Voici le Euro Fudge (encore!) - France’s demands for US-aimed 'turnover tax' crash and burn in Brussels

Back in the 1970s, commenting on how fast political positions can change, the British Prime Minister of the day Harold Wilson made the observation that:

A week is a long time in politics.

That being so, a month is even longer as French Finance Minister Bruno Le Maire has found out this week.

It’s almost a month ago since he rocked up to a meeting of European Union finance ministers demanding that they all fall in line with his government’s pursuit of a Digital Services Tax that would mostly hit US tech firms.

As noted at the time, Le Maire took a belligerent tone, hectoring his EU counterparts with a French-created deadline for action:

Let’s be clear – this is the red line for France. There must be the adoption of a directive on digital taxation by the end of this year!

Flash forward a few weeks and yesterday Le Maire’s stance was:

Don’t expect us to solve the challenge of a generation in a couple weeks or months.

Taxing times

What caused this sudden outbreak of humility? As predicted, the French-led proposals - to slap a 3% levy on the European sales of companies with a global annual revenue of €750 million or more - met with continued resistance from low-tax economies, most notably Ireland, and, crucially, ongoing concerns about the future of its automotive industry from the Germans.

France just can't get the necessary votes - all 27 EU member states need to be in agreement. As such, there’s no longer a ‘must do’ deadline of this year, but instead in time-honored tradition, on the table now is a Franco-German ‘Euro Fudge’ Plan B - a proposal to stick a 3% levy on online advertising revenues generated within the EU.

The new proposals don’t cover online marketplaces or data sales, so would take the likes of Apple, Amazon and the cloud services sector out of the picture. In reality, it would become a Google and Facebook tax in the main. It’s also pitched as a temporary fix that ought to be passed before March 2019 with implementation before 2021 and removal by 2025.

There are points of clarification that need to be addressed. The proposal is based on the idea that the necessary technology is there to track how much local revenue is coming from online advertising. It’s also not clear whether or how the plan would deal with paid for promotions on the likes of Amazon. The devil, as ever, is in the detail.

Climbing down

It’s an embarrassing climb down for the French. The Macron government had made enormous political capital out of taking the lead on the challenge of taking on US tech giants with a more effective tax regime. (Tax is unlikely to be anyone’s favorite topic in the Elysee Palace this week after Macron was forced to back down on introducing higher diesel taxes after rioting broke out in Paris.)

France had already compromised on its earlier demands for an EU digital tax, suggesting last month that it could live with the idea of a promise to work on such a tax regime only if an Organisation for Economic Co-operation and Development (OECD) agreement on new tax rules isn’t reached by 2020.

So now it’s face-saving time. Once, Le Maire insisted:

Europe must learn to defend its economic interest much more firmly — China does it, the US does it.

Now he says of his watered down proposal:

It’s a first step in the right direction which in the coming months should make the taxation of digital giants a possibility. Will it put all arguments to rest?, certainly not…Like any European compromise, some will be disappointed. They’ll say it’s not enough and I can understand them.

Will that be enough to get sceptical nations to back the new plan? On first sight, that’s far from clear. Irish Finance Minister Paschal Donohoe says he still has “strong, principled concerns about this policy direction”, while Finnish Finance Minister Petteri Orpo states:

I promise to be constructive and I'm ready to look at the proposal, but I still have serious concerns with it.

And a lot of EU member states remain nervous about the potential retaliation that would come from the Donald Trump White House, as EU Economics Affairs Commissioner Pierre Moscovici observes:

There's an elephant in the room: the fear of trade reprisals by the Trump administration that might consider a tax as a protectionist measure against US high tech giants.

Over in Washington, Kevin Brady, Chairman of the tax-writing Ways and Means Committee in the House of Representatives, wasted no time in  celebrating the “EU abandonment” of its plans:

As I have said in the past, introduction of a new tax targeting cross-border digital services would have singled out a key global industry dominated by American companies and would have been a clear revenue grab. The new idea for a tax on advertising revenue that is being floated by some countries is similarly flawed and is appropriately being greeted with significant skepticism. Rather than pursuing measures like this that would result in double taxation, countries should continue working together through the OECD framework on the important global dialogue regarding the digital economy.

What’s more likely to happen is that EU nation states will now accelerate their own Digital Services Tax regimes, such as the UK’s plan for a 2% tax on local revenues from firms generate more than £500 million a year in global revenues. Italy and Spain have already announced their own intentions, while 8 other EU countries are believed to have similar measures in the pipeline.

My take

Et voici, le Euro Fudge! Formidable, Monsieur Le Maire!

A bullying, politically-motivated approach to a complicated global economic issue gets the kicking-down-the-road that it deserved.