New French tax turns Trump and tech giants into strange bedfellows

What does French rosé have in common with American software? Both are wrapped up in a brewing trade scuffle between the U.S. and France, which has spawned an unlikely alliance between the Trump administration and major American tech giants.

In a tit-for-tat at last week’s G7 summit in Biarritz, France, European Council President Donald Tusk vowed Europe would retaliate if the U.S. were to impose tariffs on French wine. The U.S. threat to impose tariffs on France are themselves a reaction. France has instituted a 3 percent tax on companies that earn at least 750 million euros globally, and 25 million in France.

Google, Facebook and Amazon, all testified against the French tax at a U.S. Trade Representative hearing earlier this month. Their united stand reflects a rare example of tech giants — which have often drawn the ire of President Trump — seeing eye-to-eye with the administration.

Why France is pushing to hold tech companies accountable internationally

When he ran for president, Emmanuel Macron had vowed to make France a “startup nation” by fostering growth among innovative tech companies. Since he took office, though, Macron has demonstrated a keen interest in reigning in “big tech,” and leveling out competition among key players in the industry.

Experts say the calculation among France and other European companies in targeting American tech companies is simple — the “Big Four” (Google, Apple, Facebook and Amazon), are all based in the U.S., and they’re bigger and more profitable than many firms in other countries.

“The U.S. is getting more opportunities for platforms to scale,” added Eline Chivot, a senior policy analyst at the Center for Data Innovation, which is based in Washington and Brussels. “But in Europe, because of the regulations in place, they’re limited in possibility to grow.”

Enter France’s 3 percent tax on digital services , which is intended to provide a framework for an international digital tax once a wider swath of countries come to a consensus.

“France has positioned themselves as being the leading government in getting companies to cooperate more,” said Alina Polyakova, who directs the Project on Democracy and Emerging Technology at the Brookings Institution, based in Washington, D.C. Similar taxes have been proposed in the United Kingdom, Spain and Belgium, but France’s is the first tax of this kind to go into law.

While French officials have not said they intend to target American companies specifically, the U.S. Chamber of Commerce said that a large majority of the tax — which is expected to bring in 500 million euros, or $554 million, of revenue for France — will likely be paid by U.S. firms.

“This is one instance in which the U.S. administration is acting to protect U.S. business interests. The thinking is that these are American companies and therefore the U.S. should decide how to regulate them, not other governments.” Polyakova said.

A new tax code for the digital economy

The current international tax code requires that companies be physically present in order to be taxed — an outdated standard that has allowed digital companies to get away with evading taxes outside of the country where they are headquartered.

“The international tax system was essentially created in the 1920s, so what countries are seeing now is that…companies can make huge amounts of revenue from their own citizens without the companies ever being located in that country,” said Lilian Faulhaber, a professor of law at Georgetown University specializing in international taxation.

Governments argue that the system gives major companies such as Apple, Facebook and Google a significant financial advantage when it comes to their international operations. According to an oft-cited statistic by the European Commission, many tech behemoths only pay about half the effective tax rate of companies with traditional business models.

The goal of the OECD negotiations is to move beyond unilateral measures, like the one proposed in France, toward an international solution on taxing the digital economy.

Will the Trump administration and big tech lead this fight together?

While major U.S. tech companies may not see eye-to-eye with the current administration, both sides recognize that they are all invested in seeing a major overhaul of the international tax code.

“The practical reality is that U.S. policymakers are aware that tech engines are big engines of job growth. They’re clearly innovators in the U.S. economy,” said Chris Calabrese, vice president of the Center for Democracy and Technology, based in Washington, D.C.

“The U.S. is most concerned that lots of different countries will move forward unilaterally and impose a whole host of overlapping and inconsistent rules that will end up applying for U.S. tech companies,” Faulhaber said, adding that the U.S. has been heavily involved in OECD negotiations for an international solution.

While President Trump has yet to follow through on his threats of retaliatory tariffs on French wine, Amazon has already taken action — the company recently raised its seller fees for French businesses by 3 percent.