On July 12, 2019, France became the first country in the European Union (EU) to impose a Digital Services Tax (DST), effective retroactively to January 1, 2019.
The concept of a DST has been contemplated by the Organization for Economic Cooperation and Development (OECD) and several EU countries over the past few years. It responds to concerns that existing international tax rules allow digital service companies to avoid paying taxes to which tangible companies are arguably subject.
As enacted, the French DST imposes a 3% gross-revenue tax on the following two digital services when supplied in France.
Intermediary services are services provided by a digital interface that allows users to enter into contracts and interact with other people online—a prime example being social media. However, the following are excluded from the definition:
- Digital content services
- Some payment services
- Communication services
These services pertain to targeted ad campaigns that are based on data collected by users and generated by the consultation of the interface. Nontargeted advertising services are excluded from gross digital services revenue.
The DST will apply to any entity that supplies one or both of the above services to customers located in France. However, these companies must have at least €750 million, roughly $831 million, in worldwide gross revenues and €25 million, roughly $27 million, in French gross revenues for the DST to apply. Additionally, their intermediary or targeted advertising services must meet the following criteria to be considered supplied in France.
Intermediary Service Qualifications
For digital interfaces, intermediary services are considered to be supplied in France if either of the following qualifications are met:
- A transaction involves a user physically located in France
- A person transacts using an account in France, allowing them access to the interface
Targeted Advertising Qualifications
Targeted advertising is considered to be supplied in France if either of the following qualifications are met:
- An advertisement is placed on the digital interface of a user in France
- Data of a French user is collected from the interface and sold
Generally speaking, IP addresses will be used to determine a user’s physical location.
Update: On August 26, 2019, in an effort to avert retaliatory French wine tariffs suggested by President Trump, President Macron of France stated that France would likely agree to the OECD’s proposal for taxing digital services when a more broadly accepted proposal is agreed upon. Additionally, France would refund any difference in tax between the French DST and the OECD proposal, once introduced. OECD guidance on the DST is expected to be released in 2020.
Due to the particularities of the DST, companies may need to increase their international compliance and data-collecting efforts to remain compliant. Collecting monthly receipts for the enumerated services and computing the DST may be burdensome, but maintaining this practice can help your company provide documentation to the French tax authorities if it’s requested.
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Although the DST’s high-revenue threshold should prevent the tax from applying to most companies, it may be helpful to continue monitoring this development as the world continues to shift towards a more globalized digital economy.
To learn more about the DST or other regulations that may impact your company, contact your Moss Adams Professional.