French perspectives on the Digital Services Tax (DST)

Tweewekelijks • Afgiftekantoor: Mechelen • Afzender: Lefebvre Sarrut Belgium NV – Hoogstraat 139/6, 1000 Brussel • Postadres: Elfjulistraat 39D, 9000 Gent • 309608 Tijdschrift voor Fiscaal Recht 582 mei 2020 VRIJ GESTELD Koen MORBÉE, De schande van Europa DOCTRINE Rik SMET, Legitimiteit en effectiviteit van het Grondwettelijk Hof en het behoud van de gevolgen van vernietigde fiscale bepalingen. Enkele kritische bedenkingen vanuit rechtsfilosofisch en juridisch perspectief RUBRIEK BUITENLAND Marilyne SADOWSKY, French perspectives on the Digital Services Tax (DST) FISCALE RECHTSPRAAK ALGEMEEN BELASTINGONTDUIKING EN BELASTINGONTWIJKING 2020/20 Rb. Antwerpen 23 maart 2018 Simulatie – Overdracht van aandelen versus overdracht van onroerend goed 2020/21 Rb. Antwerpen 19 november 2018 Simulatie – Overdracht van aandelen versus overdracht van onroerend goed of vergoeding voor ontwikkelingsdiensten Noot: Benno DAEMEN, De overdracht van een projectvennootschap: overdracht van aandelen, verkoop van onroerend goed of vergoeding voor ontwikkelingsdiensten? INKOMSTENBELASTINGEN PERSONENBELASTING 2020/22 Antwerpen 26 november 2019 Nederlands loon – 30%-regeling – Kosten eigen aan de werkgever Noot: Andy COOLS, 30%-regeling onbelast in België ARRESTEN GEPUBLICEERD OP HET NET French perspectives on the Digital Services Tax (DST) RUBRIEK BUITENLAND French perspectives on the Digital Services Tax (DST) Marilyne SADOWSKY1 SAMENVATTING RESUME In 2019 en als gevolg van het uitblijven van een Europese digitaledienstenbelasting, riep Frankrijk op eigen houtje een dergelijke taks in het leven. De Verenigde Staten kondigden daarop prompt een reeks tariefverhogingen aan die Franse producten zouden treffen, waarop de inning van de taks voor 2020 voorlopig werd uitgesteld. In onderstaand artikel wordt dieper ingegaan op de Franse digitaledienstenbelasting, en meer in het bijzonder of deze taks al dan niet als discriminatoir beschouwd zou kunnen worden bij toepassing van het EU-recht of de belastingverdragen. En 2019, dans l’attente de solutions européenne et internationale, la France a décidé d’instaurer sa propre taxe sur les services numériques. Afin d’éviter des mesures de rétorsion américaines contre certains produits français, un compromis politique a été trouvé en marge du forum économique de Davos, qui a conduit au report du paiement de la taxe à la fin de l’année 2020. Cet article propose une analyse de la taxe française, notamment sur le fondement de son caractère discriminatoire, en droits interne, européen et international. According to the French economist François Bastiat: “When the immediate consequence is favorable, the subsequent consequences are disastrous.”2. Such could be the fate of the tax on digital services created by the law of 24 July 20193. Two goals have prompted this law: the first one is to raise some revenues to gradually reduce the corporate tax rate to 25% in 20224, and the second one is based on tax equity, in order to mitigate the failure to reach an agreement on European Union (EU) and international levels. The French DST aims to fill a short-term “legal” gap5. Indeed, article 209 of the French Tax Code (FTC) contains the principle of territoriality with regard to corporate tax6. In order to tax non-resident companies, a physical presence in France is required in the form of a permanent establishment. As a result, an administrative court of appeal confirmed in April 2019 that SARL Google France was not the permanent establishment of Google Ireland Limited in France7. The French administration’s Supreme Court (Conseil d’Etat) will never hear this case because of a judicial public interest agreement homologated on 12 September 20198 and concluded between the French national financial prosecutor, SARL Google France (GF) and Google Ireland Limited (GIL) in order to bring to an end the criminal investigation by paying a fine of 500 million Euros9. In addition, a tax agreement was reached with the General Directorate of Public Finance on 19 July 2019 to bring to a close the tax reassessment proceedings relating to the period 2005 to 2010 and amounts to 465 million Euros. Every country is concerned by the difficulties caused by the dematerialization of the tax base and the need to capture value, which can lead to the erosion of the tax base and tax evasion. Due to “base cyberization”10, developing countries 1. Associate Professor at Sorbonne Law School (University Paris 1, Panthéon-Sorbonne). 2. F. BASTIAT, Œuvres complètes – Sophismes économiques – Petits pamphlets II, 2e édition, 5e Tome, Guillaumin, 1863, p. 336. 3. Law n° 2019-759 creating a tax on digital services and changing the trajectory of the reduction of the corporate tax, JORF, n° 0171, 25 July 2019. English translation: https://www.impots.gouv.fr/portail/files/media/1_metier/5_international/french_dst_en_v2.pdf?l=en. 4. Reduction initiated by the financial law for 2017: Financial law n° 2016-1917, JO n° 303, 30 December 2016. It involves a return to the roots since at the time this tax was created in 1948, the original rate was 24%. 5. The Senate does not use the term “legal gap”, just a “short-term gap”. Senate, Ordinary Session 2018-19, “Rapport fait au nom de la Commission des Finances, sur le projet de loi adopté par l’Assemblée nationale après engagement de la procédure accélérée, portant création d’une taxe sur les services numériques et modification de la trajectoire de baisse de l’impôt sur les sociétés”, n° 496, 15 May 2019, p. 23. 6. For an analysis of this principle and its historical context, see: A. KALLERGIS, La compétence fiscale, Dalloz, 2018, § 308 and f. 7. Administrative Court of Appeal of Paris, 25 April 2019, Google Ireland Limited company: n° 17PA03065 (Local tax I), n° 17PA03066 (Local tax II), n° 17PA03067 (corporate tax), n° 17PA03068 (withholding tax), n° 17PA03069 (VAT); Administrative tribunal of Paris, 12 July 2017, Google Ireland Limited company: n° 1505113/1-1 (withholding tax), n° 1505126/1-1 (local tax I), n° 1505147/1-1 (local tax II), n° 1505165/1-1 (VAT) et n° 1505178/1-1 (Corporate tax). 8. In French: Convention judiciaire d’intérêt public (CJIP). For the English version: https://www.agence-francaise-anticorruption.gouv.fr/files/files/ ENGLISH%20TRANSLATION%20-%20GOOGLE%20CJIP.pdf. 9. According to paragraph 30 of this agreement: “Pursuant to this agreement, GF agrees to pay the full amount of 46,728,709 EUR and GIL agrees to pay the full amount of 453,271,291 EUR as part of a public interest fine.” 10. H. AULT and B. ARNOLD, “Chapter I. Protecting the tax base of developing countries: an overview” in United Nations Handbook on Selected Issues. Protecting the Tax Base of Developing Countries, edited by A. TREPELKOV, H. TONINO and D. HALKAP, 2nd edition, 2017, p. 21. intersentia t.f.r. 582 – mei 2020 [427] French perspectives on the Digital Services Tax (DST) are looking to protect their tax base, and developed countries are aiming to consolidate their tax base. Even though developed and developing countries are two different sides of the same problem, the OECD has made a decision to reach a consensus this year. In 2018, after the failure to introduce a European digital tax11, France decided to implement such a tax, strongly influenced by the European short-term proposal, joining other States or inspiring others to do the same. It can be described as a national