French OTT tax: pass-through or not?

French OTT tax: pass-through or not?

By the law n ° 2019-759 of July 24, 2019[1], the French Republic has created a tax on some digital services, namely the intermediation between sellers and buyers on the internet and the targeted advertising based on data provided by the internet user. On the contrary, the direct sales relationship between a seller and a buyer, i.e. the sales made on the seller’s own e-commerce site, are excluded from the base of this tax.

A provisional tax

This tax is presented by France as a temporary palliative to the adoption by the OECD and G20 countries of a major reform, called BEPS (Base Erosion and Profit Shifting)[2], consisting in implementing fifteen measures to deal with the issue of tax evasion, improving the consistency of international tax rules and ensuring a more transparent tax environment. Discussions are well underway at the OECD, they have actually started since the presidency of Donald Trump while the blockade was total on the part of the United States in the time of Barack Obama, but there is still no agreement.

On the side lines of the G7 summit in Biarritz, last month, the French Minister of Economy and Finance, Bruno Le Maire, pledged to US Treasury Secretary Steven Mnuchin that France would reimburse the companies concerned with any overpayment in the event that the G20 / OECD tax leads to lower payments than the provisional French tax[3].

Pending such an agreement, the European Commission has tried to implement a tax comparable to that which France has just adopted, but this project was vetoed by Denmark, Finland, Ireland and Sweden, tax issues requiring unanimity at European level. Faced with this situation, France decided, on a provisional basis, to advance alone.

Tax havens: a weapon for small countries against big ones

The fact that the fight against tax evasion by multinationals is advancing in the G20 and not in the European Union is an illustration of the fact that a tax haven is necessarily a small country. Indeed, for there to be more to be gained for a country to adopt a lower rate for a tax in order to attract location-free actors and thus broaden the base of the tax to be raised by the same actors, the weight of actors naturally located in the country must be low compared to the weight of the actors for which a lower rate can trigger a localisation in the country in question.

The tax is now adopted. It amounts to 3% of the amount of cash paid in exchange for the provision of intermediation and internet advertising services, this amount being defined as the product of all the cash inflows paid during the year on a global basis. by the representative percentage of the share of these services attached to France evaluated during the same year. It is therefore a reconstitution of a related turnover of services aimed at users located in France, but subject to VAT in the country of establishment of the seller, which is frequently Luxembourg or Ireland.

Who will be the ultimate payer of this tax?

Who will pay this tax? Given the thresholds of 25 M € for users in France and 750 M € worldwide, the direct taxpayers will be about thirty companies, mostly American but, as AB Atkinson and Joseph Stiglitz say, ” One of the most useful lessons from the economic analysis of public finances is that the agent who actually bears the economic burden of a tax is not necessarily the one who pays this tax to the treasury.[4]

The question of the passing through of the tax was raised in the French parliamentary debates. Bruno Le Maire, Minister of Economy and Finance, said in the National Assembly: “We are also told that it is the consumers who will pay this tax: bad argument. Advertisements that you see every day, willy-nilly, on your phones and other digital devices, do not require any payment from you. So I do not see how taxation of these targeted online ads could have any impact on the consumer; do not play with fears and false arguments. [5]

Since the promulgation of the law, two actors among the thirty targeted companies have taken a position on the pass-through issue: on the one hand, Amazon will pass through the tax to French merchants on its Marketplace, raising its commission rate from 15 to 15.45%, i.e. an increase of 3%[6]. On the other hand, Fabien Versavau, CEO of Rakuten France (ex-PriceMinister) said that his company will not pass on this tax in 2019, because it could not completely evaluate its effects[7].

One must be in a hyper-competitive situation to avoid passing through a turnover tax

The question of whether or not companies pass through the changes in their costs in their sales prices is the subject of very many economic studies. In general, the cost variations common to an entire industry are passed through, but, in the case where the variation occurs on a wholesale market, this may depend on the elasticity of final demand or intermediate demand in relation to prices.

Amazon, with its very high market share in e-commerce on the one hand and the multiplicity of services it offers to its merchants on the other hand, is a key player for them. As one of them says: “I can subscribe to all marketplaces in France, have my own website … if I lose Amazon, I can close shop or go back to selling on street markets.[8]“.

Although growing in France in 2018[9], Rakuten, in comparison, is in a more difficult situation. In 2016, Rakuten had to depreciate, from € 200 million to € 65 million, the amount of goodwill attached to its French subsidiary, acquired in 2010[10].

Companies are experiencing changes in their costs every day. In commerce, most cost variations, when they occur at the industry level, are fully passed on to the customer, often with a multiplier when the selling price is defined by applying a constant margin rate. There may be delays in the adjustment of the selling price (it is often criticized at service stations for lower fuel costs), but the repercussion remains the main trend. In the case of the creation of a sectoral tax on turnover, things are a little different: when was created in 2009, to finance the public broadcasting, the tax on the operators of electronic communication, the operators French have not passed on this tax. Indeed, the vivacity of competition between Orange, SFR, Bouygues Telecom and Free has dissuaded them.

At this level, several politicians have deemed scandalous the decision of Amazon, but it is the logical decision of any actor who is not in an ultra-competitive situation. In any case, the final payer of a business tax can only be the customer or the shareholder. Profit margins represent only a small fraction of turnover, it is in the vast majority of cases the customer who must pay the tax to which the company is subject.

Has the French government shot itself in the foot with this tax?

This tax should bring in € 400 million a year, which is very little compared to a French state budget of € 328 billion in 2019. Let us remind ourselves that the French legislator regularly creates sectoral taxes on turnover: the Tascom for large retail space in 1975, the tax on electronic communication operators in 2009. The initially low rate of these taxes tends to increase a few years later, at the occasion of last-minute budget amendments. It is politically easier to tax sectors perceived as rich and growing than those living through a crisis. It is also easier to create a small sectoral tax on turnover than to tune up the VAT rate, especially when it is set at the round figure of 20%.





[4] TAJ, dans son rapport pour la CIA, cite Atkinson et Stiglitz :