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France adopts a digital giants’ tax

  • France
  • Tax planning and consultancy
  • Technology, Media and Telecoms


Last Thursday, July 11, 2019, the French Parliament definitively enacted the so-called "GAFA tax” initiated by the French government in early March 2019, making France one of the first countries to tax the turnover of digital giants.


Disruptive economic models run by tech giants have led some governments, including in France, to consider that the old taxation system is now outdated. This is due to the recognition of low effective tax rates in this industry. The French Minister of Economy mentioned in March 2019 that the internet giants are generally subject to an effective tax rate 14 points lower than the one applicable to standard small or medium size companies, indicating tax planning opportunities for these giants.

International taxation has so far allowed for allocating taxation rights to jurisdictions either by reference to the consumption place (VAT) or the tax residency of the taxpayer (corporate tax), focusing on the location of assets. Regarding tech giants, this last criteria is considered not effective for governments looking for more tax justice (especially in countries where social tension exists), as the digital giants mainly hold intangible assets that can be easily developed or located anywhere and often in countries with low tax rates or reduced taxable basis, even within the EU (e.g., Ireland).

Such issues are already in the scope of discussions at international level. The OECD has worked on these questions for years and should issue a report by 2020. At European level, the Commission issued two Directive proposals to allow a better allocation of taxing rights in relation to the added value generated by digital business operators. One of these proposals focuses on implementing a tax dedicated to digital services. However, the tax sovereignty of EU countries and corresponding need for an EU consensus protected the tech giants, as some countries, including Ireland, Sweden, Finland and the Czech Republic, raised objections.

The French government continued pushing for new rules allowing them to tax a greater share of the revenues of these giants. France then adopted this week a new law, broadly inspired by the Directive proposal, leading to the taxation of 3% of the revenue generated by these giants in France. Such a move, that has already been adopted by Spain and Italy and soon possibly also by the UK, could be seen as a way for France to push other countries to act in the same way and adopt their own domestic “anti GAFA” taxation systems. Another outcome of this new French law could be to push more countries to support a multilateral agreement providing rules to tax digital giants on a global basis. A more direct outcome is an estimated €500m increase in yearly tax earnings for the French Budget.

The text of the law originally provided that the tax would be temporary. Such reference has been erased in the final version of the law enacted, but the law still provides that the French government will address a yearly report to the French parliament indicating (i) any international level progress to adopt a global tax mechanism and (ii) the date on which the French tax would be replaced by such international tax mechanism.

Scope and basis

The new tax would apply to companies which generate more than €750m revenues, of which at least €25m are deemed to be generated in France.

The services within the scope of this tax consist of 2 mains types:

1. Services of digital platforms which enable 2 customers to interact, namely in order to transfer goods or provide services

2. Advertising targeting services

The thresholds are to be considered at the level of the group which the companies belong to, so a split of the turnover among companies of the same group would not allow a group to avoid this tax.

The new tax will apply to US and UK based companies (including Google, Amazon, Facebook and Apple, collectively referred to as “GAFA”, but also other digital business operators, such as Meetic and Instagram), as well as some French taxpayers (including Criteo, Le Boncoin and SoLocal - formerly Pages Jaunes).

E-business websites (e.g., Amazon, Fnac Darty or CDiscount where selling their own products) are not in the scope of this tax, whereas marketplaces (e.g., Ebay and Amazon) would be, depending on whether they reach the thresholds.

The rules focus on the place of location of the user, which is mainly deemed to be in France where:

- the marketplace user uses a French IP address;

- the user of an account (e.g., with Netflix) has opened it from France;

- the advert has been placed on an interface thanks to data collected from a user located in France (identified as such through its French IP address); or

- the data sales have been generated through the consultation of digital interfaces by users located in France.

Then a French “nexus ratio” is to be applied to revenues of the taxpayer for the relevant year, per category of revenues: global amount of revenues / revenues allocated to French users.

Payment and filing

The net amount of revenues thus determined is then subject to a 3% tax levied through 2 instalments, in April and October, each corresponding to 50% of the tax owed.

Filings will have to be made with the filing of the VAT return relating to March, or by April 25 for taxpayers that are not subject to VAT in France. Taxpayers must also provide the French tax authorities, on demand, information re. monthly earnings corresponding to the services within the scope of the tax and the ratio applied to determine the taxable basis.

For 2019, the tax being retroactive, taxpayers will have to pay one sole instalment, generally be by the deadline for filing the VAT return relating to October 2019.

Potential tax controversy

The consistency of the new law with other regulations is already subject to discussions.

From a domestic point of view, Parliament can differentiate between taxpayers which are not in the same situation, provided that is based on objective and rational criteria relating to the main aim of the law.

As a consequence, some available exemptions, namely the ones applicable to regulated financial services, could be a first ground of challenge to the law, taking into consideration its rationale and objectives.

Another argument, based on the “equality before tax” principle as provided by the French constitutional corpus, could be used to demonstrate inconsistency with the constitution. Indeed, if France had to focus on revenues (and not income) to determine this new tax basis and therefore avoid the application of double tax treaties, it brings it in the well know discussion around contribution capacities of taxpayers.

At EU level, other arguments may be found, in particular considering the impact of the new law on EU freedoms of movement and EU State-aid regulations.

No doubt the new French taxpayers will investigate these routes further.