The US threat of tariff retribution on France for its Digital Services Tax shows how tax on corporate giants has little to do with fairness and a lot to do with global economic power
ON THURSDAY [11 July], the French Senate passed the Digital Services Tax, a landmark levy on global tech giants. The tax will see digital companies with global revenue over $750 million have to pay 3 per cent of global revenues and sales to the French Government, raising an anticipated 500 million Euros.
French President Emmanuel Macron now has 15 days to sign the legislation for it to be passed into law. He is under pressure from the US Government not to do so. The US has opened an investigation into the tax’s consequences and is threatening possible retaliation actions after an intensive lobbying campaign to halt its introduction.
So far, France is not backing down. Bloomberg report a French official stating that the US shouldn’t use trade instruments to attack the sovereignty of another state.
The outcome of the dispute will reverberate across Europe. Other countries, including the UK, have been looking at introducing a similar tax, after attempts to co-ordinate an EU-wide digital levy failed. At the 2018 Budget, UK Chancellor Phillip Hammond announced plans for a 2 per cent tax on tech firms digital sales made in the UK, saying it was “clearly not sustainable or fair that digital platform businesses can generate substantial value in the UK without paying tax here”.
However, they may think twice if they believe Donald Trump will slap new tariffs on them for doing so. The investigation into the French tax is based on the same powers which Trump has used at regular intervals to escalate tariffs on China. Trump has not been shying about criticising international trade relations with the EU, and would not fear taking the same approach to European countries as he has to China.
Of course the tax is not aimed specifically at American companies per se, but the US clearly holds a significant market advantage, with Apple, Facebook, Alphabet (Google) and Amazon, four of the largest global digital platform companies, all headquartered in the US. The US wants to defend the global power of their corporations - that explains their resistance to the digital services tax, as well as their war on China’s Huawei, an emerging global tech giant that threatens US domination of the sector.
The EU Commission estimates that global tech companies pay an average tax rate of 9.5 per cent, compared to 23 per cent for traditional businesses. In the UK the average corporate tax rate for digital platforms is significantly below the EU average, with Facebook paying £15.8 million in 2017, less than one per cent of UK digital sales. In the same year Amazon, owned by the world’s richest person Jeff Bezos, paid just £1.7 million. So the need for a tax like the one passed by the French Parliament is obvious, and the design of the tax - on global revenues and sales - makes it extremely difficult for tech companies to avoid it, hence the intervention of the US Government on their behalf.
The way in which the US is looking to fight back, through tariffs rather than taxes, reflects the hierarchy of corporate power at play: whereas US companies have more to lose from catch-all global revenue taxes, European corporate giants have more to lose from restricted access to the huge US market. And in Trump’s trade wars, nothing is off limits. As international trade litigator Douglas Heffner told Bloomberg: “The US can be very creative. They don’t have to just go after digital products. They can go after products where they have leverage.”
This battle highlights the reality of how the global economy works: international trade and taxes are both about power, with the interests of the most powerful states and their corporations representing a hierarchy of economic power. The neoliberal order has been designed ideologically to reduce trade barriers and lower taxes, but it has also been designed strategically to benefit the most powerful actors in the global system.
As economic commentator Grace Blakeley has argued convincingly in the New Statesman, while there is no shortage of economists who will make the case for higher tax rates to tackle inequality, “they don’t seem interested in the structural factors that have made tax competition so easy”.
“Tax rates didn’t start slipping because everyone suddenly decided that letting multinationals such as Apple pay tax at a rate of 0.005 per cent was a good idea. Tax rates started slipping because elites wanted it that way – in fact, they had spent the post-war period constructing a global economy wired for tax competition,” she explains.
Controlling the movement of capital across borders and higher taxes are therefore intertwined, Blakeley argues. Looking at the US threat of tariffs on France for daring to introduce a digital services tax, it’s difficult to see how it could be credibly argued otherwise.
Of course, this is not an even-handed battle - the US is equipped with economic weapons that even significant global players like France could only dream of. As historian Adam Tooze demonstrated in Crashed, his panoramic history of the 2008 financial crash, the crisis exposed the enormous reliance of European capitalism on access to the dollar, with the Federal Reserve acting as “global lender of last resort” which kept “dollar liquidity” flowing to desperate European banks.
Thus, control over the dollar gives the US enormous leverage to control the actions of supposedly “sovereign” foreign governments. It was a French Finance Minister, Valéry Giscard d'Estaing, who famously described as far back as the 1960s the post-war global reserve currency as America’s “exorbitant privilege”. That’s just one example of how the rules of the global economy have nothing to do with fairness, and everything to do with power.
The point is that getting corporations like Facebook and Apple to pay their fair share of taxes may sound like a straight forward moral and ethical issue, but the geopolitical reality is that it’s a confrontation with the global economic hierarchy, with Trump, Mark Zuckerberg and Jeff Bezos sitting at the top of the pyramid.
Picture courtesy of Stock Catalog