Published
October 28, 2024
As the French government casts about for revenues to address its budget deficit, parliamentarians are considering an amendment (I-735) to the 2025 budget to raise the Digital Services Tax (DST) from 3% to 5%, purportedly raising €500 million.
Increasing the DST rate seems bound to backfire: It would damage the French economy, inflame trade tensions with the United States, and hinder progress in international tax negotiations.
First, hiking the French DST rate from 3% to 5%—and perhaps even higher—may cause a key engine of economic growth to stall. France’s large professional and business services sector employs more workers at higher average wages than manufacturing. Professional and business services include such sectors as audiovisual, software and ICT services, architecture, accounting, engineering and project management, advertising, banking, and insurance.
Thanks to digital technologies, professional and business services are increasingly tradable. Worldwide, it is estimated that about two-thirds of all service exports can now be delivered to customers abroad digitally. Partly as a result, global trade in services is expanding 60% more rapidly than trade in goods, according to a report by the McKinsey Global Institute.
In this context, hiking the rate for France’s DST magnifies the burden it imposes on French economic growth. The knock-on effects for digital trade generally could sap expansion and job creation not just among firms considered “digital companies” but among firms that simply use digital tools. Many small and medium-sized businesses across France could be affected by the potential slowdown in the growth of digital trade. Any short-term boost in tax revenue would come at a high cost to the broader French economy.
While France’s DST does not apply to all digitally tradable services, the kinds of services targeted are critical to the growth of a huge range of French firms. This includes digital advertising, digital platforms, and online intermediation services that depend on the transmission of users’ data to other users.
Second, hiking the DST rate is bound to undermine trade relations with the United States and may lead to damaging retaliatory tariffs. It is widely acknowledged that France’s DST violates commitments the country made as a member of the WTO. The DST discriminates against U.S. companies through too-clever targeting that just happens to capture American companies almost exclusively. It targets a selection of digital services in which U.S. firms are market leaders but excludes digital services where French firms are significant actors, which the WTO has rejected.
The U.S. already concluded that France’s DST is “unreasonable or discriminatory and burdens or restricts United States commerce” and thus actionable under Section 301 of the Trade Act of 1974. Whoever wins the U.S. presidency on November 5 seems bound to react strongly—with tariffs or some other restriction—to France’s DST.
Third, the move comes at a sensitive time for global tax talks. Multilateral negotiations led by the OECD/G20 Inclusive Framework on BEPS—of which France is a leading member—continue on a taxing rights overhaul known as Pillar One, part of the “two-pillar solution” to address the tax challenges arising from the digitalization of the economy. At the same time, the United States government is working to extend the political agreement between it and several countries—including France—to nullify their DSTs once the rights overhaul is implemented. By pushing forward with this tax hike, France risks undermining these critical international discussions and setting a destabilizing precedent for other countries to follow suit, further fragmenting the global tax landscape.
The Chamber’s position on these issues is consistent and grounded in sound economic analysis and the principle of non-discriminatory treatment. At a moment of global economic instability, when stronger transatlantic cooperation is essential, unilaterally hiking taxes on foreign investors is a bad idea. We urge French policymakers to oppose this ill-advised proposal.
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About the authors
Jordan G. Heiber
Jordan Heiber leads the Chamber’s international privacy and data flow policy portfolio and manages a team responsible for the full suite of digital policy issues, including cybersecurity, artificial intelligence, and more.
