US concludes that France's Digital Services Tax is deliberately attacking US firms - quelle surprise!

In one of the least surprising developments of 2019, the US Trade Representative (USTR) has concluded that France’s new Digital Services Tax (DST) is an attack on American firms, leading to more bellicose threats of retaliation from President Donald Trump.

France passed a new law in July to impose a 3% tax on the revenues of digital services providers, most notably the likes of Google, Amazon, Facebook and Apple.

That prompted early morning Twitter storms from the White House, but more formally also resulted in the Office of the USTR launching a Section 301 investigation into whether France is "unfairly targeting the tax at certain US-based technology companies.”

With grim inevitability, the conclusion reached is that the French actions are “unreasonable” and “discriminatory” and that the USTR Robert Lighthizer is calling for $2.4 billion of retaliatory tariffs to be slapped on French luxury goods, such as champagne, handbags and cheese.

In a formal statement, the Office of the USTR said:

USTR’s investigation found that the French DST discriminates against US digital companies, such as Google, Apple, Facebook, and Amazon. In addition, the French DST is inconsistent with prevailing tax principles on account of its retroactivity, its application to revenue rather than income, its extraterritorial application, and its purpose of penalizing particular US technology companies.

In a report on its conclusions, the Office of the USTR accuses French politicians and officials of openly targeting US firms, despite protestations from Emanuel Macron’s administration to the contrary:

Statements by French officials responsible for proposing and enacting the French DST show that the law deliberately targets US companies. Minister of Economy and Finance Bruno Le Maire, as well as other officials and members of the French parliament, repeatedly referred to the French DST as the “GAFA tax,” which stands for Google, Apple, Facebook, and Amazon. The French government website announcing the DST proposal even contained a graphic with the logos of Google, Apple, Facebook, and Amazon. One French lawmaker seemed to speak for much of the government when she stated: ‘Taxing more large multi-nationals, especially the GAFA, is a laudable and shared wish on all the benches of this committee and, I suppose, of our Assembly.’

It adds that it sees clear protectionist motivation for the French tax plans:

Twelve of the twenty-one company groups expected to be subject to the DST under the digital interface prong are US.-based, and none is France-based. This reflects the fact that US companies have been, and continue to be, successful in the global e-commerce market. However, US companies do not dominate the French e-commerce market. Indeed, French companies are highly successful in e-commerce, but tend to own their own inventory. Thus, the fact that the DST excludes this business model—combined with the DST’s global revenue threshold—focuses the tax on US companies and excludes successful French company groups.

What next? 

Lighthizer added a warning shot over the bows of other countries with similar plans for digital taxes:

USTR’s decision sends a clear signal that the United States will take action against digital tax regimes that discriminate or otherwise impose undue burdens on US companies. Indeed, USTR is exploring whether to open Section 301 investigations into the digital services taxes of Austria, Italy, and Turkey. The USTR is focused on countering the growing protectionism of EU member states, which unfairly targets US companies, whether through digital services taxes or other efforts that target leading US digital services companies.  

Heading for London for an already contentious meeting of NATO members, Trump weighed in on the topic, accusing Macron of "sometimes saying things he should not do”:

I'm not going to let people take advantage of American companies. If anyone is going to take advantage of American companies, it's going to be us. It's not going to be France.

On behalf of France, Finance Minister Le Maire called the US threats “unacceptable" and warned of an EU vs US trade war ahead:

In case of new American sanctions, the European Union would be ready to riposte.

My take

The USTR inquiry was always going to lead to this point. The so-called compromise reached between France and the US back in August wasn’t worth the paper it was written on, as diginomica noted at the time.

There’s no immediate action planned on the US part - although much might yet depend on how tempers cope over the next 48 hours as the NATO gathering gets underway - but it paves the way for Trump to wave a big stick around.

This plays well politically on both sides of the argument - Trump is ramping up for a MAGA re-election campaign in which bashing the EU will go down nicely with core constituents and also with many Democrats - bashing the French tax plans has been a cross-the-aisle issue. Meanwhile Macron’s domestic economic crises could do with some expedient distractions and rallying the EU to its defence against Trumpian tariffs will play well on the home front.

Interestingly, the USTR statement doesn’t mention the UK’s plans for a 2% DST. All the leading parties in the current General Election campaign are committed to taxing US digital service providers to a greater or lesser scale. But Trump has been urged not to make any comments during his London visit that might be interpreted as commenting on which party he wants to win the election, so perhaps the USTR’s discretion has similar motives. An alternative reading of course might be that Washington is perfectly well aware that a post-Brexit Britain will be desperate to sign a free trade deal with the US and that disposing of any silly notions of taxing Apple or Google more will be a very simple red line to demand.