Global vision Tailor-made strategy - PowerPoint Presentation

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Global vision

Tailor-made strategy

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What is the “GAFA tax”

New French law

nbr

. 2019-759 of 24

th

of July 2019 (commonly referred to as “GAFA tax”)

GAFA is an acronym for Google, Apple, Facebook, and Amazon

Origin of the GAFA tax: the low tax rates paid, mainly by US tech giants, have repeatedly caused anger among voters in many European countries

The French GAFA tax shall only be applicable on a temporary basis and shall be abolished once an international / OECD approach to the taxation of digital services will be in place

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Taxation of digital services: recent developments

The French initiative appears to be part of a growing national trend towards the regulation of digital taxation (now apparently underway in Spain, Great Britain and Italy for instance)

The French GAFA tax is largely modelled after the E.U. directive proposal made by the E.U. Commission (COM/2018/148) of 21

st

of March 2018 – unlikely to be adopted in the near future

The Commission proposed a 3% tax on the revenues attributable to digital services of large entities, defined as entities with over €750 million in worldwide revenues and over €50 million within the E.U.

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The scope of the French GAFA tax: taxable services

Intermediation services:

The supply, by electronic means, of a digital interface that allows users to contact and interact with each other, particularly for the delivery of goods or services directly between those users

Advertisement services:

Services provided to advertisers or their agents enabling them to display digital targeted advertisements based on data collected on internet users

Such services include for instance: the sale of data of users, the management of that data, the display of specific ads, etc.

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Some services outside the scope of the GAFA tax

Direct online sale of goods or services

Granting access to a digital interface to offer it directly to users of digital contents (such as video, audio and software applications), as well as communication or payment services

Certain regulated financial services (such as intrabank payments or the delivery of financial instruments for instance)

Intermediation between sellers and buyers of advertisement space

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Territorial principle

Only services provided in France are subject to the GAFA tax

A service is considered to be provided in France as long as it is based on an activity of a user of a digital interface located in France, i.e. if he/she are connecting to such an interface via a terminal situated in France

The localization of the terminal in France can be determined by all means, such as for instance through the IP address, subject to the rules regarding the usage of personal data

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Territorial principle: nexus rules (1/2)

The following services are considered to be provided in France:

Intermediation services which allow their users to realize exchanges of goods and services, when, during the course of a calendar year, a transaction is realized by one user located in France (either as a buyer or a seller)

Intermediation services which do not allow their users to realize exchanges of goods and services (for instance dating sites), when, during the course of a calendar year, one of the users has an active account on a particular digital interface, account which was opened from France to access that digital interface

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Territorial principle: nexus rules (2/2)

The following services are considered to be provided in France:

Advertising services when an advertisement is displayed, during the calendar year, on a digital interface consulted by one user who is located in France

The sale of users’ data when, during the calendar year, the sale is derived from the data created or collected through the activity of one user located in France

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Tax thresholds

Only enterprises, whether or not established in France, for which the annual total of the sums received in consideration for the taxable services, cumulatively exceed

both

of the following thresholds, are liable to the GAFA tax:

€750 million for services provided at the worldwide level

€25 million for services provided in France

For enterprises that are members of a group establishing consolidated accounts, compliance with the thresholds is assessed at the group level

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Taxable event

The taxable event is realized at the end of each calendar year during which the digital operator received sums in consideration for taxable services provided in France

The enterprise liable to the GAFA tax is the enterprise which receives the sums in consideration for these services

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Taxable basis – general rules

The taxable basis are the payments received (excluding VAT) in consideration for the taxable services provided in France, no matter the nature of those payments (subscription fees, commissions, etc.) and the localization of the payor

The portion of the revenues attributable to France is computed on the basis of the worldwide revenues from the taxable services, to which will be applied a percentage representative of the share of those taxable services linked to France

The percentage is established for each service on an annual digital presence in France (and not on the basis of payments deriving from France)

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Taxable basis – percentage of services linked to France (1/2)

For intermediation services which allow their users to realize exchanges of goods and services, to the proportion of the transactions involving one user located in France (buyer or seller)

For intermediation services which do not allow their users to realize exchanges of goods and services, to the proportion of the users who have an account having been opened in France and granting access to the digital interface

