France is the first EU Member State to have implemented a DST.
This “tax of the 21th Century” entered (retroactively) into force on 1st January 2019.
The DST has been dubbed the “GAFA tax” (an acronym of the main US targets: Google, Apple, Facebook and Amazon). However, contrary to what this acronym suggests, the French GAFA tax does not only target US groups but also other international groups including French, Chinese, German Spanish and English groups. Indeed, the French tax administration has estimated that around 30 international groups could be impacted by this tax.
The scope of the French GAFA tax relates to the value of digital services supplied in France. The business activities falling within the scope of the DST are: the supply of a digital platform allowing users to interact with other users and notably in order to facilitate the direct provision of goods or services between users; and the supply of services to advertisers which aim at placing on a digital platform targeted advertising content generated by personal data collected on digital platforms.
The supply of a digital platform relates to the location of users. Where one of the users of a platform is located in France during the relevant tax year, the service will be considered to have been provided in France.
The French GAFA tax does not apply to platforms for which collection of the users' data is not a main objective. Provided the businesses principally use the digital interface to supply users with the following services, the supply of the digital platform should not be taxable:
1. digital content such as e commerce, video services, music on demand; 2. communication services; 3. regulated payment services.
Where the digital interface is used to manage specific regulated financial systems and processes such as payment settlement, the supply of the digital platform should not be taxable.
Furthermore, where main purpose of the digital platform is to facilitate the purchase or sale of services to place adverts, the supply of the digital platform will not be taxable but the supply of these services to advertisers will be taxed.
These services will be deemed to be supplied in France during the relevant tax year if the following conditions are met:
• where the digital platform allows the provision of supplies of goods and services directly between users: a transaction is concluded during the relevant tax year by a user located in France
• for other kinds of platform: at least one user opens an account from France during the relevant tax year allowing the user access to all or some of the services available on the digital platform
In terms of services to advertisers: these services may include acquisition, storage and delivery of adverts, advertising control and advert performance measurement as well as user’s data transmission and management.
These services will be deemed to be supplied in France during the relevant tax year where the following conditions are met:
• where the service relates to the sale of data generated or collected from users activities on digital platforms: when the data sold during the relevant tax year are derived from the consultation of one of these digital platforms by a user located in France
• in the other cases: when an advert is placed on a digital platform during the relevant tax year which relates to data derived from a user consulting this digital platform while located in France
Intercompany transactions are excluded from the GAFA tax.
The GAFA tax sets out two key thresholds, both of which must be met by businesses for the DST to apply: €750 million annual worldwide turnover for digital services, and €25 million domestic turnover on digital services localized in France.
France adopted the rate suggested in EU’s proposals, applying a 3 % tax on the revenues derived from any digital services meeting the criteria set out above. The person liable to pay is deemed to be the company which receives payment for the relevant digital services. The taxable sum will therefore depend on what proportion of the payments is related to France, the type of services and the type of platform. Any payments received in relation to the supply of a digital platform facilitating the sale of manufactured goods should not be taken into account.
Unlike the UK tax, the French GAFA tax is not deductible from corporate income tax. It is, however, deductible from another French tax named C3S (formerly known as “Organic tax”). This deduction mechanism has prevailed over deduction of the DST from Corporate Income tax, because French legislators wanted to avoid a requalification of this tax under bilateral treaties. However, the French Association of Internet Community Services (ASIC) has recently suggested that this tax deduction mechanism should be considered State aid and that the EU Commission should be notified.
In terms of the compliance burden on impacted business, the administrative reporting and compliance framework of the DST tax will be aligned with the existing VAT framework. For most of the affected companies, the 2019 instalment (based on the payments received in 2018) will need to be declared on their 2019 October VAT return (to be filed in November 2019) when declaring monthly VAT returns. Otherwise, the instalment will need to be paid on the 25 November 2019 at the latest.
Recently, President Trump had indicated that there would be retaliatory action on certain French wine imports if the French DST was implemented.
Following their Summit in Biarritz, France in August 2019, the leaders of the G7 group of nations issued a brief declaration on the International DST. Emmanuel Macron stated that if an international agreement on DST is agreed, the French DST tax will be repealed. The French president also mentioned that if any tax rate adopted by the international DST is lower than the tax rate adopted by the French DST, the difference would be refunded to businesses.
The tax is expected to raise €600 million euros annually.