What Happened

The Office of the U.S. Trade Representative announced July 10 that U.S. President Donald Trump had directed the agency to launch an investigation into France's proposed digital service tax bill under Section 301 of the Trade Act of 1974. The bill was passed by France's lower house last week and passed by its Senate on July 11. Once rolled out, the proposal would implement a 3 percent tax on revenue that global digital companies earn in France. To be eligible for the tax, a company must have global revenue of at least 750 million euros and French revenue of at least 25 million euros.

Why It Matters

The proposed tax's thresholds mean that U.S. tech giants are affected almost exclusively, and most French (and European) firms are ignored. Because of this, Washington views the measure as discriminatory and effectively a trade barrier of sorts. The Section 301 investigation is almost certainly going to come back with an affirmative decision, which leads to the question of what the United States will do next. In all likelihood, the White House will back tariffs on French goods. And while retaliation has to be proportional according to the law, the United States has the freedom to choose which goods it wants to target and could cherry-pick politically sensitive industries for tariffs, such as wine, cheese and other agricultural products. 

Although this could be used as a negotiating tool down the road to try to get France to drop its opposition to an agricultural free trade agreement, the U.S. concern and focus here — at least for the U.S. trade representative and most of the tech industry — is on the broader digital services tax issue itself. This is a giant ongoing issue being discussed at the Organization for Economic Cooperation and Development (OECD) and at the World Trade Organization level. Given the dominance of the U.S. tech sector and the comparative weakness of the European tech sector, the two blocs are likely to find themselves on opposite ends of the spectrum in digital services talks at the OECD, even if both broadly want to push the digital service tax debate to a global body. 

Background

The European Union had been pushing to pass a digital service tax at the EU level, but those efforts fell apart in December 2018 after France and Germany failed to get business-friendly countries including Ireland, Sweden, Denmark and Finland on board with the plan — which required unanimity for implementation at the EU level. These countries argued that the tax would lead to higher costs for consumers and pushed for a common position at the OECD. 

As a result, several European countries, including France, the United Kingdom, Spain and Italy, have proposed the tax be implemented at the national level initially and scrapped once an EU-wide (or OECD-wide) scheme comes into effect. France is the furthest along this path and it is hoping that it can lead by example in doing so. Though the tax is popular in many EU countries — because it is part of a narrative claiming that big corporations should pay more taxes — a strong American reaction against France could make the countries that support the tax reassess their positions. Given U.S. concerns about other countries copying the model, it should be no surprise that the United States is rejecting the move. That said, the Section 301 investigation response is about as heavy-handed of a tool that Washington could reach for.