France, US pursue compromise amid threats over digital tax

France and the United States are seeking a compromise in a dispute over the former's proposed digital services tax after French Finance Minister Bruno Le Maire warned the US over any retaliation against the new levy.

The French government said it will fight back if Washington introduces "highly disproportionate" tariffs in response to its tax, which demands more money from US online giants, including Google, Facebook and Amazon.

Last year, France proposed a 3 percent levy on revenue from digital services earned in France by firms with revenues of more than 25 million euros ($28 million) in France and 750 million euros worldwide.

On Friday, Le Maire wrote to US Trade Representative Robert Lighthizer: "If the US were to decide to impose trade sanctions against the EU over the French Digital Services Tax, it would deeply and durably affect the transatlantic relationship at a time when we need to stand united."

The US has threatened to impose tariffs of up to 100 percent on French imports, such as wine, cheese, handbags and cookware, claiming that the digital tax unfairly discriminates against US firms.

Chris Rowley, a professor at Kellogg College, University of Oxford & Cass Business School, City, University of London, said the dispute should be considered in the context of the US having run a trade deficit with France of more than $19 billion last year.

"It is always good to start from first principles, particularly in light of the post-Brexit trade negotiations－let us not forget that this is not about 'free trade' as tariffs are about protectionism, with the French and EU large players in this," Rowley said.

"Likewise, it is about 'transfer pricing', which global companies have always engaged in to reduce or maximize their tax exposure in certain regimes."

2-week target

France and the US have given themselves two weeks to try to resolve the row over the French digital tax, Le Maire said on Tuesday, emphasizing that Paris has the European Union's backing on the issue.

Nigel Driffield, professor of international business at Warwick Business School, said:"In general, many EU governments are fed up of companies like Google making huge profits in their country but paying no tax."

After a meeting in Paris with Phil Hogan, the EU's trade commissioner, Le Maire said efforts have been stepped up to "try and find a compromise, within the OECD, on digital tax".

Hogan said the European Commission "will stand together with France" in its digital dispute with Washington.

The Organization for Economic Cooperation and Development has been working toward an international framework to tax digital companies and Paris argued that once there is an international agreement on digital taxation it would immediately supersede the French tax.

Other EU nations are reported to be establishing their own national digital taxes, with Italy quite advanced with its legislation and Austria and the United Kingdom looking at applying similar duties. Reports say the conflict between Washington and Paris could become a wider EU battle.

"In terms of some form of EU response, that will be very difficult as it implies the EU itself actually being united, which it is not," Rowley said. "It comprises 28－soon to be 27－very disparate countries and economies with varied exposure to trade and the US. Any agreement would also be in the context of the internal hot debates.

"These are not only about the EU's future direction, possibly under a centralizing, 'dirigisme' Macronian mantle, but also practically concerning its budget composed of net contributors and receivers."

During a US Trade Representative hearing in Washington on Tuesday, representatives from industries including wine retailers, cookware manufacturers and handbag importers warned that businesses and consumers would bear the brunt of the proposed tariffs.

Faye Gooding from Le Creuset, the cast-iron cookware company, said: "The tariff proposed would truly make this company not sustainable in the United States."

Ben Aneff, managing partner at Tribeca Wine Merchants in New York, said the proposed tariffs would be "the greatest threat to the wine industry since Prohibition" and "be catastrophic for tens of thousands of American businesses".