French President Emmanuel Macron announced Monday that he and U.S. President Donald Trump reached a deal at the G-7 summit to avert tariff hikes that Trump had threatened against French wine in retaliation against a 3 percent tax that the French government recently imposed on the digital services revenue earned in France by multinational technology companies.
Under the agreement, companies would be reimbursed or would be able to deduct the payments once an international agreement under the auspices of the Organization for Economic Cooperation and Development is finalized. The OECD, which developed the Base Erosion and Profit Shifting, or BEPS, action plan and the country-by-country reporting regime in an effort to discourage multinational corporate tax avoidance strategies, is aiming to produce an agreement on digital taxes by the end of 2020.
“We have reached a very good agreement,” Macron said at the conclusion of the summit of world leaders in Biarritz, according to Bloomberg News (see Macron says deal struck with the U.S. on taxing tech giants). However, Trump was noncommittal at the news conference, joking that First Lady Melania Trump “loved your French wine.”
“The idea is that we need to find a joint agreement in order to address joint international problems,” Macron said, according to The Hill. “And the situation right now is very negative, and the international tax system definitely needs to be modernized, and I think we will work together in a spirit of cooperation on this.”
Before leaving for the summit on Friday, Trump reiterated an earlier threat to impose tariffs on French wine in reaction to the new tariffs. The tax could affect some of the biggest U.S.-based tech companies, including Amazon, Facebook and Google. “Those are great American companies and frankly I don’t want France going out and taxing our companies,” Trump told reporters on Friday before leaving for the summit, according to Fox News. “And if they do that, we’ll be taxing their wine or doing something else,” he said. “We’ll be taxing their wine like they’ve never seen before.”
European Council president Donald Tusk said at the G-7 that if the U.S. imposed such tariffs, the European Union would respond in kind, according to USA Today.
However, once Trump arrived in Biarritz, he was welcomed by Macron and invited to lunch, where he told reporters, “I love French wine.”
After the announcement of the tentative deal, Sen. Ron Wyden, D-Ore., the top Democrat on the Senate Finance Committee, urged caution.
“The Trump administration should reject any deal that allows France and other countries to move ahead with discriminatory taxes on U.S. technology companies, in exchange for vague promises down the line,” Wyden said in a statement Monday. “If Donald Trump gives France a pass now, then it will be open season for foreign governments to go after major American employers.”
Benjamin Alarie, CEO of Blue J Legal, a predictive tax law software company, foresees higher taxes on tech companies, whether they’re imposed in France or other parts of the world.
“The big difference over the status quo is that technology companies may have to start paying meaningful amounts of tax in these jurisdictions where they really aren’t paying significant and meaningful amounts of tax under the current status quo,” said Alarie. “That would be the number one biggest change.”
He doubts that many tech companies would undergo a major restructuring to avoid a digital services tax, though. “Most of the proposals I’ve looked at don’t suggest that the amount of tax at issue would really be such that the firms would be motivated to undergo major restructuring to avoid them,” said Alarie. “Part of the exercise here is to presumably set up a digital tax so that it’s fairly difficult to avoid the tax. Depending on the proposal. there are different strategies to make it relatively difficult to avoid paying, and then also the amount of tax and the rates that are being talked about usually aren’t so high that you would think that it would lead an organization, a company to fundamentally change how they’re going about their operations. It’s the art of setting it up so that the best strategy for the company is simply to just pay the tax. Naturally, in order to make a tax more difficult to avoid, one of the things that the countries considering these proposals want to do is to coordinate with other jurisdictions if possible. If you have an E.U.-wide approach, that’s actually very helpful, but I do believe that some of the countries now are considering unilateral measures because they feel like it’s been difficult to get a coordinated response articulated and implemented.”
Blue J Legal’s software helps companies with planning the impact of various tax law changes. “Our customers use our software to better understand what the likely legal treatment would be of a particular tax situation if something were to go to court or be challenged,” said Alarie.
The tax implications have morphed into political implications for leaders in both the U.S. and France. “I think it is deeply political, and you can understand why this actually becomes less of a tax policy question, and more of a political question because most of the big technology firms are headquartered in California,” said Alarie. “American companies who have global reach have set themselves up in many cases around the world in lower-tax jurisdictions in the ownership of intangibles and certain assets in order to shift profits around in certain ways. But it’s easy to imagine that this becomes very much a political issue, if predominantly American firms are feeling that they are being singled out by predominantly European countries for a special tax being imposed on them.”
However, the U.S. may come across as hypocritical if it insists on waiting until the OECD comes up with a worldwide agreement since the U.S. hasn’t fully implemented some of the OECD’s earlier initiatives.
“It’s very interesting to me that the multilateral instruments under the OECD base erosIon and profit shifting plan have been executed by dozens of countries, and among the jurisdictions that have not signed onto it, I believe, is the United States,” said Alarie. “On the one hand, it appears that the U.S. doesn’t want to subscribe to the BEPS project with the multilateral instrument, but on the other hand is suggesting that the OECD would be the better forum for these kinds of questions. I actually think there’s some force to that argument. These kinds of decisions have to ensure that digital services are being taxed fairly and efficiently in a way that the international community can get comfortable with, but it is a conversation that should be happening at an international level. I would definitely support that. It’s hard to know because sometimes if you want to stop something from happening, sometimes the best strategy is to try to get international agreement before anything happens. It’s part of a delay strategy or an avoidance tactic. But if you go into that process in good faith and say, ‘Yes, we want a fair and efficient system of taxation for these kinds of digital services,’ then that’s something different altogether. People can say that in good faith and want to avoid a patchwork of unilateral measures.”