Thursday, July 11, 2019

United States Trade Representative launches investigation into France's digital tax for good reasons--and should look into copyright law, too

Yesterday the United States Trade Representative (USTR), Robert Lighthizer, announced, officially at the behest of President Donald Trump, the initiation of a Section 301 investigation (i.e., an analysis of whether a foreign government violates a trade agreement or acts unreasonably or discriminatorily against U.S. commercial interests) of France's digital services tax. The next formal step will be a Federal Register notice. This is what Mr. Lighthizer said:

"The United States is very concerned that the digital services tax which is expected to pass the French Senate tomorrow unfairly targets American companies. [...] The President has directed that we investigate the effects of this legislation and determine whether it is discriminatory or unreasonable and burdens or restricts United States commerce."

The President and the USTR are rightly concerned. France, with its almost plan-based highly-centralized economy and statist approach (= the opposite of Reagan's take that one has to get government out of the way) is an abysmal digital-industry failure, and TIMSS, the leading international math skills analysis, shows that French students are pretty much at a level with Third World countries, which means things are only going to get worse in the "Hexagon." Geographically, France is part of Europe; in educational terms, it's the worst country in the entire EU. By comparison, Singapore takes 25 times as many students (relative to the total number of students) to the top-performing level; Russia, ten times as many; and even the U.S., with its oft-criticized educational systems, seven times the number of France (again, this is a relative measure, so large countries don't have any advantage). While Germany performs 2.5 times as well as France (still far behind not only East Asia but also the U.S. and even a country like Kazakhstan), its politicans are incompetent and/or ideological enough to believe that France is their best partner in innovation policy, instead of trying to stay away from the failed French approach as much as possible.

There are two French computer game makers I think highly of: Ubisoft and (in the segment of "snackable" minigames) Other than that, I can't even think of a French technology product that would matter.

The French digital-tax initiative is ill-conceived because they don't want to tackle the real issue. The real issue is simply that the EU as a whole is a fundamentally-flawed supranational structure that does more harm than good. I sometimes recommend a great Wall Street Journal article (which doesn't even mention all of the problems), "Incredible Shrinking Europe."

Just like it was stupid and irresponsible in the first place to put a common currency in place without a common economic policy (as a result, the European Central Bank hasn't increased its interest rates even once in more than a decade, while the U.S. had half a dozen hikes during the same period), it was also incompetent and irresponsible to create a "Single Market" without some minimum tax standard or, in the alternative, an easy way to exclude members taking unfair advantage of this by positioning themselves as a low-tax access point to a market of 500 million consumers. As a conservative I'm all for tax competition, but fair tax competition and not just leeching.

The EU and the large member states of the eurozone are so poorly run that they didn't even seize the historic opportunity they had when Ireland needed a bailout. They could have conditioned the bailout on Ireland agreeing to some minimum tax standard. Obviously, leeches like Luxembourg (Juncker's country) wouldn't have liked this anyway, but Ireland is the #1 problem in this regard.

The Apple "state aid" case is the only crazy thing Mrs. Vestager did during her first term (other than that, I disagree only gradually, not fundamentally, such as with respect to some aspects of the Android case; I'm now looking forward to her second antitrust hammer--the final one for this term--coming down on Qualcomm soon; and on Twitter I repeatedly voiced the view that she was the best potential candidate for the presidency of the European Commission). That Apple-Ireland case has nothing to do with "state aid" and everything to do with "buyer's remorse" in the sense of the EU now seeing the problems that a Single Market without a common fiscal policy (at least a minimum tax standard) creates. Apple is not responsible for the EU's structural issues.

What France is doing with its digital tax is really odd. It's not a sales tax because there is no physical sale occurring in France when Facebook, for instance, displays an advertisement. Nor is it a tax on profits. Instead, France argues that because major digital platform companies are very profitable, foreign entities owe France a percentage of revenues attributable to the French market.

France wanted to make this happen at the EU level, but never got real traction as Germany was reluctant to support this with a view to potential backlash affecting its automotive industry. So France decided to implement something at the national level, and I'm glad the U.S., under its best president in decades, will seriously consider some retaliation in order to dissuade France from this idiocy. Maybe the U.S. International Trade Commission, with its investigative resources, will also be of help in the process. The top-listed candidate of Macron's party in this year's EU Parliament elections made it very clear that they view Google, Amazon, Facebook and Apple as enemies of the state, or collectively as the equivalent of a rival world power, all of which is downright insane.

While I'm not going to do any more copyright reform-related posts on this blog (maybe a new blog further down the road), I would like to just say that Articles 15 and 17 (previously Articles 11 and 13) of the EU Copyright Directive adopted this year are also the equivalent of a digital tax discriminating against U.S. Internet platform makers. France was the driving force behind Article 17 (upload filters), while Germany was more interested in Article 15 (link tax). In fact, France politically blackmailed Germany by threatening to block the Nord Stream 2 pipeline deal with Russia at the EU level if Germany hadn't supported Article 17 of the copyright bill. That is not a conspiracy theory. It was confirmed by reliable sources and reported by Frankfurter Allgemeine Zeitung, and it was obviously no coincidence that both the gas pipeline issue and copyright reform were the only two "A items" on the EU Council's April 15, 2019 agenda (so as to make it clear to Germany, which was having second thoughts, that derailing copyright reform would trigger some energy-related blowback).

The "upload filter" paragraph of the copyright bill is practically a digital tax because it creates a liability regime that is so strict that even the term "strict liability" the way it is reasonably understood in the U.S. would be an understatement. It gives enormous leverage to copyright holders (many of whom are European collecting societies and publishers) against major Internet platform companies in licensing negotiations. There are, as we all know, many very significant U.S. copyright holders (Hollywood, music industry etc.), and they'll benefit from this, too, but the European share of copyrighted works consumed in Europe is hugely greater than the European share of digital platforms used by Europeans. Therefore, this is another means of unreasonably and discriminatorily sucking money out of major U.S. Internet platform companies. It's like the digital tax, but indirect: collecting societies and publishers will initially receive the money, but obviously this will result in incremental tax payments in Europe, including France.

EU member states have some limited flexibility--a modicum of wiggle room--regarding the transposition of Article 17 into their national laws. France is already pressing ahead with the most draconian and unbalanced implementation imaginable, and other European countries may follow, though there's clearly less enthusiasm for this elsewhere.

I will follow the Sec. 301 investigation of the digital tax issue, and I strongly recommend to major Internet platform companies and the industry bodies representing them to raise the EU Copyright Directive, or at least its transposition into French law, in this context. It really is an indirect digital tax. Doing so now might dissuade other EU member states from adopting France's copyright extremism. While that is not what President Trump was elected for, it would happen to have significant benefits for European Internet users, too.

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