remedy pending the formalization of an international agreement. For now, France has collected the sum of 280 million Euros in 201912 and for 2020 has just announced the postponement of the payments until December 202013. This deferral of tax payment is the result of a political compromise reached on the sidelines of the January 2020 Davos Economic Forum with the United States (US) Treasury Secretary. In December 201914, a report issued on the basis of Section 301 of the Trade Act of 197415 concluded that the French tax system discriminates by its structure and operational procedures against US digital businesses. As a response to this protectionist tax, the US Trade Representative has proposed retaliatory measures in the form of sanctions amounting to 100% additional duties on a list of French products comprising 63 tariff subheadings with a trade value of approximately $2.4 billion16. In this context, France wished to postpone the implementation of the tax in order to encourage international negotiations within the OECD. The French DST is a good example of the shortcomings of the law and the incompleteness of the international tax system. The purpose of this article is not to discuss the digital reform currently being carried out by the OECD, but the French digital tax in particular. Indeed, it is interesting to note that the French legislator has chosen a title “Tax on certain services provided by large companies in the digital sector” (I.)17, which directly challenges the discriminatory treatment (II.). I. Tax on certain services supplied by large companies in the digital sector This tax, codified under article 299 of the FTC in a heading under turnover taxes, comes after the codification of the Value Added Tax (VAT). The presentation of the scope of the tax (A.) explains why the tax administration interpreted it as a “special” turnover tax (B.). A. Scope of the tax The rules applicable to the taxpayer (1.) reveal some legal uncertainties (2.). 1. Rules applicable to the taxpayer The first paragraph of Article 299 of the FTC states: “A tax is instituted, payable on the revenues received by the companies in the digital sector defined in Section III, resulting from the provision in France, during the calendar year, of the services defined in Section II.” The rest of the article therefore logically identifies the services (in II) and undertakings concerned (in III). The taxable services covered two categories of service. First, making available, by electronic means, a digital interface which allows users to find other users and to interact with them, in particular regarding the supply of goods or services directly between such users. Secondly, services sold to advertisers or their representatives who wish to place targeted advertising on a digital interface based on data relating to the user that are collected or generated when such interfaces are consulted18. The text sets out exceptions for these two categories. Concerning the first, the following services are excluded: where the person making the digital interface available uses it principally in order to provide users with digital content, communications services, or payment services19; where the digital interface is used to run some systems and services20. Concerning both categories, the services provided between companies belonging to the same group are excluded from taxable services. Target companies are those, wherever they are established, for which the amount of turnover received in consideration of taxable services exceeds the following two cumulative thresholds: 750 million in respect of services provided worldwide – evaluated at the consolidated level – and 25 million in respect of services provided in France. Territoriality principles are established by article 299bis of the FTC and set out criteria for the location of the user of the service and of the provider of the service. A user of a 11. Proposal for a Council Directive on the common system of a digital services tax on revenues resulting from the provision of certain digital services, COM(2018) 148 final, 21 March 2018; Proposal for a Council Directive laying down rules relating to the corporate taxation of a significant digital presence, COM(2018) 147 final, 21 March 2018. 12. National Assembly, Hearing of M. Bruno Le Maire – Minister of Economy and Finance – by the Committee on Foreign Affairs, 28 January 2020. 13. General Directorate of Public Finance, Press Release n° 960, 10 February 2020. 14. United State Representative, Section 301 Investigation, Report on France’s Digital Services Tax, December 2, 2019, 93 p. 15. Trade Act of 1974, 19 USC 2101, Public law 93-618, Statute 88, 3 January 1975, p. 1978 and s. 16. “Notice of Determination and Request for Comments Concerning Action Pursuant to Section 301: France’s Digital Services Tax”, Federal Register, Volume 84, n° 235, 6 December 2019, p. 66956-66960. 17. We underline: certain and large. The French version is: “Taxe sur certains services fournis par les grandes entreprises du secteur numérique.” 18. For these second types of service, a non-exhaustive list is given. Such services may include in particular: services for the purchase, storage or dissemination of advertising, advertisement control, performance measurement and user data management and transmission services (our emphasis). 19. Within the meaning of art. L-314-1 of the Monetary and Financial Code. 20. Are listed: interbank settlement systems or systems used for the settlement and supply of financial instruments, the trading venues or the trading systems of systematic internalisers, advisory activities in participative investments and, if they facilitate the granting of loans, intermediation services in participative financing and the other intermediation systems. [428] t.f.r. 582 – mei 2020 intersentia French perspectives on the Digital Services Tax (DST) digital interface is located in France when he consults it with a terminal located in France. The location in France of such a terminal is determined by all possible means, including its IP address (internet protocol), in compliance with personal data protection rules. To locate the supply of a service in France, the criterion remains one of the parties to the transaction being located in France as a result of consulting the interface in France or opening an account allowing access to the service from France. If the taxable service is provided in France, the amount of payments resulting from such provision is defined as the product of all payments made during a year in return for such a service by the percentage representing the share of such services attached to France evaluated during that same year. According to article 299quarter II of the FTC, a 3% rate applies on the grounds of this basis. 