The French DST will have retroactive effect as from 1 January 2019 and it will apply to companies, irrespective of their country of establishment, with worldwide revenues from taxable digital services exceeding €750 million per annum and with more than €25 million annual revenues from taxable digital services supplied in France.
Taxable digital services
For the purposes of the French DST, the taxable digital services include:
- intermediation services, i.e. the supply, through electronic means, of a digital interface which enables users to interact with each other, notably for the purpose of exchanging goods or services; and
- targeted advertising services based on user's data. These services may include, but are not limited to, the purchase, storage and distribution of advertising messages, advertising control and performance measurement, as well as services for the management and transmission of user data, including the sale of users' data.
Exemptions
The provision of a digital interface will be exempt from the French DST, where such digital interface is used to:
- provide users with digital content, communication services and payment services;
- manage systems and regulated financial services such as interbank settlement or settlement systems and the delivery of financial instruments, trading services, advisory services on crowd investing and crowdfunding intermediation services, and other intermediation services which are subject to authorization; or
- enable the purchase or sale of advertising services.
In addition, the provision of digital services between entities of a consolidated group for financial accounting purposes will be exempt from the French DST.
Territorial scope
Digital services will be taxable for French DST purposes insofar as they are provided in France. The criteria for assessing the digital services' nexus to France vary depending on the nature of the services. Thus:
- with regard to intermediation services on a digital interface, the service will be deemed to be supplied in France if at least one of the users is located therein or if one of the users' interface accounts is opened from France;
- with regard to targeted advertising services, the service will be deemed to be supplied in France if the user consults the digital interface displaying the targeted advertising through a device located in France. The geolocation of such device may be determined on the basis of its Internet Protocol (IP) address or by any other means;
- with regard to the sale of users' data for advertising purposes, the sale will be deemed to take place in France if the data have been generated by a user located in France.
Tax rate and tax base
The French DST, which will be deductible for French corporate income tax purposes, will apply at a single rate of 3% to total gross revenues, net of VAT, derived from the supply of taxable digital services in France during the year in which such tax is due.
The portion of the revenues attributable to France will be computed on the basis of the worldwide revenues from taxable digital services, to which a percentage of the share of the services attributed to France will be applied. The criteria for the determination of such percentage will be, depending on the nature of the service provided, either the location of the user in France in relation to the total number of users or the number of accounts opened from France in relation to the total number of accounts.
Tax collection mechanism
The triggering event of the French DST, which will also be its due date, will be the end of the calendar year, i.e. 31 December. A self-assessment regime will apply and the French DST will be declared, recovered and controlled according to the rules applicable to French VAT, subject to certain adjustments.
An annual tax return will have to be filed in April of the year following the one in which the French DST is due. Tax payment will be made in two instalments in the year in which such tax becomes due. Such instalments must be at least equal to half of the amount of tax that was due in respect of the previous calendar year. The payment of any balance will be made upon the filing of the annual tax return in April. Any overpayment will be offset against the subsequent tax instalments or, in case of absence or insufficiency of such instalments, it will be reimbursed. By way of derogation, the payment of the tax due for 2019 will be made in a single instalment in October 2019, which will correspond to the notional French DST based on 2018 figures.
Taxpayers not established in the EU or in any other European Economic Area member state, which has concluded with France an administrative assistance agreement against fraud and tax avoidance and a mutual assistance convention on the collection of taxes, will be required to appoint a tax representative subject to VAT in France to file the French DST return and pay the corresponding tax on their behalf.
A company member of a consolidated group for financial accounting purposes may make an election to file the French DST return and pay the tax on behalf of all group companies. Such election will take effect upon filing of the French DST return in the year following that in which the election is made and it will be valid for at least three years. For 2019, this election may be made until 31 October, 2019 and it will take effect as of the first tax payment made following that date.
The standard statute of limitations which applies to the French DST is 6 years. However, a 10-year statute of limitations applies in the event of fraud.
Compatibility with international tax law
The French DST raises questions about its compatibility with international tax law. There are serious doubts that France could tax profits that would not otherwise be taxable in France under tax treaty law. In addition, such tax may not be compatible with the EU principle of freedom of establishment and the EU State aid rules.
US response to the French DST
The US have opposed unilateral efforts to impose special taxes on digital activity, instead advocating a multilateral approach through the OECD to address the challenges to the international tax system posed by the digital economy.
The US have particularly opposed the French DST, viewing it as targeting US digital company giants, such as Google, Apple, Facebook and Amazon. Following adoption of the French DST, the Office of the United States Trade Representative (USTR) initiated an investigation under Section 301 of the Trade Act of 1974. The USTR indicated that the French DST unfairly targets certain US-based technology companies. For example, the revenue thresholds in the French DST have the effect of subjecting to the DST larger companies, which tend to be the US companies, while exempting smaller companies, particularly those that operate only in France. Moreover, the French DST does not apply to traditional advertising platforms such as radio, television, and print, among others, but rather is limited to digital advertising and the sale of personal data.
At the G7 Summit in August of this year, the US and France reportedly reached an agreement to settle their differences over the French DST. Under the deal, France will abolish its 3% DST once a new international taxation agreement is reached, which the OECD expects to occur by 2020. France will reimburse companies that pay the DST once the international agreement is in place.
