Fed up with big technology multinationals, most of which just happen to be American, France wants to tax them more heavily.
Last week, French lawmakers passed a measure that would impose a tax of up to 5% on digital companies with annual global revenue of more than US$845mil (RM3.4bil) and local revenue of more than US$28mil (RM115mil).
"When France shows its will, that’s when things change,” Finance Minister Bruno Le Maire has said, with Gallic modesty. Unfortunately, things aren’t changing for the better.
This measure is thoroughly ill-conceived. Because it applies to revenue rather than profits after expenses, it could end up taxing companies that don’t make money. Because France is enacting it in isolation, it’s likely to lead to double taxation and onerous compliance costs.
With vague and ambiguous rules, it’s causing needless risk and uncertainty. And for all the trouble, it’ll earn a pittance: about US$560mil (RM2.3bil) a year.
That’s about a 1% increase in corporate tax revenue. Worse, the measure is plainly discriminatory. In addition to illogically singling out a specific industry, it will apply to only a handful of global companies – most of them, as it happens, American.
It includes indefensible carve-outs to protect local competitors. The government concedes that only a single French company will be subject to the tax. This is a tariff by another name.
America, then, has every right to object. It doesn’t help that big US tech companies are currently besieged by European Union regulators; a new antitrust fine imposed on Qualcomm Inc is just the latest initiative.
Unfortunately, president Donald Trump is inclined to make a bad situation worse. Last week, his administration said it was opening a "Section 301” investigation into the tax. Under US law, if such a probe concludes that another country has engaged in unfair trade practices, the president has broad discretion to impose tariffs in response.
Trump, it’s safe to assume, will not resist that temptation. He should.
Section 301 cases have been exceedingly rare in recent years, and with good reason: They’ve been almost entirely ineffective at achieving America’s goals.
In all likelihood, going down this road will only worsen tensions with Europe, invite retaliation and legal challenges, impose costs on American consumers and businesses, slow economic growth, jeopardise jobs, and slam another nail in the coffin of the rules-based trade system that Trump seems determined to bury.
A far better way to address France’s misguided protectionism is through the World Trade Organisation’s dispute-settlement system, where the US has been largely successful over the years.
That might take time – a year or more – but it would achieve the administration’s objectives, limit collateral damage, and demonstrate that the US still upholds the rules and values it built into the system over decades.Instead, there’s glib talk in Washington of tariffs on French wine and cheese.
Members of Congress – in both parties – are not only applauding Trump’s unilateralism, they’re threatening to invoke an arcane statute that would allow them to double taxes on French citizens and companies in the US.
Remember that France is still a notional ally. Before things get worse, both countries should take a step back. It’s true that taxing tech companies has proved challenging in recent years. But the way forward is through international cooperation, not yet another misbegotten trade war.
France and the US are both participating in talks at the Organisation for Economic Cooperation and Development that are intended to establish a truly global system of digital taxation.
It’s a slow and cumbersome process, but it’s also fair-minded, rational and economically sound. The same can’t be said for France’s new tax, or Trump’s unenlightened response. If it continues to escalate, this is a conflict that no one will win. – Bloomberg