided they didn’t want to pay these taxes, they would need to remove all of their ad-related services from France. Without a country-wide firewall, like China, tech giants are hard pressed from preventing people in a certain area from using their services. Business owners in France would find ways around location-based blocking to use ads on Google or Facebook, so these tech giants wouldn’t really be able to hide from the tax.

Why France’s Digital Tax May Be Destined to Fail

The problems explained above show there are many hurdles for the digital tax to overcome before it’s considered a viable option for other countries to follow. There are so many obstacles that it seems the plan is doomed to failure.

The most likely fate is that the law would fall before EU judges or international trade regulators. While the EU has certainly shown a willingness to take on tech giants (e.g. GDPR) the fact that the EU couldn’t reach a consensus on a digital tax is a good indication that there will be challenges from the members who opposed an EU-wide tax. Similarly, Google, Apple, Facebook and Amazon are likely to complain to regulators about discriminatory treatment, since the tax is specifically designed to target them.

There’s also a very large chance that the American government would get involved if the targeted companies were unable to secure the end of the digital tax on their own. As was stated earlier, the international status quo is that countries don’t create taxes and other trade barriers that hurt international companies. And it goes without saying that the Trump administration has no qualms about introducing sanctions if they feel American companies are being treated unfairly.

Early this year, Treasury Secretary Steve Mnuchin said the Administration has “strong concern with countries’ consideration of a unilateral and unfair gross sales tax that targets our technology and internet companies. A tax should be based on income, not sales, and should not single out a specific industry for taxation under a different standard.”

All things considered, France’s new digital tax will find itself in an uphill battle and what is probably an unwinnable fight. But no matter what happens next, their actions will shape future battles in the world vs the web. Either this new digital tax will become the new standard or it will be the first step in a legal battle to discover the limits of international taxation of the internet.

For more on the topic of the internet and international law, read the first article in the World vs. the Web series.

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