2. Legal uncertainties Even if part of these rules reflects the ideas contained in the Collin and Colin report of 2013 on the taxation of the digital economy21, which already recommended taxing the value of free work carried out by internet users located in France, some elements are missing and reveal the first crack in the coherence of the system. In particular, the tax base is not clearly defined. How to identify the values to be taken into account linked to French territory? In fact, the tax does not relate to turnover produced in France, but must take account of the worldwide turnover and the national share. Therefore, a ratio must be calculated, without knowing which economic aggregates are concerned. If it is understood that a service falls within the scope of the tax because of a user’s location in France, it is then necessary to estimate a French income according to an allocation key that is not given, i.e., the share of French users over the share of global users of the service. If the parameters of the percentage are given, the rule is extremely vague. For instance, concerning making available a digital interface the percentage is equal to “the proportion of supplies of goods or provision of services for which one of the users of the digital interface is located in France”. However, the elements of this ratio are fundamental, as it applies to both thresholds. For some practitioners, this lack of precision does not eliminate the risk of the double taxation of the operator of an interface allowing the sale of goods in the State of the seller and in the State of his customer22. In addition, not all users are benefiting from similar services depending on the country of use. While the recent publication of the administrative comments on the scope of the tax23 gives some explanation of the way to determine the total of all amounts received (worldwide) in consideration for the supply of the taxable service and the “national presence coefficient” – a percentage representative of the part of the service relating to France –, examples given are very basic and do not reflect the complexity of certain international transactions. These administrative comments are subject to public consultation from 23 March 2020 to 23 May 2020 and may be revised at a later date. Even with these latter clarifications, the reality of this percentage still seems difficult to establish. Thus, the determination of the base remains hypothetical. The problem is that the law was not subject to an a priori constitutional review (i.e. it was not challenged before its promulgation), whereas the previous digital tax drafted by Article 78 of the 2017 Finance Act had been censured on the basis of such a review. Indeed, the first draft of the tax had been designed as a derogation from the principle of territoriality of corporation tax and from the applicable transfer pricing rules. It was possible to extend the scope of corporation tax to profits made in France by legal entities established outside France, without reference to a permanent establishment in France. Consequently, the logic was totally different because it was based on benefits, and the constitutional problem was the power given to the tax authorities to choose which taxpayer can fall within the scope of the tax24. That is why the law was never enacted. Here, the logic is grounded on a turnover tax based on gross income. The lack of definition of the tax base can lead to a posteriori constitutional review (i.e. it may be challenged once enacted). In our opinion, it seems possible to question the French DST constitutionality on the grounds of a preliminary ruling on the constitutionality (question prioritaire de constitutionnalité) on the basis of two arguments. The first one is the incompatibility with Article 34 of the Constitution, under which the legislator must determine with sufficient precision the conditions under which the principle it has just laid down is implemented. As the legal principle is not precise, it brings into question the quality of the law. The second one, on the grounds of the ability to pay principle, with its several unresolved questions: Which capacity is targeted: consumers or companies? Is the turnover criterion the best indicator of the ability to pay? Who are the “users” the law should apply to? What is the objective of the tax in order to legitimate some derogation, or budgetary return? The ability to pay implies oversight of the rationality of the system in relation with the objective pursued. The problem which remains to be solved is the ambiguity of this tax, termed by the tax administration as a “special turnover tax”. 21. P. COLLIN and N. COLIN, Mission d’expertise sur la fiscalité de l’économie numérique, janvier 2013: www.economie.gouv.fr/files/rapport-fiscalite-dunumerique_2013.pdf 22. A. RETUREAU, A. BAILLEUL-MIRABAUD and C. LECLERE, “Le projet de taxe française sur les services numériques (‘taxe GAFA’): un caractère temporaire autoriset-il tous les risques?”, FI, 2-2019, May 2019, n° 1.3. 23. It is interesting to note that it is the last interpretation that has been given by the tax administration at the end of March 2020 (BOI-TCA-TSN-10-20200323), whereas all other ones were issued in 2019 on reporting and accounting obligations, recovery, control and litigation (BOI-TCA-TSN-20-20191016) and the system of consolidation intra-group (BOI-TCA-TSN-30-20191016). 24. Decision n° 2016-744 DC, 29 December 2016, § 82. intersentia t.f.r. 582 – mei 2020 [429] French perspectives on the Digital Services Tax (DST) B. A “special turnover tax” The tax administration includes this tax on a list of thirty “special turnover taxes”25 dedicated to different areas. The ambiguity here is the mismatch between political will and the legal principle (1.) which maybe explains the cautious opinion of the French administrative Supreme Court, the “Conseil d’Etat” (2.). 1. The ambiguity: mismatch between political will and the legal principle The legal principle is based on two characteristics. It is an impersonal tax and an indirect one. Thus, tax liability is generally determined by the nature of the transactions carried out, and the aim is to indirectly capture an income revealed at the time of an expense. This thus includes all the elements of a turnover tax. The problem is the political will at the origin of its implementation. The aim is to fill the legal gaps of the French system of territoriality principle applicable to corporate tax by a policy of taxing the turnover of digital companies which are essentially foreign companies. Why not introduce a derogation to this principle of territoriality of corporate tax in order to tax profits? It was the primary intention of the legislator at the time of the first attempt in 2017. Instead of doing this, France introduced taxation which aimed at companies with a high tax capacity, but on their gross income. One of the reasons may be the wish to reach some large digital companies which may not have taxable profits. Politically, it is a way of circumventing the territoriality rules applicable to corporate tax pending international consensus. It is a strategy to apply political pressure to force the conclusion of an international agreement. Digital companies are the target. A reading of the preparatory work reveals one of the main objectives of the tax on digital services: tax equity to ensure fair taxation of all businesses26. The main idea is to reinforce the taxation of large groups that manage to optimize their taxation. Equity motivated the political will, whereas legal questions are asked on the grounds of equality. Equity and equality are not the same, in the absence of common international rules. Legally, it reveals the difficulty of taxing digital activities under the current rules. It is a means of filling a legal gap in French corporate tax rules caused by the digital economy, int the absence of common international rules. Here, the territoriality approach is based on value creation. The aim is to bring revenue back to the State whose