On July 11th, the French Senate gave its final approval on the implementation of a new Digital Services Tax (the "DST") that has been in discussion at parliamentary level since March. This tax (new FTC article 299) will be effective immediately. France is a "Lone Rider" in this domain, as DST has been voted in anticipation for a worldwide solution at OECD and EU levels, which could take a few years. DST is supposed to be a temporary levy. As it stands, DST is expected to hit 29 non-French companies and only one French company and generate some EUR 500 million per year.
The Digital Services Tax will be applicable to gross income derived from certain digital services provided in France in which there is user involvement. The rate is set at 3% of "qualifying" revenues. It will only concern companies with worldwide revenues of at least EUR 750M and French "qualifying" revenues of at least EUR 25M.
The digital services covered by the tax are the following:
- Online intermediation services, i.e. services consisting in making available multi-sided digital interfaces to users, allowing users to find other users and to interact with them, and facilitating the provision of underlying supplies of goods or services directly between users. Notable exceptions include intermediation services used only to provide digital content, communication services or payment services.
- Online advertising services, particularly activities consisting in targeted advertising, and the transfer of users' data for advertising purposes. Such services may include, but are not limited to, purchasing, storing and advertising, advertising control and performance measurement services, and user data management and transmission services.
Banking and financial services are excluded from the scope of DST. Also, services provided between related entities are excluded from the scope of the tax.
It should be noted that online linking services whose method of payment is based on a subscription, such as dating websites and computer reservation systems (CRSs), will remain within the scope of the DST, against expectations. However, the Minister of Finance is currently working with the companies concerned to "draft a ruling that should secure their situation". It is also expected that the Tax Guidelines commenting the DST will specify the criteria to be regarded as CRSs.
What are "qualifying" revenues? The DST base will include all revenues (excluding VAT) over services deemed to be made or supplied in France. Services are in France when the user is located in France (IP address is one of the means of proving this, but all other methods of proof are open according to the law) or when the account allowing the access to the services was opened in France.
The portion of the revenues attributable to France is carved out from worldwide digital revenues by applying a percentage representing the share of the services attached to French-based users.
The tax is due on the basis of French digital service revenues as on 31 December of each year. Taxpayers will be required to make two advance payments, the sum of which must be at least equal to the amount due in respect of the previous financial year: for most large companies, these instalments will be due in April and September, on the basis of the DST due on the previous year.
Companies may opt for a single tax return at the group level. By doing so, the revenue thresholds are added amongst group members. The "group tax" option is valid for 3 years.
DST is retroactive : for 2019, most companies
will be paying one sole instalment, payable in October 2019,
calculated on the amount of French digital service revenues
generated between 01 January and 31 December 2018, prorated to the
number of days between the publication of the DST law bill
(expected around July 20th) and October 31st, 2019 (i.e. around 103
days out of 365).
In the event of an audit, taxpayers must be able to provide within 2 months, all documents detailing sums collected, by category of services provided in and outside France.
The statute of limitation for this tax will be of six years, instead of the standard 3 years applicable to most commercial taxes in France.
If the company is not established in the European Union or in any other State party on the European Economic Area, it must appoint a tax representative to pay the DST in its place.
On the legal level, DST raises many questions. By taxing turnover, it has an obvious cyclical character. It can hit companies that are losing money. It can also lead to double taxation for many companies that already pay taxes on the profits they make in France. Parliament indicates that the purpose of this tax is not to add additional taxation to a company that already pays tax, but rather to attract to France tax revenues that otherwise fall out of the French scope.
DST also poses the question of whether it can be regarded as a VAT-assimilated tax, on which the EU has exclusive legislative power. Every portion of the DST has been drafted under the conditions of VAT, subject to the same procedures, period of calculation, audit conditions and guarantees tax representation conditions, etc.
Parliament has flagged the fact that smaller companies not
paying the DST may be regarded as having received an unlawful
subsidy (which is contrary to EU "state aid"
regulations). As DST applies under specific conditions to a small
number of companies, a vast majority of which are not French, it
may also be regarded as discriminatory in our opinion.
The fact that the tax basis is highly difficult to asses, in terms of revenue carve-out and territoriality, may be regarded as being unlawful as tax laws are required under the constitution to be understandable (under the "intelligibility" principle).
Last, it should be noted that DST is not a tax that can be deducted from Corporate profits, as government specifically organized things in this manner : had it been deductible, it would fall into the scope of double-tax treaties, which is precisely what France has aimed to avoid. DST is out of the scope of all tax treaties, so the tax territoriality principles under the treaties do not apply to DST and DST cannot benefit from any tax credits.
There were advanced discussions about partially compensating DST against the "C3S" tax. However, such discussions have been abandoned since they were regarded as "too complex" and a potential legally obstacle to validating the tax.
We would be happy to further elaborate on any if these points should you so require.
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