France’s new digital tax proposal: the details  

By Terence Wilhelm and Clelie Ardellier, Cara Avocats, France 

The French government on Wednesday published a draft bill proposing a new tax on the revenue of large digital companies which was immediately submitted to the Parliament for checks and vote. It is expected that the final bill will be released in the coming weeks.

The bill follows an announcement made 2 March by Bruno Le Maire, the French Economy Minister of President Macron’s government, disclosing that France will vote a special bill for fairer taxation of the online tech giants.

The minister said that such a bill should only target companies meeting a twofold threshold: (i) companies with a worldwide consolidated turnover derived out of digital activities of at least 750 million euros (USD 849 million); and (ii) recording more than 25 million euros (USD 28.3 million) in France.

Such twofold criteria would narrow the targeted companies to approximately thirty companies mostly originating from the US, China, and the UK. Yet, a few French companies should also fall within that ambit. In doing so, France is hoping to fetch an extra 500 million euros (USD 566 million) tax per year.

France’s draft digital tax bill

As an introduction, the draft bill acknowledges that the average tax rate borne by companies in the EU is 23.2%. Yet, tax rate falls to 9.5% when it comes to digital companies.

In this environment, the new tax would be charged on those sales derived out of digital activities with revenues being originated on the French soil. The rate of that tax is set at 3%.

Not all digital companies are being targeted. The scope of the tax would specifically cover interfaces and websites that connect clients and businesses, advertising companies that provide targeted ads, and resellers of private data for advertisement purposes.

Conversely, the bill shall specifically exclude from its scope companies that directly sell goods (on-line sales), including digital contents (such as music or videos for instance) to consumer, e-mail and payment service providers, advertising companies that provide untargeted ads, and regulated financial service providers.

Sales made out of digital activities would be calculated based on the consolidated revenues of the digital company which would then be split on a pro rata share to the use of the service in France, so as to reflect the digital presence of the company in France.

The use of the services in France would be determined based on the location of the user or the location of the interface account used or the location where advertising is consulted. So far, it seems that the burden of proof of the user’s location would rest with the taxpayer. 

Computation and double installments

As an exception to most taxes under the French Tax Code, this new tax would be offset against the accounting result for tax purposes and therefore would reduce the corporate tax basis.

The new tax would be reported and paid according to similar features and processes as VAT. Companies would file an annual tax return and pay the tax in the form of two installments and a year-end adjustment.

For 2019, a special double installment would be implemented and would be paid in October based on the taxpayer’s 2018 net taxable income.

This bill will, however, trigger a second side effect. Indeed, the draft bill provides that, for the current fiscal year, companies falling under the scope of the digital tax and whose French taxable turnover exceeds 250 million euros (USD 283 million) will be taxed at the 33.33% rate with respect to the part of its net taxable income exceeding 500,000 euros (USD 566,000).

The 28% regular rate, therefore, would be applied only to the part of its net taxable income which is less than or equal to 500,000 euros as it would also be applied to net taxable income of all the other companies.

France’s digital tax in context

This sudden move regarding digital taxation is to be read in the wider scope of global work on addressing tax challenges of the digitalisation of the economy.

An EU directive was expected on taxation of digital companies, but no agreement has been found so far between the 28-member states. 

In parallel, the OECD issued a Policy Note on 29 January 2019 describing two central pillars identified so as to reach a consensus-based agreement on taxation of digital companies.

Anticipating such an agreement in the coming year, French Minister Bruno Le Maire already stated that French special tax would only be applied until the implementation of an efficient new tax, based on a new model of digital business taxation that would reach a consensus within the OECD. The shelf life of this new digital tax may, therefore, be quite short after all.

Clelie Ardellier contributed to this article.