value is created from the physical presence of the consumer or the opening of the account allowing access to the service. The focus is made on the territoriality of the service and taxation in the country of consumption. However, various economic analyses have already demonstrated its perverse effects. It shows that the tax burden will mainly be passed on to consumers and businesses using digital platforms, and will be minimal for the companies targeted by the tax27. Thus, the economic burden of the tax will be passed on to customers, even though they are not legally liable for it. One could take the example of digital advertising and a budget of 100 which starts from the advertiser, then passing through intermediaries taking a commission, and onto the publisher. If the turnover of all the intermediaries bears the tax, the tax base will be much higher than the actual advertising expenditure of 100. Moreover, the lack of a common framework and the multiplication of such taxes open up the risk of multiple taxation depending on the location of the services. Consequently, it leads to a mismatch between the political will and the legal principles implemented. Some questions linked with the intention of the legislator are not resolved. Can the user always be taken to be consumer? How to identify them? How to precisely calculate the tax base and the value to be taken into consideration in the ratio? This ambiguity reinforces the uncertainties of the rule and leads the French administrative Supreme Court to remain cautious about the compliance of this tax with certain constitutional requirements. 2. Cautious opinion of the “Conseil d’Etat” This opinion was delivered by the Conseil d’Etat before the adoption of the law as part of its advisory functions28. To start with, the Conseil d’Etat recognizes that the aim of the tax is to subject those digital services to specific taxation, whose value creation is decisively based on the activity of users located in France, in particular on the use of the data they generate concerning two categories of service mentioned in the law. When these services are provided by large companies, a specific business model is targeted, distinct from that of other companies in the digital or other economic sectors. Characteristics of this specific model are network effects, performance growth, collection of data, winner takes most, value creation by users to generate revenue, viability of the model which depends on the size of the company (etc.). Consequently, the opinion starts with the distinction between companies with a traditional business model of a smaller size, compared to companies with a digital business model of a larger size. The way of generating revenue between these two kinds of business model is different. 25. BOI-TCA-20191230, § 1. 26. Senate, Ordinary Session 2018-19, “Rapport fait au nom de la Commission des Finances, sur le projet de loi adopté par l’Assemblée nationale après engagement de la procédure accélérée, portant création d’une taxe sur les services numériques et modification de la trajectoire de baisse de l’impôt sur les sociétés”, n° 496, 15 May 2019, p. 17 and f. 27. J. PELLEFIGUE, “Taxe sur les services numériques. Etude d’impact économique”, Cabinet TAJ, 22 mars 2019; Institut économique Molinari, N. MARQUES, “La taxation française des services numériques: un constat erroné, des effets pervers”, mars 2019. For J. PELLEFIGUE, if the tax is maintained, and therefore in the longer term, it would be likely to create distortions of competition between firms, which could hamper the productive efficiency of the French markets. 28. Conseil d’Etat, Section des Finances, “Avis sur un projet de loi portant création d’une taxe sur les services numériques et modification de la trajectoire de baisse de l’impôt sur les sociétés”, n° 396878, 28 February 2019. [430] t.f.r. 582 – mei 2020 intersentia French perspectives on the Digital Services Tax (DST) Based on that assumption, the opinion analyzes the compliance of the tax with constitutional requirements. Many elements of economic differentiation are used to justify a difference in tax treatment. Notably, these large digital companies are not in a situation that is “objectively comparable” to companies with a traditional business model. They are not comparable. Thus, the scope of the tax is based on objective and rational criteria directly related to the objective of the law. It is the same for the scope of territoriality, even if there are “new criteria compared to the usual rules applicable in direct or indirect taxation”29, thus in our view revealing the ambiguity. However, the Conseil d’Etat made two reservations. The first one on the exclusion of “certain regulated financial services”, as no details are given to determine which services fall within the scope of the exclusion30. The second one concerning the tax base, where it is permitted to tax on annual takings related to economic activity without providing for the deduction of charges, provided respect for the principle of equality before public charges is upheld31. For the moment, no a posteriori inspection of the tax has been carried out and no one has yet submitted a preliminary question of constitutionality, even if it seems possible. The temporary nature of the tax should not allow for all risks, and certain discriminatory aspects of the tax will inevitably lead to its withdrawal. II. A discriminatory tax treatment? In the French32 or international literature33, we can find the idea that digital taxes are contrary to EU law and/or to international law. Concerning the French digital tax services, we can demonstrate the compatibility of the tax with EU law (A.), and its incompatibility with international law (B.). A. Compatibility with EU law We already demonstrated in 200834 the confusion between the principle of non-discrimination and the prohibition of state aid, and notably the confusion of the concepts used in this context between discrimination and obstacle, on the one hand, and advantage, non-discrimination and selectivity35, on the other hand. The link had been made with the aim of EU law, which remains the implementation of an internal market, on the basis of economic integration, in comparison with subsidies under WTO law on the basis of free trade. Here again, concerning the French digital tax, it seems artificial to distinguish the compatibility with state aid rules (1.) and fundamental freedoms (2.) as was done by the opinion of the Conseil d’Etat, as arguments for neutralizing criticism of incompatibility with state aid rules are the same for fundamental freedoms. 1. State aid rules The advisory opinion of the Conseil d’Etat is in favor of the compatibility of the digital tax, because the digital business model is not comparable with other companies relying on a traditional business model36. Starting with two decisions of the Commission recognizing some progressive turnover taxes in Hungary37 and Poland38 as state aids, the opinion concluded that the difference in economic power “may” justify a distinction between these two kinds of company (digital business model and traditional ones). These companies are not objectively in a comparable situation and the economic model of the company is a distinguishing criterion. In our opinion, three arguments respectively related to the benchmark, the threshold and the size of the company ruled in favor of compatibility. Concerning the benchmark, what is the norm of reference? What is a normal tax? It is one of the most important elements to demonstrate. Indeed, a tax measure is qualified as a state aid if it introduces an exception to the application of the general tax system in favor of certain companies of the Member State. Thus, in order to assess selectivity, it is necessary to determine the common system applicable. How can a selective tax advantage be differentiated from a general tax standard without objective criteria? Selectivity is sometimes the consequence of a general 29. Ibid., § 19. 