Trump's wine whine uncorks more digital services tax tension on eve of G7 Summit

We knew it was coming of course, but President Donald Trump’s threats of retaliation on France for daring to get US tech firms to pay their fair share of tax still grabbed the mainstream media headlines over the weekend.

For those who haven’t being paying attention, some background. The French Government, under President Emmanuel Macron, was the prime cheerleader among the European Union (EU) nations for imposing a digital services levy on taxes paid by firms of a certain size. This levy would be based on revenues generated by those firms on a regional basis. In other words, if Company A earned X amount in France, it should be taxed on that figure.

This was interpreted in Washington as an attack on US tech firms, such as Amazon and Apple, and while the Trump administration has its own issues with both such firms, it’s not about to let a bunch of foreign governments have a bash at them.

In the event, France failed to convince other EU states to go along with its demands for a co-ordinated approach. Despite a combination of persuasion and petulance, the Macron administration ran into a wall of self-interest from others as, for example. Germany sought to protect its car industry from tariffs and Ireland cast a wary eye over all the US tech inward investment it’s been cultivating for so long.

So France has taken unilateral action and signed off on a 3% level on digital services generated in the country by companies with more than €25 million in annual revenues there and €750 million worldwide.

It should be noted that while France has been the first major nation to enforce such a levy, other nations are preparing their own versions, including the UK, Spain, Austria and Italy. And France has also committed to lifting its national tax regime if the OECD (Organisation for Economic Co-operation and Development) succeeds in coming up with an international consensus approach.

US response 

But the US is having none of this. The US Trade Representative’s Office is due to hold a hearing on 19 August as part of a probe into the new tax, which the  White House says targets US tech firms almost exclusively. The following week will see the US and France leaders attend the G7 Summit in Biarritz where the digital tax situation is on the agenda.

But President Trump escalated the situation late last week with a Tweet denouncing France’s plans and insulting Macron. In it, he said:

France just put a digital tax on our great American technology companies. If anybody taxes them, it should be the home Country (sic), the USA. We will announce a substantial reciprocal action on Macron’s foolishness shortly. I’ve always said American wine is better than French wine.

Trump is tee-total, so that last snipe can be put down to rhetoric. Nonetheless it  points to a potentially problematic situation for France, which is the single largest export for French win, accounting for 25% of total international sales.

Striking a more diplomatic tone, the official White House statement was less colorful:

[The US] is extremely disappointed by France’s decision to adopt a digital services tax at the expense of US companies and workers. France’s unilateral measure appears to target innovative US technology firms that provide services in distinct sectors of the economy. The administration is looking closely at all other policy tools.

But later in the day, after speaking to Macron on the phone, Trump doubled down on his threats in blunter terms:

They shouldn’t have done this. I told them, I said, ‘Don’t do it because if you do it, I’m going to tax your wine.

But France in turn is, in public at least, in no mood to pander to this. French Economy Minister Bruno Le Maire issued a statement reiterating his government’s position:

The universal taxation of digital activities is a challenge that concerns all of us. We want to reach a deal on this within the framework of the G7 and the OECD. In the meantime, France will move ahead with national decisions.

And he had a word of advice for the US President regarding threatened increases to import tariffs on wine:

Please do not mix the two issues.

My take

Fat chance of that. The cork, as it were, is out of the bottle on this now.

Perhaps more alarming for France though was a follow-on Trump comment to the effect that while his wine remarks grabbed the most attention, he suggested that whatever “substantial” response is coming:

Might be on wine, might be on something else.

The obvious something else is the aerospace sector, France’s biggest export industry. France and the US are already at daggers-drawn over the EU’s government aid to Airbus, ruled illegal and anti-competitive to US firm Boeing by the World Trade Organisation. That's a tempting big stick to beat for America. 

And this increasingly tense situation reaches beyond France. The UK intends to impose a 2% national digital services levy from April next year. It also hopes (needs) to strike a trade deal with the Trump administration if a No Deal Brexit occurs on 31 October, as now appears to the officially assumed position of the new government under Prime Minister Boris Johnson.

Whether the UK sticks to its position on the planned new levy has to be up in the air. Forget chlorinated chickens and hormone-packed beef, if the UK wants a trade deal it might need to quietly drop its tax plans, particularly since the President’s re-election campaign will be heading into its final stages and pitching a MAGA mantra loud and clear.

The problem in terms of getting any movement on this issue is, as I’ve noted before, that both the US and France have political points to score here. Renaming French Fries ‘Freedom Fries’ did George W Bush no harm with Middle America, any more than taking a stand against France will hurt Trump. But then again, a bit of standing-up to America is never a bad move electorally for a French President, particularly one under pressure on the home front.

The G7 Summit next month provides a useful forum to re-open discussions, although the hearing in Washington the week before risks enflaming the situation further before then. It’s in the interests of other G7 nations to try to broker some kind of compromise. But all the while, the prospect of international consensus on this critical issue in the global digital economy looks ever further away.