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France's digital tax could hurt consumers more than tech companies

Lisa Micheal 21 Jul 12

France's Finance Minister Bruno Le Maire sent a clear message to the U.S. and the rest of the world on Thursday when the country passed a 3% tax on the digital revenues of big tech companies: "France decides its own tax rules."

By choosing to go-it-alone, France set the stage for a country-by-country approach toward taxation of tech companies in Europe. Hours after the French vote, the U.K. released its own draft proposal for a 2% digital services tax.

The national proposals come after an EU-wide effort to pass a digital tax on corporations failed last year, thanks to resistance from countries like Ireland and the Netherlands.

Some experts fear France's unilateral approach with the digital tax will backfire, ultimately harming consumers and smaller businesses it aims to protect.

"This tax will completely miss its objective," said Aleksandra Bal, an EU tax expert at Vertex, a tax software provider, in an interview Friday.

France's tax is specifically focused on roughly 30 companies that generate at least 750 million euros ($845 million) in annual revenues from digital services, including 25 million ($28 million) from within France. Le Maire argues the measure is necessary to make internet giants pay their fair share of taxes.

Unlike a VAT tax, Vertex's Bal said the digital services tax does not aim to place the burden on consumers. Instead, it is a targeted measure on three types of "digital activities:" online advertising, online intermediary activities and the sale of user data. In other words, the tax is designed for big tech firms like Facebook, Google and Amazon.

But a study published earlier this year by Deloitte and advisory firm Taj found only 5% of the digital tax's burden will fall on the large internet companies it aims to target. Instead, the study said consumers will absorb 55% of the cost and 40% will be borne by businesses that use digital platforms. The study estimated that Amazon, for example, might increase the commission it charges merchants on the platform, which could in turn result in higher prices for shoppers.

Industry group techUK warned of similar consequences from the U.K.'s proposed 2% tax on digital services in a statement Thursday.

"At present, the tax could very likely lead to some bizarre outcomes, including increasing costs being passed onto consumers, dis-incentivizing investment in R&D and reducing competition," techUK's associate director for policy Giles Derrington said.

On its own, a 3% tax such as France's would hardly dent the revenues of big tech companies. France's finance ministry aims to raise up to 500 million euros ($562 million) annually from the measure by 2020.

For comparison, Apple raked in more than $13 billion in sales in Europe in the first-quarter of the year, while Facebook's European revenues were $3.65 billion during that period.

Some experts said the costs of compliance could add up for tech firms, especially if more EU countries push through their own national taxes. Tech companies like Amazon disputed France's tax on Thursday arguing for a multilateral approach instead. In a statement announcing an investigation into France's tax, the U.S. Trade Representative said the measure "unfairly targets American companies."

France argues the digital tax is a temporary measure until a broader agreement among countries is reached. The Organization for Economic Cooperation and Development (OECD) is currently reviewing steps to modernize the tax system for the digital economy but has said it won't reach a conclusion until 2020. The French tax is expected to be enacted within 21 days and will be applied retroactively from January 2019.

  • France's 3% digital tax is designed to target big tech companies like Facebook, Amazon and Google.
  • But some experts fear the tax could end up hurting consumers.
  • France argues the digital tax is a temporary measure until a broader agreement among countries is reached.

France's Finance Minister Bruno Le Maire sent a clear message to the U.S. and the rest of the world on Thursday when the country passed a 3% tax on the digital revenues of big tech companies: "France decides its own tax rules."

By choosing to go-it-alone, France set the stage for a country-by-country approach toward taxation of tech companies in Europe. Hours after the French vote, the U.K. released its own draft proposal for a 2% digital services tax.

The national proposals come after an EU-wide effort to pass a digital tax on corporations failed last year, thanks to resistance from countries like Ireland and the Netherlands.

Some experts fear France's unilateral approach with the digital tax will backfire, ultimately harming consumers and smaller businesses it aims to protect.

"This tax will completely miss its objective," said Aleksandra Bal, an EU tax expert at Vertex, a tax software provider, in an interview Friday.

France's tax is specifically focused on roughly 30 companies that generate at least 750 million euros ($845 million) in annual revenues from digital services, including 25 million ($28 million) from within France. Le Maire argues the measure is necessary to make internet giants pay their fair share of taxes.

Unlike a VAT tax, Vertex's Bal said the digital services tax does not aim to place the burden on consumers. Instead, it is a targeted measure on three types of "digital activities:" online advertising, online intermediary activities and the sale of user data. In other words, the tax is designed for big tech firms like Facebook, Google and Amazon.

But a study published earlier this year by Deloitte and advisory firm Taj found only 5% of the digital tax's burden will fall on the large internet companies it aims to target. Instead, the study said consumers will absorb 55% of the cost and 40% will be borne by businesses that use digital platforms. The study estimated that Amazon, for example, might increase the commission it charges merchants on the platform, which could in turn result in higher prices for shoppers.

Industry group techUK warned of similar consequences from the U.K.'s proposed 2% tax on digital services in a statement Thursday.

"At present, the tax could very likely lead to some bizarre outcomes, including increasing costs being passed onto consumers, dis-incentivizing investment in R&D and reducing competition," techUK's associate director for policy Giles Derrington said.

On its own, a 3% tax such as France's would hardly dent the revenues of big tech companies. France's finance ministry aims to raise up to 500 million euros ($562 million) annually from the measure by 2020.

For comparison, Apple raked in more than $13 billion in sales in Europe in the first-quarter of the year, while Facebook's European revenues were $3.65 billion during that period.

Some experts said the costs of compliance could add up for tech firms, especially if more EU countries push through their own national taxes. Tech companies like Amazon disputed France's tax on Thursday arguing for a multilateral approach instead. In a statement announcing an investigation into France's tax, the U.S. Trade Representative said the measure "unfairly targets American companies."

France argues the digital tax is a temporary measure until a broader agreement among countries is reached. The Organization for Economic Cooperation and Development (OECD) is currently reviewing steps to modernize the tax system for the digital economy but has said it won't reach a conclusion until 2020. The French tax is expected to be enacted within 21 days and will be applied retroactively from January 2019.