30. Ibid., § 18. 31. Ibid., § 20. 32. D. GUTMANN, “La taxe GAFA: quelques éléments d’analyse”, Recueil Dalloz, 2019, p. 1704 et s.; B. GOUTHIERE, “La future taxe ‘Gafa’ à l’épreuve des conventions fiscales et du droit de l’UE”, FR, 16/19, 28 mars 2019; Y. RUTSCHMANN, P.-M. ROCH et A. SOUMAGNE, “Projet de taxe sur les services numériques: une solution d’attente qui suscite des interrogations quant à sa conformité aux normes supérieures” Rev.dr.fisc., n° 13, 28 mars 2019, étude n° 212. 33. W. CUI, “The Digital Services Tax on the Verge of Implementation”, Canadian Tax Journal, 67:4, 2019, pp. 1135-1152; L.V. FAULHABER, “Taxing tech: the future of digital taxation”, Virginia Tax Review, Volume 39.2, 2019, pp. 145-196; A. D. MITCHELL, T. VOON et J. HEPBURN, “Taxing tech: risks of an Australian digital services tax under international economic law”, Melbourne Journal of International Law, Volume 20, Issue 1, July 2019, pp. 88-124; J.F. PINTO NOGUEIRA, “European Union – The Compatibility of the EU Digital Services Tax with EU and WTO Law: Requiem Aeternam Donate Nascenti Tributo”, International Tax Studies, 2019, Volume 2, n° 1; R. MASON and L. PARADA, “Digital battlefront in the tax wars”, Tax notes, 2 January 2019. 34. M. SADOWSKY, “Droit OMC, Droit communautaire et fiscalité directe,” Ph.D defended on 26 November 2008 at the Sorbonne Law School. This Ph.D was published later: M. SADOWSKY, Droit de l’OMC, droit de l’Union européenne et fiscalité directe, Larcier, 2013. 35. Since 2008, this idea has been consecrated by a document published by the US treasury Department on 24 August 2016, the “White Paper”: US Department of the Treasury White Paper, “The European Commission’s recent state aid investigations of transfer pricing rulings”, August 24th, 2016. Available at: https:// www.treasury.gov/resource-center/tax-policy/treaties/Documents/White-Paper-State-Aid.pdf. 36. Conseil d’Etat, Section des Finances, “Avis sur un projet de loi portant création d’une taxe sur les services numériques et modification de la trajectoire de baisse de l’impôt sur les sociétés”, n° 396878, 28 February 2019. Ibid., § 25 and f. 37. Commission Decision (EU) 2017/329 of 4 November 2016 on the measure SA.39235 (2015/C) (ex 2015/NN) implemented by Hungary on the taxation of advertisement turnover. 38. Commission Decision (EU) 2018/160 of 30 June 2017 on the State aid SA.44351 (2016/C) (ex 2016/NN) implemented by Poland for the tax on the retail sector. intersentia t.f.r. 582 – mei 2020 [431] French perspectives on the Digital Services Tax (DST) tax system. The idea of taxing a type of business model because its characteristics favor the lack of taxation is a general measure that is part of the tax policy of a state, even if it only affects certain companies. The tax aims at one phenomenon: the non-taxation of large groups with a digital activity. The favor it gives to those that are not taxed, compared to others, is only an incidental consequence. Thus, the establishment of such a tax system is not “in itself” a State aid, even if not all companies are subject to the tax. We can find this reasoning and the same logic about carbon dioxide emission taxes39. Another difficulty is the need to identify two references: the national reference standard and the European one40. What is the reference for digital taxes? The question remains open. Concerning the threshold, the conclusions of Advocate General KOKOTT in the Tesco case seem to bring the debate to an end41. The Advocate General argues that it is understandable that there is a European or national desire to ensure tax justice between larger companies operating globally, and smaller companies operating only on a European scale. The national tax rule which seeks to obtain a greater contribution to the public burden from larger undertakings than from smaller undertakings is not, in principle, an abuse of rights42. Thus, this kind of digital tax based on the general presumption that companies should be taxed only above a certain turnover threshold, irrespective of whether they make a profit, is not an unreasonable criterion. Larger firms are those with greater financial capacity than smaller ones and the turnover test leaves less room for maneuver in designing aggressive tax planning models. That is the approach adopted in two judgments of the General Court concerning Hungarian43 and Polish44 taxes, with the same sentence appearing in both cases: “As regards a turnover tax, a variation criterion taking the form of progressive taxation above a certain threshold — even if that threshold is a high one — which may reflect the wish to tax an undertaking’s activity only when that activity reaches a certain level, does not in itself imply the existence of a selective advantage.” Consequently, taxation above a certain threshold, even a high one, does not in itself imply the existence of a selective advantage and may correspond to the desire to tax a company only when an activity reaches a certain scale. Taxing a level of sales does not appear to be a hidden form of state aid to small enterprises. Finally, the Commission has already used the criterion of economic power to determine selectivity, specifying that this criterion “is further met by the fact the conditions under which the measure applies implicitly require a certain economic strength and therefore could apply only to sufficiently large companies”45. In this case, a distinction was made between sufficiently powerful groups of companies generating a significant turnover and smaller structures which have different means and cannot act in the same way – in this case, constituting a captive insurance company. Consequently, the difference in economic power “can” justify not looking at companies in objectively comparable situations. 