ANALYSIS - France Plans To Solve Tax Row With US In 2 Weeks But Fight Against GAFA 'Cannot Be Won'

BRUSSELS (Pakistan Point News / Sputnik - 10th January, 2020) Less than two weeks are left for Paris and Washington to resolve their row over a French digital tax and the US' planned retaliatory levies, yet experts told Sputnik that the fight against major tech companies, referred to as GAFA, simply cannot be won by Europe.

On Tuesday, French Finance Minister Bruno Le Maire said that he had agreed with his US counterpart, Steven Mnuchin, to reach a compromise - within the Organisation for Economic Co-operation and Development (OECD) - on a digital tax in the next two weeks, prior to their next meeting on the sidelines of the World Economic Forum in late January.

Le Maire made his statement after a meeting with EU Trade Commissioner Phil Hogan, who has already said that the European Commission "will stand together with France" in this row with the US. Hogan also warned that any decision by the US to activate the retaliatory measures would "bring an end to the discussions."

Hogan is notably an Irish, while Ireland was originally very much against taxing GAFA (acronym for Google, Apple, Facebook, and Amazon) as the country is the main beneficiary of the tech giants' "tax optimization." These companies have established head offices in Ireland to avoid taxation everywhere else in Europe.

The European Commission thus supports France, which is new, since Germany, Ireland and other countries earlier have had doubts about the taxation of the digital giants.

That is what Arthur Wellesley, 1st duke of Wellington, shouted to French general Pierre Cambronne at the end of the Battle of Waterloo. The answer by the Frenchman was: "The Guard dies but does not surrender!" According to another version, he said: "Merde!"

This sounds personal and far-fetched, but there seems to be something of a personal contest between French President Emmanuel Macron and US President Donald Trump, in the tax spat between allies across the Atlantic. Heading for the NATO meeting in London in December, Trump even accused Macron of "sometimes saying things he should not do."

Macron personally defended the digital tax, saying that "taxing more large multi-nationals for their activities in France, where they pay practically no taxes, especially the GAFA, is a goal that we share with most European partners."

Trump swiftly reacted: "I'm not going to let people take advantage of American companies. If anyone is going to take advantage of American companies, it's going to be us."

The Office of the United States Trade Representative launched an investigation into France's digital tax, concluding in December that it was unfair and "discriminatory," having the "purpose of penalizing particular US technology companies."

The US government threatened to slap taxes of up to 100 percent on $2.4 billion worth of French sparkling wines, bags, clothing, cheese, lipsticks and other luxury products.

Le Maire protested, saying that the American accusations were "unacceptable," but he has himself repeatedly referred to the taxation as the "GAFA tax."

Is the quarrel going to be a Waterloo defeat all over again, this time for Emmanuel Macron? Time will tell.

According to professor Paul Belleflamme of the Louvain school of Management, a specialist in digital business, it is hard to predict what "this exercise in 'muscle-strengthening'" between France and the US will result in.

"It is difficult to tax these platforms which are intermediaries between groups of users. It is difficult to analyze the differences between services and users of these services. If the provision of Airbnb accommodation is taxed, the platform will change its pricing system so that it is not the hosts who will be impacted by the tax, but the travelers/consumers. The impact of a GAFA tax is difficult to analyze," Belleflamme told Sputnik.

Another problem is difficulty with locating the service.

"Our taxation systems are national and it is all the more difficult as these multinationals are the champions of tax optimization and make maximum use of existing rules with armies of lawyers to pay almost no taxes. Note that this is also the case in the United States and Trump would certainly want to tax them, but for the benefit of the American treasury," he explained.

The expert believes that a perfect solution would be the one jointly found in the OECD and the World Trade Organization, but "we are far from it." The reality is there are still a large number of tax havens, and the EU itself is "far from a fiscal union," Belleflamme noted.

Another aspect is that this taxation is a political and even social issue as much as it is an economic one.

"The question is not so much a technical as a political one. The decision to seek to tax the GAFAs was taken in France last year at the height of the 'yellow vests' crisis, which demanded more social justice. The French people wondered how it was that the digital giants did not contribute to the financing of the state. It is a matter of social justice," Dan Khalifa, a lawyer at France's De Gaulle Fleurance & Associes and an author of several publications on GAFA taxation, told Sputnik.

Khalifa, however, noted that the companies that are "in the crosshairs" could simply move to another country where this tax is not applied and continue their activities.

With the 2020 US presidential race around the corner, this tax row is also rather political for the US, while Trump seeks to show that the United States is strong.

Though the main front for the US is China, Washington is also in an economic war with Europe, the expert noted, suggesting that the EU as a "weaker competitor" can be weakened first.

Etienne de Callatay, the chief economist at Orcadia Asset Management in Luxembourg, agrees that the taxation issue is both a political issue and a matter of justice. He also argued that France's proposed 3 percent tax is too "little" for the rich tech giants.


Other experts however believe that the problem is that Europe lacks own tech giants and has so far been mostly unattractive for digital businesses from a tax perspective.

"In principle, everyone agrees that taxation should be levied where wealth is created; however the GAFA have created wealth everywhere except in Europe ... You have the well-known American giants, then the Chinese, but nothing in Europe which is comparable. The problem is that in the digitalization of the economy, Europe is underdeveloped and does not create wealth. Europe is also unattractive from a tax perspective, and most of the wealth is created in the United States," fiscal expert Thierry Afschrift, the founder of L'association Afschrift lawfirm and a professor at the Free University of Brussels, told Sputnik.

In case of the French taxation, it is the consumer who will bear the brunt, according to the expert.

"Amazon has already announced that the firm will pass the tax on to its European suppliers, who will pass it on to their customers (Marketplace platform). It is not the state that decides, but the market ... If we had Amazon in Europe, we wouldn't be there; European companies were not of critical size and were bought out," he said.

As for tax optimization, the expert said that it is natural that companies seek the least taxed route. According to him, "this fight will never be won," despite the extension of competition rules by the EU, and tax avoidance would continue.


Back at the G7 summit in Biarritz, Macron promised Trump that France would immediately abandon its national digital tax should an international agreement on digital taxation be concluded.

Amid the US-French row, BusinessEurope, the influential association of European businesses, strongly speaks in favor of a global solution to the digital taxation to avoid "fragmentation" of the international tax system and a "further increase in international double taxation."

"We continue to believe that the global nature of the issue of taxation in the digitalized economy requires a global solution at the OECD. Only through a global and deep consensus, and not through unilateral initiatives, can we hope to reform the global tax system in a coherent and lasting way, without risking a competitive disadvantage for companies as they adopt new business models and get digitalized," BusinessEurope told Sputnik.

Countries therefore "must make a clear commitment to repeal the existing unilateral measures, such as the so-called digital services taxes, when the OECD finds an agreement," it added.