On July 11, the French Senate approved a digital tax, known as “Les GAFA” — Google, Amazon, Facebook, Apple, on digital companies that have a revenue of more than €25 million in France, and more than €750 million worldwide, Le Monde reported. The aim is to tax digital activities that “create value through French internet users”. This tax makes France the first major economy to tax the Big Tech. This bill is likely to be signed into law by French President Emmanuel Macron within two weeks, the New York Times reported. This will potentially cause another trade war, but this time between USA and one its allies.

This bill comes a week after the French National Assembly approved a draft bill which directs social media companies such as Facebook and Twitter to take down any hateful content from their platform within 24 hours.

What will the tax do?

The bill was sponsored by the French Minister of Economy and Finance Bruno Le Maire.

  • 3% tax on revenue from digital services earned in France by companies that make more than 25 million euros ($28 million) in French revenue and 750 million euros ($844 million) in global revenue
  • Specially targets online advertising, revenue from the sale of data for advertising purposes, and the linking of users by the platforms, Le Monde said
  • To be applied retroactively from January 2019
  • The tax is expected to yield €400 million in 2019, and €650 million in 2020, Le Monde said.
  • Will affect 30 companies, including GAFA, Meetic (French online dating service), Criteo, Instagram, and Airbnb. Other companies are Chinese, British, German and Spanish, the Guardian reported

Why implement a national digital tax?

The French GAFA tax resulted from the EU’s failure to pass a law to tax the Big Tech due to resistance from Ireland, Sweden, Denmark and Finland. This unilateral bill is meant to be a temporary solution; once the Organisation for Economic Cooperation and Development (OECD) reaches and international agreement to overhaul its decades-old cross-border tax rules for the digital era, Paris will drop this tax, the Guardian reported.

Other EU countries, including Austria, the UK, Spain, Poland, the Czech Republic, and Italy have also announced plans for their own digital taxes, Reuters and NPR reported. The UK is planning a similar digital services tax on “revenues of search engines, social media platforms and online marketplaces” that serve UK customers, the Guardian reported. The tax would be levied on companies with global revenues over £500 million, and British revenue over £25 million. The bill has been released for consultation. India had also called for greater tax on the Big Tech at the G20 2019.

This tax was announced by Macron on December 10, amidst the “Gilets Jaunes” crisis and will help finance the €10 billion emergency economic and social measures that had been put on the table. BFMTV had then reported that this project was supported by Germany.

For these countries, taxing Big Tech has emerged as more of a social issue, than a financial or economic one. Exponential growth of the Big Tech has cannibalized local retailers, both online and offline. They say that companies like Amazon and Facebook are able to book profits in low-tax countries like Ireland, irrespective of the origin of the revenue.

The European Commission had calculated that digital companies pay an effective tax rate of 9.5%, compared to 23.2% that traditional companies pay.

US retaliates. Another trade war on the horizon?

In a predictable reaction, USA got angry and the Office of the United States Trade Representative (USTR, under the Executive Office of the President) preemptively announced on July 10 that it had launched an investigation into the effects of the tax. The USTR Robert Ligthizer said, “The United States is very concerned that the digital services tax which is expected to pass the French Senate tomorrow unfairly targets American companies.”

Bruno Le Maire responded on July 10, before the final vote in the Senate, and said that allied countries had to settle their “differences in other ways than by threat”. He further said reiterated that France is a sovereign nation “whose decisions on tax matters are sovereign, and it will continue to decide its tax decisions sovereignly”.

The investigation was initiated under Section 301 of the Trade Act of 1974 which allows the US to impose “trade sanctions on foreign countries that either violate trade agreements or engage in other unfair trade practices”. This section allows the US, in case negotiations fail, to “raise import duties on the foreign country’s products as a means to rebalance lost concession”.

Irish Finance Minister Paschal Donohoe reportedly said in May that national taxes that target mostly US-based tech firms were “highly likely to exacerbate global trade tensions and damage cross-border trade and investment”, and would make it harder to reach agreement on a global reform.

Giuseppe de Martino, the president of ASIC French lobby, which represents Facebook, Google, Amazon, Twitter and Airbnb, warned that by unilaterally “overtaxing” American players, Le Maire had “triggered a trade war” that will penalize French technology today, and other French sectors, such as wine and automobiles, tomorrow, Reuters reported.

Although this will potentially worsen bilateral relations between France and the US, numerous reports on both sides of the Atlantic suggest that President Trump could leverage this tax to obtain EU concessions on trade.

Read more: France approves draft bill that requires social media platforms to take down hateful content in 24 hours