2. Fundamental freedoms With regard to the fundamental freedoms of the establishment and provision of services, the Conseil d’Etat recalls the principles and case law applicable to overt or covert discrimination. Then, it declares that the proposed tax is compatible with fundamental freedoms. The planned tax does not create any direct distinction according to the nationality of taxpayers, since the tax applies to all companies, whether they are established in France or in another State. Moreover, the services covered are offered by both French and foreign companies, and the 3% tax rate is not at a level that can be regarded as an obstacle to the freedom to provide services46. As regards the existence of an indirect difference in treatment on the basis of nationality, if the tax mainly affects non-national taxpayers, it is because of the particular contributive capacity deriving from the scale of their activities and which places them in a situation which is not comparable to that of smaller operators in terms of the purpose of the law. Thus, the same argument of the distinction of the economic power is given. In this framework, it is not surprising that the Grand Chamber of the ECJ in the judgments Vodafone47 and TescoGlobal48 held the compatibility of the special taxes levied in Hungary with the principle of freedom of establishment. The economic reality of certain markets has to be taken into account. This economic approach allows to make a difference between the notions of selectivity (market comparability) and advantage (difference of treatment). It was one of the main ideas of my Ph.D in 2008, explaining the difference between state aid and subsidies, especially the distinction between specificity (WTO law) and selectivity (EU law). There is a predominant economic analysis within WTO law compared to EU law which is mainly based on fundamental freedoms, blurring the distinction between selectivity, advantage and non-discrimination principle on the ground of equal treatment. Already at that time, it was possible to demonstrate that when EU law focuses on economic criteria (market comparability analysis), the aid is not automatically qualified as 39. K. BACON, “State Aids and General Measures”, Yearbook of European law, Volume 17, 1997, p. 301. 40. M. SADOWSKY, Droit de l’OMC, droit de l’Union européenne et fiscalité directe, Larcier, 2013, § 680 and f. 41. Opinion of Advocate General KOKOTT delivered on 4 July 2019, Case C-323/18, Tesco-Global Áruházak Zrt. 42. Ibid., § 96. 43. Judgment of the General Court (9th chamber) 27 June 2019, T-20/17, Hungary / European Commission, § 104. 44. Judgment of the General Court (9th chamber), 16 May 2019, T- 836/16 and T-624/17, Poland / European Commission, § 92. 45. Commission Decision (EC) 2002/937 of 10 July 2002 on the aid scheme implemented by Finland for Åland Islands captive insurance companies, § 52. 46. Conseil d’Etat, Section des Finances, “Avis sur un projet de loi portant création d’une taxe sur les services numériques et modification de la trajectoire de baisse de l’impôt sur les sociétés”, n° 396878, 28 February 2019. Ibid., § 28 and f. 47. Judgment of the Court (Grand Chamber), 3 March 2020, C-75/18, Vodafone Magyarország Mobil Távközlési Zrt. 48. Judgment of the Court (Grand Chamber), 3 March 2020, C-323/18, Tesco-Global Áruházak Zrt. [432] t.f.r. 582 – mei 2020 intersentia French perspectives on the Digital Services Tax (DST) a state aid49, in order to conclude that EU law should consider the “market criterion”, as explicitly implemented and interpreted by the dispute settlement body within the concept of subsidy50. The most convincing arguments in favor of the incompatibility of the French digital tax are those relating to tax treaties. B. Incompatibility with tax treaties For the US, the French digital tax essentially discriminates against American companies, since it is aimed at only one French company. In this context, a notice from the federal register of 16 July 201951 announced the opening of an investigation against France on the grounds of an unfair competitive practice. We know the outcomes. The French digital tax is considered as a protectionist tax by the US Trade Representative, and that has given rise to retaliatory measures. The elements of incompatibility of the French digital tax are to be found in the French commitments contained in multilateral and bilateral tax treaties (1.). In any event, it seems that the consequences of the economic war caused by US retaliation will be more damaging for France than the expected return on the digital services tax. So, what is the next step (2.)? 1. Multilateral and bilateral tax treaties The opinion of the Conseil d’Etat concerns only bilateral tax treaties. The drafting is very cautious: this tax “should not” fall within the scope of the tax treaty rules on the allocation of taxing rights52. However, legal reasoning requires that a turnover tax does not fall within the scope of the Convention. Here again, it reveals the ambiguity on which this provision is based. This method raises doubts and questions about the general principles of the interpretation of international treaties, in particular with regard to Article 31 of the Vienna Convention on the Law of Treaties of 23 May 1969. Indeed, interpretation in good faith should lead States to not introduce a tax whose object and effect is to circumvent the treaty provisions by depriving them of their meaning, and thus removing taxpayers from its protection. Legally, there is no doubt that as a turnover tax, the French digital tax is not “an identical or a similar tax” to corporation tax within the meaning of Article 2 of the OECD Model Convention. All bilateral agreements concluded between France and the US and containing an obligation of non-discrimination in the form of a national treatment principle and a most favored nation clause should be analyzed carefully. For instance, the Convention of Establishment signed in Paris on 25 November 195953 contained a first article providing equitable treatment of the nationals and companies of the other state. It is a general requirement and parties must respect it. More difficult is the interpretation of the reference made in the treaty to “activities within the territories”54. Is it necessary to have an evolving or historic interpretation? On the one hand, in 1959, it is obvious that the reference made to territory in this text necessarily refers to France and to the principle of territoriality of corporation tax laid down in 1917. This principle requires the presence in France of a fixed place of business or a permanent establishment in order to tax the profits of a non-resident company. On the other hand, nowadays value creation may be taken to be a “territory” without any physical presence. Under WTO law, an appellate body has considered that specific service commitments made by a state must cover services that were not technically feasible or commercially available at the time the commitments were made55. The French digital tax falls within the scope of the General Agreement on Services (GATS). Trade in services is defined as the supply of a service by different modes: cross-border supply (mode 1), consumption abroad (mode 2), commercial presence (mode 3) and the presence of a natural person on the territory (mode 4)56. The first three modes are particularly relevant to the digital economy. The question is therefore whether France, as a member of the EU, complies with its de jure and de facto non-discrimination obligations with regard to national treatment and most-favored-nation treatment. Does France treat the services and service suppliers of other WTO members less favorably than its own services and service suppliers (national treatment principle contained in Article XVII, § 1 of GATS) and less favorably than the services and service suppliers of other WTO members (most favored nation clause contained in Article II.1 of GATS)? The principle of national treatment prohibits France and the EU from granting treatment less favorable to services or service suppliers of other WTO Members than to its own “like” services and service suppliers57. As a member of the European Union, France must respect the specific commitments contained in the EU schedules, by articulating the two cate- 49. M. SADOWSKY, Droit de l’OMC, droit de l’Union européenne et fiscalité directe, Larcier, 2013, § 831 and f. 50. Ibid., § 974 and f. 51. “Initiation of a Section 301 Investigation of France’s Digital Services Tax”, Federal Register, Volume 84, n° 136, 16 July 2019, p. 34042-34044. 