Bezos and Trump become unlikely bedfellows to make France pay for its Digital Services Tax

Profile picture for user slauchlan By Stuart Lauchlan August 20, 2019
Summary:
Amazon will pass on the cost of France's new Digital Services Tax to sellers, a move that has enterprise implications for buyers of digital services.

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Amazon’s Jeff Bezos and US President Donald Trump have something in common - they’re both mad as hell about France’s imposition of a Digital Services Tax and they’re both out to make the French pay.

Last month, the French Senate signed off on a 3% levy on revenue from digital services companies with more than €25 million in French-generated revenue and €750 million worldwide. This  unilateral action followed the failure to secure agreement on an overall European Union tax late last year.

It prompted a furious response from Trump, who’s now threatening to tax French wine and warned President Emanuel Macron via Twitter:

We will announce a substantial reciprocal action on Macron’s foolishness shortly!

With the entente decidedly non-cordiale, Macron and Trump are due to meet face-to-face this coming weekend when the G7 Summit kicks off in Biarritz. The Digital Services Tax will be on the agenda, according to both parties.

In the meantime, the Office of the US Trade Representative’ (USTR) has taken evidence from tech leaders, including the likes of Salesforce, Microsoft and Google, on the new tax which is seen in Washington and Silicon Valley as deliberately targeted at such US tech firms. The USTR is conducting a Section 301 inquiry into the implications for the US economy and will make recommendations on tariffs or other trade protections towards the end of this month.

There was an attempt made during Monday’s hearings to dampen down the charge towards tariffs. While acknowledging that the French tax is “an imperfect solution to address an outdated tax system" Jennifer McCloskey of trade association the Information Technology Industry Council cautioned:

We support the US government’s efforts to investigate these complex trade issues but urge it to pursue the 301 investigation in a spirit of international co-operation and without using tariffs as a remedy.

Others were in more bellicose mood however. Matthew Schruers, Chief Operating Officer at the Computer and Communications Industry Association (CCIA), said his organization supports “an aggressive response to this problem”, while Alan Lee, Facebook’s Global Head of Tax Policy, said in written evidence that:

Unilateral measures like the DST are harmful to Facebook and the digital economy.

Amazonian response

But it was Bezos’ Amazon that rattled its saber most publicly and provided the best indication of how messy the situation may well become. The firm has written to sellers based in France - Amazon’s second biggest European market - and to US-based sellers with French customers warning them that it will be passing on the cost of the new tax to them from 1 October.

Peter Hiltz, Amazon's Director of International Tax Policy and Planning, told the USTR inquiry bluntly that the company regards the French move as creating “double taxation” and that it wasn’t prepared to take the hit:

We cannot absorb this expense if we are to continue making investments in infrastructure.

The ‘double tax’ argument is one that could become even more complicated as other EU countries are set to roll out their own national Digital Services Tax regimes. Spain last week confirmed that it was the latest EU state to plan a 3% tax of its own. Hiltz said this supported his concerns:

If you have a French customer and a Spanish seller on the US website, then both of those countries would be subject to the 3% tax.

All told, the tax is set to be a hugely thorny issue at this weekend’s G7 gathering and could result in some highly public tension between Trump and Macron. A meeting of G7 finance ministers in mid-July had appeared to make some progress towards a consensus position of some kind, albeit one that US Treasury Secretary Steven Mnuchen warned still needed a lot of work done on it.

It was however enough for France’s Bruno Le Maire, who chaired the gathering, to suggest that all G7 members were in agreement “in principle”.

But that was before Trump took an active interest in the situation and reached for his Twitter account to declare:

France just put a digital tax on our great American technology companies. ”If anybody taxes them, it should be their home Country, the USA…I’ve always said American wine is better than French wine!

If a tariff bump on French wine is the response from Washington, it will cause pain to France, which exported $2.1 billion of alcohol to the US last year, making it the biggest international market for French producers. Exports of Californian wine to the EU are about a quarter of that amount across 28 countries.

Brexit bother for Bojo

It’s not just France likely to be on the firing line. The G7 Summit will also be the first face-to-face meeting between Trump and Boris Johnson since the latter became the UK Prime Minister. While the two are allies and highly complimentary about one another (these days at least), the UK is set to introduce its own Digital Services Tax next April which has also been criticised from Washington.

With Johnson committed to a 31 October Brexit from the EU, with or without a deal with Brussels, there’s a lot riding on securing a trade deal with the US. While Trump has been promising that this will happen, the digital tax plans can be added to the Irish border as a potential barrier.

While there’s been no Twitter storm from the West Wing as yet, there has been criticism. Several media outlets last month quoted unnamed White House sources as stating:

If you go ahead and introduce this tax, we will not begin free trade negotiations with you.

My take

Amazon will not be alone in passing on the new tax burden and it’s an issue that will impact on enterprise consumers and providers of digital services, not just B2C marketplaces and social media platforms. There is a genuine risk that EU customers face higher prices and that providers find themselves forced to deal with multiple tax regimes, adding complexity to their service delivery and potentially altering investment decisions by US tech firms looking to European expansion.

The OECD’s efforts to put in place some form of global response to this issue is still the best hope, but getting a consensus between countries is not going to be easy and even less so in the run-up to a MAGA election in the US.

Tensions will be running high in Biarritz this weekend. For Trump, there’s a lot of votes to be had in ‘defending’ US tech firms, even it means being an unlikely bedfellow with Bezos. For Macron, it’s hard to see how he can climb down from his stated position and again there aren’t many votes to be lost from a bit of America-bashing for the home audience.

For Johnson, the position is probably the most straight-forward - if a Digital Services Tax is going to stand between Brexit Britain and a US trade deal, the tax will be dropped from the immediate political agenda before you can say ‘chlorinated chicken’. His get out is that the new tax was the brainchild of former Chancellor of the Exchequer Philip Hammond, who quit rather than work for Johnson, and has not yet passed through the necesary legislative approval. As such, it can be quitely shunted to one side.