Tuesday, December 3, 2019

France seeks to drag rest of Europe into senseless trade war with U.S. over ideologically-motivated digital services tax

Yesterday, the United States Trade Representative (USTR)--which is the title of a presidential appointee at the rank of an ambassador (presently Robert Lighthizer), who has an entire agency, the Office of the USTR, working under him--published the findings (PDF) from the first segment of its Section 301 (Trade Act of 1974) investigation into France's Digital Services Tax. In July I reported and commented on the initiation of the investigation.

The USTR's proposed action "includes additional duties of up to 100 percent on certain French products," such as French wine. The approximate annual trade volume of those goods is $2.4 billion. Today, the French government threatened retaliation, seeking to leverage the collective economic power of the EU (which leverage is the whole reason why French politicians pretend to be pro-European) against the U.S., but President Trump remains optimistic that he'll "be able to work it out."

There are some European countries whose existing or envisioned digital tax regimes may come under pressure, so France will have some allies. But there are also many European countries that simply cannot have an interest in an escalating trade war with the U.S. only to defend of one of failing Macron's pet projects.

I've read the USTR's report in detail. The comments submitted by various stakeholder representatives to the USTR during the course of the investigation are also worth reading (you can find them on the public docket).

The U.S. government has reason and logic on its side, as well as longstanding principles of international tax and trade policy. By contrast, France has almost nothing to offer but envy and ideology.

I wrote "almost" because there is a problem that does need to be addressed, and the U.S. doesn't deny it as it's affected by it as well: it's called "base erosion and profit shifting" (BEPS). The OECD is working on that one, and it's a difficult one to tackle. Donald Trump has had some success in that regard: he basically struck a deal with large U.S. corporations under which he gave them a tax rate that made it make business sense for them to repatriate some of the profits they had parked abroad, particularly in Ireland. That kind of deal, however, is only an option if you have a truly strong economy, as the U.S. does and France doesn't to nearly the same extent. It also presupposes a political leader who, like Donald Trump, takes a pragmatic, results-oriented, non-ideological perspective.

President Trump is standing on higher ground here. He's a frequent and sometimes fervent critic of social media giants like Facebook and Twitter, who also in my observation tend to suppress conservative voices by applying dual standards. But as a matter of principle, those comp√ľanies have to be taxed primarily in the U.S., not in France.

The primary obstacle France faces in the BEPS context is simply the European Union. Just like its monetary union is an abysmal failure (as the dysbalance of the European Central Bank's TARGET2 system and ever more negative interest rates and their devastating effects on many low-income earner's retirement savings prove) because it came too early, the "Single Market"--though it does give the EU a lot of political power (500 million reasonably affluent consumers)--is flawed because it has no safeguards in place against abusively low tax rates by small member states: neither can the EU force them to impose higher taxes (though in Ireland's case there would have been a window of opportunity when the country needed a bailout) nor is there even a way of excluding a country from the Single Market if it doesn't meet certain demands (probably the only club in the world that can't get rid of antisocially-behaving members).

There's a parallel between France's Digital Services Tax (DST) and the ill-conceived "state aid" case against Ireland--in reality, against Apple: both measures were taken just because the EU couldn't agree on bloc-wide minimum corporate tax rates. Commissioner Vestager (who's great in many other ways, but misguided in this context) and French president Macron wanted to "do something" at any rate, so the Danish commissioner made up a "state aid" case out of thin air--the Court of Justice of the EU may very well overturn it entirely or for the most part--and the French president had his parliament put that DST in place.

Even that controversial Article 13 (now 17) of this year's EU copyright reform falls in that category. Advocated most aggressively by France, it basically seeks to impose a copyright-based levy on digital content platforms, knowing that Europe's market share in content consumed by European users is greater than its share in platforms. It's a DST by any other name, though not as obviously discriminatory as France's DST.

The biggest mistake those unqualified French politicians made in this context is that they made their intent to discriminate against U.S. companies very clear. The USTR's report refers to ample evidence. At all stages of the political process, and at all levels, French politicians left no doubt that they wanted to target major U.S. digital economy players while defining all thresholds and categories to the effect of not affecting any other companies with very limited exceptions (such as Spotify's advertising-based free music service).

With respect to the discrimination, the following quote from an aide to French finance minister Bruno Le Maire is also telling--it was his response to someone expressing concern over the possibility of Amazon passing on the DST to third parties selling products via its platform:

"“[T]his response makes Amazon less competitive, and so much the better, because its monopoly worries us. [...] This may allow other platforms to recover some of their customers."

It's highly unusual--and equally objectionable--for a government to state publicly that a tax regime is designed to redistribute not only money, but market share.

The French DST is also structurally more discriminatory than the EU's proposed DST (which failed to receive unanimous support) would have been.

The USTR's report makes a very good point: for low-margin businesses, a tax based on revenues (not on sales like a value-added tax, which would affect everyone, and not on profits, which only affects profitable companies) disadvantages low-margin businesses and may even force some of them to exit the French market.

The practical implications of France's DST are also insane. Companies like Amazon or Google would have to put new accounting systems in place so they can track, for the purpose of French DST, whether a transaction came from a user who was on French soil at the given time (even though that may sometimes be the only connection to France--the user may be foreign, and the seller of a good may be foreign). What's worse is that, contrary to longstanding principles of taxation, the French DST is put in place retroactively, and if some companies didn't have the related user-location-based revenue tracking in place before July, then some rough and potentially unfair estimates of the portion of their first-half-of-2019 revenues subject to French DST will have to be performed.

As for who will be affected and how much, the largest volume is presumably digital advertising. Here, the affected players (according to the USTR's report) are Alphabet (Google, YouTube), Amazon, eBay, Facebook (also including Instragram), Microsoft, Snapchat, TWitter, and Verizon (Yahoo)--and only one French company, Criteo.

Where margins are a greater problem, and volumes lower than in digital advertising, is the "marketplace" category. The French law defines marketplace services in such a way that even huge French retailers who sell products directly won't be affected--it's about those who perform eBay-like intermediary services. Here, most are from the U.S., and a few from Japan and other European countries than France. The affected U.S. companies in this context are AirBnB, Google with respect to the Android Play Store (app store), Amazon's retail involving third parties selling via its platform, Apple's App Store, Booking Holdings (booking.com, OpenTable etc.), eBay, Expedia, Groupon, Match Group (Match, Meetic, Tinder), Sabre, Uber, and ContextLogic (Wish). There will be some impact on China's Alibaba, Spain's Amadeus (business-to-business travel services), Germany's Axel Springer media conglomerate (which owns a French real estate site named Seloger) and the Zalando retail site, Japan's Rakuten and Recruit, the Netherlands' Randstad (recruiting), Norway's Schibsted (Leboncoin), and the UK's Travelport.

All in all, 17 of the 27 company groups expected to be covered by the DST will be U.S.-based, and only one French-based.

I wish all of the companies for whose rights President Trump is standing up here were grateful. Some of them are run by ultraliberals who will likely just take this for granted. Some others are more constructive. But should the Democratic Party nominate "Fauxcahontas," one of whose stated goals is to break up various Big Tech players, it will be interesting to see whom Silicon Valley PACs will ultimately donate to...

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