52. Conseil d’Etat, Section des Finances, “Avis sur un projet de loi portant création d’une taxe sur les services numériques et modification de la trajectoire de baisse de l’impôt sur les sociétés”, n° 396878, 28 February 2019. Ibid., § 36. 53. Decree n° 60-1330 of 7 December 1960 on the application of the establishment convention between France and the USA of 25 November 1959, JORF, 15 December 1960, p. 11220-11224. 54. Art. IX of the Conventions: “4. The nationals, companies and associations of either High Contracting Party referred to in paragraph 1 (b), (c), and (d) of the present Article shall not be subject, within the territories of the other High Contracting Party, to any form of taxation upon capital, income, profits or any other basis, except by reason of the property which they possess within those territories, the income and profits derived from sources therein, the business in which they are there engaged, the transactions which they accomplish there, or any other bases of taxation directly related to their activities within those territories. 5. The term ‘form of taxation’, as used in the present Article, includes all taxes of whatever nature or denomination.” (our emphasis). 55. WT/DS363/AB/R, “China – Measures affecting trading rights and distribution services for certain publications and audiovisual entertainment products”, 21 December 2009, § 390 and f. 56. The prohibition of discrimination concerns indirect taxation for modes 1 and 2, and direct taxation for modes 3 and 4. 57. For a more detailed analysis: M. SADOWSKY, Droit de l’OMC, droit de l’Union européenne et fiscalité directe, Larcier, 2013, § 38 and f. intersentia t.f.r. 582 – mei 2020 [433] French perspectives on the Digital Services Tax (DST) gories of commitment, i.e., horizontal58 and sectoral59. The EU made national treatment commitments for modes 1 to 3, without limitation, in the following sectors which could be covered by a tax on digital services60: advertising services, computer and related services, travel agencies or press and information agencies. Concretely, the tax must not affect the conditions of competition in favor of domestic services or service suppliers to the detriment of similar US services or service suppliers. A heavier burden will be imposed if exceeding the thresholds set by the French tax leads to taxing essentially or exclusively foreign services and service providers. For some authors, the competitive relationship could thus shift from a comparison between digital or non-digital services to a comparison between companies exceeding or not exceeding this threshold61. In addition, if it is established that the French digital tax essentially applies to US service suppliers by excluding similar domestic or European services by a threshold effect, it could be considered as arbitrary or unjustifiable discrimination under Article XIV of the GATS. In our opinion, the real question is to determine if the French DST can be qualified as a domestic measure “ensuring the equitable or effective imposition or collection of taxes”62 listed in footnote 6 of Article XIV, d) of the GATS. These measures are considered to be outside the national treatment obligation. The footnote refers to six measures taken by a Member State under its tax system, which can justify a difference in treatment with another WTO Member States63. According to this list, the French DST can be qualified for instance as a measure which aims to prevent the avoidance or evasion of taxes, or taken to ensure the imposition or collection of taxes in the Member’s territory. Consequently, the incompatibility with national treatment clause is not evident. The reasoning could be the same for the most-favored-nation clause. Indeed, Article II.1 of the GATS applies to all measures taken by a Member State affecting trade in services in all sectors and carried out in accordance with one of the four modes of the supply of services described above. France must grant immediately and unconditionally to services and service suppliers of any other member (the United States) treatment no less favorable than which it allows to like services and service suppliers of any other country (EU Member States). Again, Member States may request exemptions in lists of concessions. The EU maintains such exemptions for services that are not related to digital services, mainly in the audiovisual, financial and transport sectors64. The obligation is therefore total and France will have to ensure that it is respected, in particular by ensuring that French and European companies are not systematically exempted in comparison with American companies. Here again, there is an exception contained in Article XIV, e) of the GATS. A difference in treatment can be the result of an agreement of double taxation or provisions on the avoidance of double taxation in any other international agreement or arrangement by which the Member is bound. On the ground of bilateral tax treaties, this situation is rare in practice65. Thus, the question of incompatibility with the MFN clause is more relevant on the basis “any other international agreement”, in particular on the ground of a multilateral agreement. 2. What is the next step? France has three main options. The first one is to temporarily maintain its digital tax. As things currently stand, France is not in an isolated position. In line with a mimicry effect, sometimes EU States draw inspiration from other measures that have been put in place in order to obtain new revenues and fill a legal gap. After the European failure to find a tax framework for the “digital single market” in 2018, some States have decided to follow the implementation of such a tax initiated by Hungary. That is the case for Austria66, Italy67 and the UK68. Spain is on the way69. Diversity70 is the European reality. The situation is the same for third countries which implement three types of measure: a notion of significant economic presence (India) or significant digital 58. These commitments indicate the limitations applicable to all sectors in the schedule. 59. These commitments apply only to a particular sector or sub-sector. 60. GATS/SC/157, “European Union – Schedule of specific commitments”, 7 May 2019. 61. A.D. MITCHELL, T. VOON and J. HEPBURN, “Taxing tech: risks of an Australian digital services tax under international economic law”, Melbourne Journal of International Law, Volume 20, Issue 1, July 2019, pp. 88-124. 62. The text gives an alternative between equity and effectiveness. Indeed, the tax measure must be either equitable or effective. Therefore, the combination of these two characteristics is not necessary. 63. The footnote states: “Measures that are aimed at ensuring the equitable or effective imposition or collection of direct taxes include measures taken by a Member under its taxation system which: (i) apply to non-resident service suppliers in recognition of the fact that the tax obligation of non-residents is determined with respect to taxable items sourced or located in the Member’s territory; or (ii) apply to non-residents in order to ensure the imposition or collection of taxes in the Member’s territory; or (iii) apply to non-residents or residents in order to prevent the avoidance or evasion of taxes, including compliance measures; or (iv) apply to consumers of services supplied in or from the territory of another Member in order to ensure the imposition or collection of taxes on such consumers derived from sources in the Member’s territory; or (v) distinguish service suppliers subject to tax on worldwide taxable items from other service suppliers, in recognition of the difference in the nature of the tax base between them; or (vi) determine, allocate or apportion income, profit, gain, loss, deduction or credit of resident persons or branches, or between related persons or branches of the same person, in order to safeguard the Member’s tax base (...)” 