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What is the digital services tax? How it impacts big tech companies and the US

ILLUSTRATION - A woman makes the 'thumbs down' sign with her fist and thumb in front of an enlarged 'Like' symbol of the social netweorking site Facebook in Schwerin, Germany, 04 April 2013 (STAGED PICTURE). The social network counts more than 25 million users in Germany alone, but it keeps losing more and more especially young users to other online services. Photo: Jens Buettner | usage worldwide   (Photo by Jens Büttner/picture alliance via Getty Images)
US president Donald Trump has been railing against digital tax proposals. Photo: Getty

Digital tax proposals are set to take centre stage at the World Economic Forum in Davos this week, with US President Donald Trump expected to rail against France’s levy on tech giants and plans to introduce a similar one in the UK.

In December, the Trump administration last month threatened to impose 100% tariffs on $2.4bn worth of French goods, including champagne and handbags, arguing that the 3% tax on the revenues of large digital services companies unfairly targets US firms.

France’s digital tax proposal is just one just move in the battle to prevent US tech giants from shifting profits to low tax jurisdictions.

In essence, digital tax initiatives tax large global firms on their revenue or sales in a particular country, rather than on their profits, which are often booked elsewhere.

In France, any digital company with revenue of more than €750m (£670m) — of which at least €25m is generated in France — must pay the 3% tax.

But earlier this month, French economy minister Bruno Le Maire warned that any retaliation to his country’s new digital tax could “deeply and durably” damage relations between the United States and Europe.

“If the Americans decide to go ahead and impose sanctions against the digital tax ... in this case we would retaliate,” Le Maire said, warning that — in some cases — the only alternatives to certain French goods are Chinese ones (paywall).

France has signalled that it is hoping to reach agreement with the United States in Davos.

“We are ready to make steps towards the United States, and we have already proposed a certain number of measures. We hope to reach a resolution by Wednesday,” Le Maire said this week.

But Italy has recently introduced a similar tax, and the UK is expected to unveil a “digital services tax”, a 2% levy on the UK revenues of technology businesses, in the upcoming 11 March budget.

The proposals in France, Italy and the UK are national tax proposals. But these countries would prefer if there was international agreement on this topic, and hope that OECD proposals come to pass.

Progress had been made on these global digital tax proposals, but they have recently been derailed by the United States.

The European Union has said, meanwhile, that it intends to bring forward its own digital tax proposals — essentially picking up the mantle — if the OECD discussions on the matter collapse.