France takes the lead in a digital tax to regulate its domestic market
Marcus Walsh-Führing / Mar 2019
Bruno Le Maire, France's Minister of the Economy and Finance
In January, a new report commissioned by the center-left Socialists and Democrats Group (S&D Group) in the European Parliament, which includes MEPs France's Socialist party, suggests that the scale of tax avoidance in Europe is smaller than that of tax evasion.
France has demonstrated that, to successfully regulate European markets, member states need to strengthen national legitimacy by implementing EU regulation. In short, the importing of a regulatory framework by the EU has strengthened the abilities of member states to impose taxes on international companies operating in Europe.
Although this EU political strategy has been considered by member states in the past, the French Ministry of Finance is now making a proactive effort in promoting a political outcome that forces compliance from international companies to legitimize the ability of EU national governments to impose taxes. This action by the French Ministry of Finance is contrary to past common practices. Under the Juncker Commission, the LuxLeaks investigation highlighted EU institutions’ strategy to turn a blind eye to tax avoidance. It was not until political discontent surfaced over international companies taking advantage of the EU-wide tax system to avoid paying taxes that the European Commissioner for Competition Margrethe Vestager was forced to take action.
In France as in many European states, regulatory agencies have been grappling with how to impose more comprehensive tax compliance measures. In January, the French Finance Minister Bruno Le Maire stated that he was confident in member states reaching an agreement on an EU-wide tax on global digital companies by March. Throughout Europe, member states have faced challenges in addressing corporate taxes, taxing the wealthy and addressing market dominance by international firms. The political debate on tax compliance has allowed Vestager to point out the adverse political, commercial, and social effects of noncompliance by multinational corporations on the EU Single market. Consequently, Vestager’s actions to impose taxes and fines have changed the conversation on allowing member states to enforce tax and competition compliance.
To highlight the advantage of international companies over EU member states, the following example comes to mind. In the United States, the Institute on Taxation and Economic Policy has reported that Amazon profited from a negative tax rate in 2018 in the form of a tax rebate of 130 million dollars on profits of $10.8 billion. This is equivalent to an effective tax rate of -1.2 percent and places US tech firms at a considerable advantage over their EU counterparts by undercutting global tax rules. The Trump administration’s tax plan of a one time tax rate of 15.5 percent on all global cash reserves for United States companies while reducing the corporate tax to 21 percent, places members states at an even greater disadvantage.
In Europe, the legitimizing force in regulation has been the legal capacity to tax industry. To address market dominance, the EU Commission has primarily focused on imposing tax penalties, such as in the Apple tax case, and not on breaking up monopolistic firms. Recently, this strategy has been implemented by the French Finance Ministry’s action against Apple and UBS to address tax avoidance. In the UBS case, the French government imposed a fine of 4.5 billion euros, which has caused the French legal community to grapple with how to address tax avoidance vs. tax evasion.
For instance, the ability of the French judicial system to address the legal grey area in the definition of tax avoidance and tax evasion will strengthen EU-wide legislation and will set precedent for greater jurisdictional accountability not only in France but in other EU countries. This will likely make it more difficult for multinational companies to utilize loopholes in the EU tax system. At the same time, it increases the likelihood for confrontation from the United States over its position that US tech firms have been unfairly targeted by the EU.
On February 14, 2019, the European second-highest court ruled on a Belgian case where tax breaks and illegal state aid had been provided to some 35 large international companies. As part of a crackdown on tax avoidance, the European Commission ordered the Belgian government to recover some 700 million euros from these businesses to address the excess profit tax plan granted to them, which gave them an unfair market advantage. This judgment could provide clues to other tax cases involving Apple, Starbucks, and Fiat Chrysler.
This provides the opportunity for member states to enact EU regulation to hold international companies operating in the Single Market more accountable. For example, the actions taken by France give the EU commission greater political flexibility to challenge the commercial dominance of companies such as Apple by imposing the “Apple Tax” and allowing member states to regulate other aspects of tax avoidance. Judgments such as in the Belgian case also allow European companies to be protected under EU competition policy that promotes the breaking up of foreign tech multinationals.
If the French strategy proves to be effective, it will address discontent in society and will allow for a greater role of the EU in regulating the Single Market and providing resources for member states to tax. This strengthens the argument for more intergovernmental cooperation and the expansion of EU institutions to support the actions of member states. The balance that is found in the regulatory authority of both, the EU and member states, builds the institutional framework for addressing backlash from anti-European sentiment.
Currently, finance ministers of smaller member states oppose a plan to limit their power to block EU reforms that favor the increase of an EU-wide tax on large digital firms. The sentiment is that excessive tax and regulation will hinder economic growth in their countries. This is seen as political brinkmanship to gain other concessions in the expansion of competition regulation in the EU. It is expected that EU leaders will vote on passing legislation on the EU-wide tax, thereby providing France and other member states with greater authority and capacity to tax global digital companies.