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Taxable basis – percentage of services linked to France (2/2)

For the advertisement services, to the proportion of the displayed advertisements on a digital interface in relation to the data of a user located in France

For the sale of users’ data, to the proportion of the users who have an account having been opened in France and granting access to the digital interface

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Tax rate

The tax rate is set at

3 %

The amount of tax is equal to the respective percentages of the services linked to France times the tax rate

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Entry into force

The GAFA tax is applicable as of the entire calendar year 2019 (law published as of 25

th

of July 2019)

The GAFA tax return is filed annually and generally two advance payments are due during the ongoing calendar, both equal to 50% of the GAFA tax pertaining to the previous calendar year – any payment made in excess can be imputed on future advance payments or can be reimbursed

For 2019, a unique advance payment is due in October 2019

The advance payment is computed on the amounts received in 2018 and the percentages of the services linked to France are determined on a period ranging between the 26 July 2019 and 31 October 2019

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Open questions

According to the French State Council, commenting the then draft bill of the GAFA tax, it should not be within the scope of double tax treaties, as it targets only gross inflows and not profits

According to some commentators, this remains to be challenged in court, as the clear purpose of the GAFA tax is to create a substitute for the impossibility to tax the profits in the absence of a permanent establishment in France

Does the new GAFA tax constitute a form of state aid and/or a barrier to the freedom of establishment and of service providing?

The French State Council, when commenting the draft bill, considered that it does not

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The international response to the French GAFA tax

The Office of the United States Trade Representative promptly launched an investigation under Section 301 of the Trade Act of 1974 into whether the French digital services tax unfairly targets US businesses

At the G7 Summit taking place in Biarritz on the 24

th

to 26

th

of August, an appeasement between the French and US positions was reached

France reconfirmed that it would abolish its GAFA tax once a solution at the OECD level will be set in place and France would then allow to offset any already paid GAFA tax on the new OECD taxation mechanism

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OECD’s Secretariat proposal for a “Unified Approach” under Pillar One (nexus and profit allocation rules)

Released on 1

st

of October 2019 and currently undergoing a public consultation

This proposal has been made by the Secretariat to facilitate a negotiation on the basis of the “Unified Approach”, to allow the G20/OECD

Inclusive Framework for BEPS

to make significant progress in the coming months so that a political agreement on Pillar One could be reached in 2020

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Proposed new nexus rules (1/2)

For businesses within the scope, it creates a new nexus, not dependent on physical presence but largely based on sales

The new nexus rule would address this issue by being applicable in all cases where a business has a sustained and significant involvement in the economy of a market jurisdiction, such as through consumer interaction and engagement, irrespective of its level of physical presence in that jurisdiction

The simplest way of operating the new rule would be to define a revenue threshold in the market (the amount of which could be adapted to the size of the market) as the primary indicator of a sustained and significant involvement in that jurisdiction

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The revenue threshold would also take into account certain activities, such as online advertising services, which are directed at non-paying users in locations that are different from those in which the relevant revenues are booked

This new nexus would be introduced through a standalone rule – on top of the permanent establishment rule – to limit any unintended spill-over effect on other existing rules

Proposed new nexus rules (2/2)

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New profit allocation rules going beyond the arm’s length principle

New profit allocation rules are proposed (

three

tier

mechanism

), irrespective of whether taxpayers have an in-country marketing or distribution presence (permanent establishment or separate subsidiary) or sell via unrelated distributors

At the same time, the approach largely retains the current transfer pricing rules based on the arm’s length principle but complements them with formula based solutions

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Ongoing work on Pillar Two (global anti-base erosion mechanism)

Pillar Two aims to develop a minimum tax proposal under a program known as the global anti-base erosion proposal (

GloBE

proposal) - a public consultation is foreseen in December 2019

Some agreement has already been reached on the design of Pillar Two like the fact that it will operate as a top-up to an agreed fixed rate of tax that will be set once other key design elements of the proposal are finalized

It is hoped that some of the main features of Pillar Two can be agreed by the next meeting of the G20/OECD

Inclusive Framework

in January 2020 while a political agreement on the architecture of Pillar Two would be expected in half of 2020 too

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