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Strained Relations

Kitty Miv, Editor
15 April, 2019

The gilet jaunes – the yellow vests movement – have a lot to answer for. It could be partly thanks to them that France is hell-bent on bringing in its national digital tax, a move that is only likely to apply further pressure to already strained transatlantic trade relations.

Why do I say this? Well, it appears that the French Government is about to cave in to months of protests against the Macron administration's policies by cutting taxes. At least, that's what Prime Minister Edouard Philippe seemed to suggest on Monday in an act of contrition following the conclusion of the "Great Debate." This was a national venting of the spleen which commenced last December. And it transpires from these "consultations" that the most annoying thing about life in France is tax – in particular, income tax and value-added tax.

But that's hardly surprising really, is it? France, Belgium, and Denmark have been fighting it out for the top spot in Europe's most-taxed nation list for what seems like time immemorial. I could have told the Government that French citizens were probably pretty fed up with the amount of tax they pay without the need for a three-month self-flagellation exercise.

So where does the digital tax fit in to all this? Well, if there's one thing that the Great Debate has achieved for the Government it's a certain amount of breathing space. It bought it some time to cook up a digital tax the minute the negotiations on the EU version failed. This could provide the French Government with an additional EUR400m (about USD450m) in tax revenue this year if approved and applied from January 1, 2019, as envisaged, according to the latest estimates. Then another EUR650m from 2020 to 2022. Handy that, when you urgently need to legislate for some unforeseen tax cuts. That's politics!

However, problematically, it is often the case that political expediency can solve one problem and immediately lead to another, sometimes worse one. In this case, the United States is getting increasingly twitchy about European digital taxes, and especially the French measures. And retribution could be swift.

Members of the US Congress from both sides of the aisle have been queuing up to publicly condemn foreign digital taxes, which they say are a deliberate fiscal raid on a group of largely US-based companies. But their intervention on this subject is not altogether surprising, given that such statements are aimed in the direction of lawmakers' constituents as much as the White House and foreign governments.

More worryingly for France and the EU though, is that the Administration itself is talking tough too. Recently, a senior Treasury official revealed to reporters that the department is actively exploring the deployment of countermeasures to the French and other digital measures under World Trade Organisation rules, and even the public face of the Treasury, Secretary Steven Mnuchin, has not minced his words on the matter.

Let's face it, this US administration has hardly been slow to respond to economic threats from other nations, perceived or real, with tariffs and other sanctions. So, for the French Government, the digital tax could open a can of worms it might come to wish had remained firmly shut. Oh well, Emmanuel, you can't please 'em all. Trouble is, recent French presidents have had a remarkable talent for not only pleasing nobody, but also making most of them rather angry. Politics 101: Steer clear of wasp nests, especially if you're French and have aspirations towards political leadership. It's no coincidence that wasps are yellow. Or should that be jaune?

Still, perhaps we shouldn't be surprised either about this Balkanization of international tax policy. After all, the world, or significant areas of it, has been pulling apart in so many ways for quite some time. In an era of sky-high divorce rates, countries no longer seem to be content with marriages of convenience. It's my way or the highway.

Just look at the UK. Doesn't want to be part of Europe any more, while its constituent countries, namely Scotland and Wales, don't want to be part of the UK either, at least fiscally. The Chartered Institute of Taxation reported last week that Scotland's tax regime is diverging further from that of the UK, while west in Wales, from April 6, 2019, people with a main residence in Wales will pay Welsh rates of income tax set by the Welsh Government and Welsh National Assembly.

One wonders how far this thirst for devolution will go, not only in the UK but elsewhere. States? Counties? Cities? Towns? Villages? Neighborhoods? Streets? Will we soon need a passport just to cross the road? At least that'll put an end to those awful chicken jokes...

In a world seemingly now obsessed with inter-company transfer pricing, perhaps the motto of the day should be "love thy neighbour, as long as he's at arm's length."

Tags: Euro | Scotland

About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net


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