France is among the first countries to adopt the Digital Services Tax on large international digital services providers. The DST is a tax imposed at a single rate on the gross income derived from the supply of certain digital services.
France enacted its DST in July 2019, with a flat rate of 3% on the gross turnover of digital services providers. The “GAFA” tax, as it was initially abbreviated, is now “GAFAM” and is an income-based tax that primarily affects the most impactful digital services companies with clients worldwide and significant market share.
GAFAM tax, a summary of initials from companies with the largest market share in this business sector, i.e., Google, Amazon, Facebook(now Meta), Apple, and Microsoft, is applicable in France if the likes of the companies above and others in conditions when the registered global turnover of taxable services is above EUR 750 million, and in France above EUR 25 million for certain digital services that are deemed to be placed in the country.
However, 2024 has been a very challenging year for the French budget, so most parties have continuously expressed the necessity of introducing different tax increases to increase public funding for the following year and reduce external debt.
One of the proposed amendments is increasing the flat rate of DST from 3% to 5% starting from 2025. The National Assembly has already adopted this proposal. Now, it remains to be seen whether the bill will pass the final voting of the Finance Act for 2025, scheduled for December 12, 2024.
Introduction of the Change
Suppose the proposal for increasing the Digital Services Tax passes the Parliament and is later signed by the President. In that case, the Finance Act 2025 will introduce a new flat rate of 5% for digital service providers that surpass the threshold indicated by the French General Tax Code starting from January 1, 2025.
Impact of New Tax Rate
Suppose the Parliament adopts the proposed increase in the Digital Services Tax rate starting next year. In that case, the providers of digital services will need to transfer more money to French tax authorities. The approximate calculation of the impact of the increase in the DST rate states that the public budget will receive around EUR 500 million more from these companies.
It remains to be seen how these digital service providers will react if the proposal passes the final voting. There are mentions of possible “business and tax” retaliation from the US toward France-based manufacturers. If the proposed amendment receives a yes, increasing the customs duty on French-based products is an option.
Moving forward, it is also a big question mark how the impacted companies will react to the tax rate increase affecting their profits. As it often happens, they could transfer “this loss” to end customers via an increase in the value of their services.
Considering France’s fiscal situation, it is highly probable that the Digital Services Tax increase from 3% to 5% starting from 2025 will be implemented. The calculations suggest a EUR 500 million increase for the state coffers from this move.
If the proposed amendments pass the final voting, it remains to be seen how the US government and international digital service providers will act.
The introduction of the Digital Services Tax levy is gaining increasing traction worldwide. Digital service providers’ impact on the manner in which services and goods are supplied or provided has entirely changed the business landscape.
Governments from different regions are adopting different legal and tax measures to protect local “traditional businesses” and reduce the part of the national VAT gap made up of missing regulations designated for these service providers or based upon their fraudulent practices.
Aleksandar Delic
1stopVAT Senior Indirect Tax Researcher (Global Content)