France Passes Tough ‘Google Tax’ Measure With Steep Penalties

The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.

By Rick Mitchell

Big U.S. internet companies in France could face anti-abuse penalties of up to 60 percent under a “diverted profits” tax measure in a new budget law.

France’s Parliament on Dec. 20 adopted a 2017 budget bill that drops “permanent establishment” language and a 5 percentage point penalty from an earlier version. But it widens the tax administration’s latitude to apply anti-abuse penalties of up to 40 percent to 60 percent, Frederic Teper, a Paris-based partner at Arsene Taxand, told Bloomberg BNA Dec. 21.

France’s minister of economy and finance, Michel Sapin, called the earlier version of the measure bad for France’s competitiveness. Tech In France, an association of 400 companies including Facebook Inc., Google Inc., Microsoft Corp. and Uber Technologies Inc., said the earlier version violated France’s international tax conventions against double taxation and unfairly targeted technology companies.

The definitively adopted measure, which takes effect for the 2018 tax year, states that “a moral person domiciled or established outside of France is subject to income tax when a company or legal entity, whether established in France or not, conducts an activity that consists of the sale or supply of products or services that belong to the previously mentioned moral person or that it has the right to use.”

Because the government is controlled by President Francois Hollande’s Socialist party, as is the National Assembly, the government had a hand in wrangling over revisions of the bill.

Teper said the text “was rewritten to make it more compatible with certain EU commitments and international commitments, but fundamentally it targets the same thing. And it creates a presumption that benefits the tax administration.”

The adopted 2017 bill also includes language allowing the French tax administration to pay whistle-blowers for tips on international tax fraud under an “experimental” measure.

Other measures in the bill would complete the government’s 40 billion euro ($41.8 billion) deal with businesses to gradually cut taxes through 2017 in exchange for increased hiring, as part of a so-called responsibility pact initiated in 2014. The opposition-controlled Senate rejected the bill Dec. 19, but the National Assembly has the last word on budget matters. Still, the Constitutional Council can strike down laws on constitutional grounds.

Excessive Transfer Pricing Targeted

The diverted profits tax measure that Parliament adopted as an amendment in November said it targeted foreign companies that “artificially divert profits that they earn in our country by a mechanism of excessive transfer pricing, but also by avoiding the establishment of tax presence in France through complex financial arrangements or just by taking advantage of gaps in our tax legislation.”

Drawing heavily on the U.K.’s 2015 diverted tax measure targeting technology companies, the amendment adopted in November would have redefined permanent establishment and widened the application of transfer pricing rules. And it would have slapped a 5 percent penalty—on top of France’s standard 33.33 percent corporate rate on profits—on companies deemed to have diverted profits.

May Ease Higher Penalties

The final measure drops mention of “permanent establishment” and the 5 percent penalty tax. Nevertheless, “it still allows determining that there is an entity in France. Because the text is not clear, there can still be an assumption of a permanent establishment, even when the entity is not in France,” Teper said.

As did the initial amendment, the text states that it doesn’t intend to “prejudice” article 57 of the tax code, which addresses transfer pricing. It says the measure doesn’t apply to companies established in the European Union if the companies’ activities or structure can’t be considered as designed to avoid French taxation.

But it has language that appears to be directed at Google. For example, the text cites “Internet sites, whether hosted in France or not.” Teper said the text “ targets commissionaire schemes, and Internet sites that allow selling in France.”

The text would penalize companies deemed to have diverted profits by disallowing tax deductions on those profits. And it includes new language stipulating that article L. 64 of the tax procedures code, on anti-abuse law, and article 1729 of the tax code, which allows penalties of between 40 percent and 60 percent, still apply, Teper said. “So it may make it even easier to apply the anti-abuse penalties than under the earlier version,” he added.

Apple Fighting Tax Authorities

The French diverted profits measure comes as Apple prepares to fight the European Commission’s order for Ireland to collect $14.5 billion in unpaid taxes it deemed unfair state aid. According to French press reports in November, the French tax administration has hit Apple Inc. with a 400 million euro ($418 million) proposed adjustment accusing the company of aggressive “tax arrangements.”

French laws, decrees and other legal acts take effect when published in the Journal Officiel, the official gazette.

To contact the reporter on this story: Rick Mitchell in Paris at

To contact the editor on this story: Molly Moses at

For More Information

French-language text of the 2017 budget bill passed by Parliament, but not yet published, is at

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