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Tech Stocks Hit By France's Digital Tax: Trade War Brewing?

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It seems as if there is no respite for technology stocks as another potential trade war is brewing between long-term allies — the United States and France. The bone of contention has been a 3% digital tax on technology firms that French lawmakers have decided to impose from January 2020.

Although France’s President Emanuel Macron has aimed to defuse the tensions by reportedly reaching a ‘compromise’ after his U.S. counterpart threatened to levy retaliatory tariffs on wines, the issue is far from being fully resolved. The stop-gap arrangement on the sidelines of the G7 summit is merely keeping at bay a budding conflict from escalating.  

Digital Services Tax

The French digital services tax is applicable to businesses with global revenues of more than €750 million ($845 million) and €25 million ($28 million) in France. The 3% tax will be levied on large technology companies that generate significant revenues from digital businesses, such as by collecting vast amounts of user data and selling targeted digital advertising. The tariffs are broadly based on the recommendations by Organization for Economic Cooperation and Development (“OECD”) and seek to address the shortcomings of global taxation policy related to digital businesses.

Time and again, France has raised its voice against low tax payments by large multinational players despite having significant operations in the country. The proposed tax will largely apply to about 30 such companies, the lion’s share of which is U.S.-based technology firms. This, in turn, has led the tax to be widely referred to as the GAFA tax, an acronym for technology behemoths Google or Alphabet Inc. (GOOGL - Free Report) , Apple Inc. (AAPL - Free Report) , Facebook, Inc. (FB - Free Report) , and, Inc. (AMZN - Free Report) .

Knee-Jerk Reactions

In retaliation, President Trump has threatened to impose counter tariffs on French wines. The Office of the United States Trade Representative also invoked Section 301 investigation, accusing the French government of using discriminatory policies against U.S. companies. The tit-for-tat tariff warnings led the two countries to agree to a 90-day reprieve against the proposed tax, giving some legroom to diplomatic channels to reach an agreeable solution.

Meanwhile, leading companies have vehemently opposed the new set of tax rules and have criticized France for unfairly targeting U.S. companies. While Google decried that it was a “sharp departure from global rules”, Amazon has threatened to pass the added costs to third-party sellers operating in the country from Oct 1.

The ‘Compromise’

As the situation threatened to snowball into a full-blown conflict, President Macron announced a ‘compromise’ solution to defuse the tensions. Per the agreement, France would repay companies the difference between its digital tax plan and that arising from an overhaul of global taxes as drawn up by the OECD. Although the U.S. government seemed to be a reluctant party to the reconcilement, a latent threat of trade war has kept the companies on tenterhooks.

Peter Hiltz, Amazon's director of international tax policy and planning, perfectly observed, "The tax has the potential to impede the efforts of U.S. SMBs (small- and medium-sized businesses) to grow and sell into France because it increases their cost of doing business. Selling partners may be forced to choose between increasing their prices, reducing their own costs, or stop selling entirely.”

Whether the beleaguered technology industry that bore the brunt of the geopolitical crisis and its cascading effect on global trade following the Sino-U.S. tariff war can brave yet another conflict remains to be seen.

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