French Panel Adopts ‘Google Tax’ on Diverted Profits

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By Rick Mitchell

Nov. 17 — Big U.S. internet companies in France could get hit by a new BEPS-inspired penalty on “diverted profits” under a so-called Google tax measure that France’s National Assembly is set to consider next week.

The amendment, proposed by Socialist Deputy Yann Galut and adopted by the Assembly’s finance committee, targets 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.”

Frederic Teper, a Paris-based partner at Arsene Taxand, told Bloomberg BNA Nov. 17 that Amazon Inc., Apple Inc., Google Inc. and other U.S. companies are likely targets. But “it’s a complicated text and it goes after a lot of other things.” France’s minister of economy and finance, Michel Sapin, has said he opposes the measure.

The amendment text says the proposal was inspired by the U.K.'s 2015 profits tax targeting technology companies, and by recommendations in the OECD’s international project addressing base erosion and profit shifting.

But Teper said the amendment draws on BEPS proposals that have not been formalized into international tax law.

Double Whammy

The amendment text says “a moral person domiciled or established outside of France is deemed to have a permanent establishment in France 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.”

Teper said the amendment’s definition has nothing to do with the current definition of permanent establishment under French law and goes well beyond the current OECD definition. It aims to “readjust” transfer pricing rules by widening permanent establishment to take in such things as a moral person acting for another moral person, which would target commissionaire schemes, or a subsidiary’s physical site used for storage in France, or an internet site like Google’s or Apple’s.

It suggests that “once there are intergroup relations, there is a definition of control between a foreign company and a site in France, and that allows recharacterizing its operations in France.”

For example, for the French subsidiary of a foreign company that pays very high license fees for intellectual property but earns a very low profit in France on sale of products in France, the tax administration could disallow its tax deductions for those license fees. So the subsidiary would have to pay a 5 percentage point penalty tax on top of France’s standard 33.33 percent corporate rate on profits that could be made significantly higher by recharacterization, he said.

Unfinished BEPS Work

Teper noted that “the full national assembly will very likely make several changes to the proposed amendment, making it even more complicated.”

The Organization for Economic Cooperation and Development’s 15-item BEPS plan, issued in October 2015, managed to make consensus recommendations on closing rule gaps that allow multinationals to drastically reduce their tax bills. The recommendations, recently adopted into the OECD transfer pricing guidelines, included major updates to better take intangible assets into account, as well as documentation rules and requirements for the largest multinationals to report on their taxes paid and profits earned in each country of operation.

But the project failed to produce consensus recommendations on taxing the digital economy. Pascal Saint-Amans, head of the OECD’s Center for Tax Policy and Administration, said recently that the OECD Task Force on the Digital Economy plans to try again to establish some recommendations, but he doesn’t expect progress anytime soon.

As a result—and despite OECD objections—countries will likely take unilateral actions on the digital economy, Saint-Amans said.

France and some other countries have long called for special or amended rules to deal with taxation of digital companies. New Zealand is said to be considering its own diverted profits measure.

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

To contact the editor responsible for this story: Penny Sukhraj at

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