After several months of reflection, the French State has voted in favour of a new Tax on certain services provided by the largest companies in the digital sector, otherwise known as the “GAFA Tax”.
This tax was adopted on 11 July 2019.
This tax is largely based on the draft European Directive on the Common System for the Digital Services Tax presented by the Commission in March 2018 (Draft COM/2018/148), but for which an agreement from all Member States seems unlikely in the short term.
What does this tax mean and why does it generate so much debate?
What is the geopolitical context of thr GAFA TAX ?
For several years, it has been shown that the major global digital groups (Google, Apple, Facebook and Amazon) do not pay tax, in Europe, and especially in France, at the right level compared to the value that is created there.
The introduction of taxation at the French level, without waiting for the adoption of the European directive, was deemed necessary to respond quickly to the objective of greater contribution to the public treasury of large companies in the digital sector that are receiving a significant part of their income from their activities in France.
What is the purpose of this tax according to the French State?
The French Government plans to raise 500 million Euros annually through the introduction of this tax.
The GAFA tax would only affect about thirty major digital operators (mainly foreigners). Particularly noted are Google, Apple, Facebook, Amazon, Meetic, Airbnb and Instagram.
The French Government wishes to encourage the development of start-ups, and has set thresholds high enough for them to be exempted from this tax.
Is the GAFA TAX meant to last?
First of all, it is important to specify that the application of French tax will be temporary, and should in principle be repealed as soon as new rules are adopted at international level.
Indeed, France is the first country in Europe to implement this tax, although it is not the only country to have looked into this. Other countries in the European Union, such as Germany, the United Kingdom, Austria, Spain and Italy, are considering putting in place a similar tax.
In order to avoid multiple taxation problems, it is therefore planned to reach an international agreement and create a single framework at the OECD level.
Once the framework agreement has been approved and ratified, the French GAFA tax will be phased out to make room for a new tax.
What is the US position on the GAFA TAX?
Following the vote on this new tax, the US Trade Representative opened an investigation to ensure that this tax was not discriminatory, and to judge its impact on US companies.
The reaction of the US could lead to the establishment of a new customs barrier on French products.
In this regard, the President of the United States, Donald Trump, announced that he wanted to put in place a customs penalty on wines of French origin.
The holding of the G7 in Biarritz on 26 August was an opportunity for the President of the United States and the President of the French Republic to open negotiations.
Following the G7, the French government has undertaken to set up a tax credit for companies subject to the GAFA tax. This tax credit would be equal to the difference in taxation between the GAFA tax and what should have been paid had the OECD version of GAFA tax been applied.
It is therefore necessary to wait until an OECD version of the GAFA tax is passed and ratified in order to implement this tax credit, at which time the French State will compensate companies for the surplus paid, if any.
What are the concerns of the companies involved ?
Despite this development between France and the United States, US digital companies continue to fear a multiplication of the GAFA tax, and that each country of the European Union may apply its own GAFA tax.
Moreover, the Digital Companies argue that their global profits are already subject to a 24% corporate tax, which is more than the average of European companies. Therefore, taxing a turnover, and not a profit, would result in increasing this tax burden.
Digital companies are already announcing that all of this would have the consequence of putting the cost of this tax on other stakeholders, consumers and economic partners.
What type of companies will be affected by this new tax ?
Digital businesses that perform at least one of the following activities will be affected : screening of online advertising, selling of user data for advertising purposes, platform and intermediation activities, provided that these services are provided in France.
A service is considered to be provided in France when it is based on the activity of Internet users located in France, defined as those who connect to the service via a terminal located in France.
What type of companies will be not affected by this new tax ?
The following will not be affected by the GAFA tax: services whose primary purpose is not to connect users, such as: the direct sale of goods and services, including digital content (such as e-commerce, or video or music on demand service), messaging or payment services, advertising services for which the advertising messages are determined solely on the basis of the content of the website and are identical for all Internet users, and selling of data collected other than via the Internet, or for purposes other than advertising, as well as regulated financial services.
What will be the taxation of digital activites ?
To be subject to the GAFA tax, it is necessary to exceed two cumulative thresholds of turnover. It is necessary to generate more than 750 million Euros in sales worldwide, and 25 million Euros in sales in France.
If these two thresholds are reached, a single tax of 3% will apply on the amount of turnover generated in France.
These thresholds will be analysed at the level of the group of companies to which each company belongs.
Who will be calculate the turnover in France ?
Whatever the billing methods (commissions, subscriptions, etc.), or the nature and location of the payer and the service provider, all digital revenues will be affected.
The national turnover will be estimated from the global turnover to which a digital coefficient of presence will be applied in France (and not on the basis of payments from France).
To determine this coefficient, the number of French users active on the service in question will be compared to users in the rest of the world.
What is the effective date of the GAFA TAX ?
The tax is applicable from 2019, for the first time.
It must be paid for the first time at the end of October 2019.
It will then be paid as an advance payment calculated on the basis of revenues generated in 2018. This advance payment will be adjusted in April 2020.
Who the GAFA TAX will be declared and paid ?
An annual declaration of the GAFA tax must be completed and sent automatically at the end of April 2020 for the entire year 2019.
Then, the tax will be paid through two instalments: one at the end of April and the other at the end of October for the current year, with a final adjustment in April of the following year.
Each advance payment must be at least equal to half of the amount of the tax due for the previous year.
What will happen for the companies already subject to corporate tax in France ?
If the Company pays corporation tax in France on the same activities, then the GAFA tax may be deductible from the corporate tax base.