Last week the Senate of France reached a compromise with the legislature’s lower chamber, the National Assembly, on its version of a digital services tax (DST). This unilateral move from France comes after the European Union (EU) wasn’t able to agree on its own DST proposal that would have applied in all EU member states. 

The main point of contention between the Senate and the National Assembly revolved around the concept of state aid. Under Article 107 of the Treaty on the Functioning of the European Union, a member state may not grant state aid or use state resources to distort competition or trade in the EU marketplace. There are certain exceptions to this standard, but to meet these exceptions a government must notify the European Commission and await its notification before implementation of any proposed law. 

The French Senate introduced language into the bill passed by the National Assembly that would “oblige the government to give Parliament the reasons for its refusal to notify the digital services tax to the European Commission as state aid.” This language was ultimately adopted in the compromise bill. 

The concern among the Senate is that a DST proposal will face a legal challenge arguing it is discriminating against large companies due to the tax being a tax on turnover and having a revenue threshold. The French proposal, which is broader than the failed European Commission proposal, is a 3% tax on revenue from companies with more than 750 million Euros in worldwide revenue, of which at least 25 million must be generated in France. The challenge would likely be in terms of the tax being state aid to companies that generate less than the 750 million Euros threshold. 

Make no mistake that the French digital tax is discriminatory, whether the European Commission rules it is, or it is not in the EU marketplace. By using revenue as a proxy for nationality, France is looking to pillage the accounts of American tech companies in order to get their “fair share” of tax. While the OECD is working to develop a global consensus on the issue, the French have decided to go ahead on their own, risking worsening the already bad French-American relationship and a massive blowback on future trade.