64. GATS/EL/31, “European Communities and their member states – Final List of Art. II (MFN) Exemptions”, 15 April 1994. 65. M. SADOWSKY, Droit de l’OMC, droit de l’Union européenne et fiscalité directe, Larcier, 2013, § 298 and f. 66. Bundesrecht konsolidiert: Gesamte Rechtsvorschrift für Digitalsteuergesetz 2020, 30 Oktober 2019, BGBl. I, Nr. 91/2019 (NR: GP XXVI IA 983/A AB 686 S. 88. BR: AB 10251 S. 897). 67. Legge 27 Dicembre 2019, n° 160, “Bilancio di previsione dello Stato per l’anno finanziario 2020 e bilancio pluriennale per il triennio 2020-2022”, Gazzetta Ufficiale della Repubblica italiana, 30 dicembre 2019, p. 115 and s. 68. The DST is applicable since the 1st of April 2020. 69. “Proyecto de Ley del Impuesto sobre Determinados Servicios Digitales”, Boletín Oficial de las Cortes Generales, viernes 28 de febrero de 2020. 70. Differences are noted in the national threshold, in the rate, in the scope and the structure of the tax itself. [434] t.f.r. 582 – mei 2020 intersentia French perspectives on the Digital Services Tax (DST) presence (Israel); a specific tax regime for the taxation of profits (UK, US and Australia) or a turnover tax. For some authors71, the multiplication of these unilateral measures can open the way to international cooperation. The second option is to find an agreement with the US, as some factors could also be raised against the US according to their commitments. Indeed, it is still possible for the European Union to refer the matter to the Dispute Settlement Body under WTO law to denounce the illegality of the US retaliation, contrary to their WTO commitments on the grounds of the non-discrimination principle. For the time being, political negotiation is preferred. In any event, some agreements will have to be reached to articulate the protection of data, notably the US Clarifying Lawful Overseas Use of Data Act (Cloud Act)72 and the EU General Data Protection Regulation (GDPR)73. For instance, Article 48 of the GDPR74 allows the extraterritorial transfer of personal data on the basis of a mutual legal assistance treaty or comparable international agreement. On this basis, the Cloud Act does not allow the transfer of data from a European provider to the US authorities. Therefore, the EU will have to negotiate a bilateral agreement with the US in order to achieve a sufficient level of reciprocity. Other incompatibilities could be raised against the US on the grounds of Article 8 of the European Convention on Human Rights (ECHR) and Articles 7 and 8 of the European Charter of Fundamental Rights recognizing a fundamental right to privacy. Indeed, the Cloud Act does not offer the minimum guarantees offered by the European Court with regard to the monitoring of electronic surveillance carried out by governments. In this context, the digital commitments of each party will lead France and the US to find some bilateral agreements. The last option is to find an international agreement. In this case, there will be consequences for France as it promises to reimburse the amounts already levied if a more favorable international solution is found for digital companies. One recalls the consequences of the unconstitutionality of the 3% tax on dividends75, which led the French State to create two corporate tax surcharges to finance part of this refund. Technically, we do not know how the State will operate this refund. On the international level, lots of political and legal obstacles have already been pointed out, for instance: the difficulty of finding a consensus, the legitimacy of the OECD, the interests of developing countries, the determination of the value creation of a digital transaction, new concepts of market jurisdiction or “digital sovereignty”76, digital identity or the elimination of double taxation. Like others77, we are in favor of evolution more than a revolution. Revolution implies modeling a new international tax order where multilateralism will become the rule, the arm’s length principle the exception and states become “market jurisdictions”. History teaches us that multilateralism has its flaws, and that it tends to exacerbate political differences in tax matters without necessarily offering a satisfactory legal solution. Within the WTO, the current state of the dispute initiated between Boeing and Airbus in 2004 is a good example. In this context, why not start by rethinking the dispute resolution system? The proposed change cannot be based solely on fairness, but must also ensure the certainty and the simplicity of the new system. It is difficult to change a century of international tax rules in a few months. In reality, there is what we see and what we do not see. The distinction between the good economist who takes into account the effects we see and the effects we have to predict, and the bad economist who focuses on the visible effects, depends on that78. In this context, it would be wise to take sufficient time to forecast the new international tax order. 71. L.V. FAULHABER, “Taxing tech: the future of digital taxation”, Virginia Tax Review, Volume 39.2, 2019, p. 191. 72. H.R. 4943 – 115th Congress, 2nd session (2017-2018). 73. Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC (General Data Protection Regulation). 74. This article states: “Any judgment of a court or tribunal and any decision of an administrative authority of a third country requiring a controller or processor to transfer or disclose personal data may only be recognised or enforceable in any manner if based on an international agreement, such as a mutual legal assistance treaty, in force between the requesting third country and the Union or a Member State, without prejudice to other grounds for transfer pursuant to this Chapter.” 75. Décision n° 2017-660 QPC, 6 octobre 2017, Société de participations financières. 76. Senat S.O. 2019-20, “Rapport fait au nom de la commission d’enquête sur la souveraineté numérique”, n° 7, October 1, 2019. The main idea is that digital companies are now competing directly with the state because of the value of data. 77. A.B. MORENO et Y. BRAUNER, “Taxing the Digital Economy Post BEPS...Seriously”, Columbia Journal of Transnational Law, 58:1, February 2020, pp. 121188; A.J. COCKFIELD, “Tax Wars: How to End the Conflict Over Taxing Global Digital Commerce”, Berkeley Business Law Journal, SSRN paper, November 2019; S. GREIL, “The Arm’s Length Principle in the 21st Century – Alive and Kicking?”, SSRN paper, September 2019; W. SCHÖN, “Ten Questions about Why and How to Tax the Digitalized Economy”, Bulletin for International Taxation, April/May 2018, p. 278-292; R. BIRD, “Reforming international taxation: Is the process the real product?”, Review of Public Economics, n° 2, 2016, p. 173. 78. F. BASTIAT, o.c., p. 336. intersentia t.f.r. 582 – mei 2020 [435]