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D I G I T A L D A T A T A X A T I O N :

C O M M E N T A R Y f R O M A P C O W O R l d W i d E ’ s P A R i s T E A M

THE SOLUTION FOR TAXING THEDIGITAL ECONOMY…OR JUSTANOTHER PROPOSAL?

KEY HIGHLIGHTS

It is liely that the scal ramewor or digital businesses in France will change by January 1, 2014. Whilethe tax aairs o the digital economy are under close scrutiny across a number o EU countries, the Frenchgovernment is looing or new sources o revenue to reduce the public decit. In France, the amount o taxthese companies pay is perceived by many as too low compared to the revenues they generate in the Frenchmaret.

Although a solution has yet to be found, there is a growing belief among decision-makers that thecurrent taxation system is inadequate. In addition, the new socialist-green parliamentary majority seemstempted to seize this opportunity to orce greater transparency on Internet businesses.

On January 182013, Nicolas Colin & Pierre Collin1 made public a report on the taxation o the digitaleconomy, commissioned by the government2, which created turmoil among digital players in France andaround the world.

The authors oer two suggestions or adapting France’s tax system to the digital economy’s new economicmodels:

• At the international level: Creating a legal status or permanent virtual establishments including

recognition that a percentage o the prots come rom “unpaid wor” by local users sharing their personaldata in a specic country.

• At the national level: Creating a tax on collection o data through regular and systematic monitoring o user activity in France.

At this stage, the report has no legal status, but it will liely infuence decision-maers in the near uture.

Certain measures may be included in the drat 2014 Finance Bill, which will be discussed during the autumn.This report, described as theoretical by many commentators, is just one of many approaches that willcontribute to the introduction of a new tax. Nevertheless, today it is the most careully argued proposal andwill probably be used as a ey tool in this complex economic debate. It must now be submitted or an opinionto the recently reshufed National Digital Council, chaired by Benoît Thieulin3, beore the government decides

its next steps.

COLIN-COLLIN REPORT CONCLUSIONS

The report concludes that, in an environment that is experiencing huge growth in the number o online terminals anddevices, all digital economy businesses “regularly and systematically monitor” user activities4. It argues that, whencollected, stored and processed or direct integration into a production chain, the data collected rom users blur theboundaries between production and consumption.

1 Nicolas Colin is a tax inspector and ormer businessman (Founder o start-ups 1x1connect and StandAloneMedia), co-author with Henri Verdier o L’Âge de la multi-tude (Armand Colin). Pierre Collin is a government advisor, specialising in tax aairs.2 This report was commissioned on 24th July 2012 by the Minister o the Economy and Finance, the Minister o Productive Recovery, the Minister responsible or theBudget and the Minister responsible or Small & Medium sized enterprises, Innovation and the Digital Economy.3 Founder and President o the digital communication agency called Netscouade4 The concept o “regular and systematic monitoring” o users has been taen rom EU regulations on personal data collection.

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THE SOLUTION FOR TAXING THEDIGITAL ECONOMY…OR JUSTANOTHER PROPOSAL?

The report states that although the digital economy is everywhere, we still don’t now how to measure theconstituents and prots properly. The act that most data is available online (and ree o charge) maes it dicult toassess the added value provided by its collection and use. Thereore, the productivity gains generated by the digitaleconomy do not automatically lead to additional tax revenue in the countries where they were gathered.

Clearly, national and international taxation systems are struggling to adapt to these new economic models. Thereport’s authors believe that it is now necessary to dene a new tax ramewor so that countries can regain the rightto levy taxes on prots generated by digital companies in their countries (Objective N°1).

Meanwhile, a tax on the use o data collected through regular and systematic monitoring o user activities in France

could be anticipated (Objective N°2).While the objective o the report is to propose appropriate methods o taxing new economic models associated withthe growth o the Internet, it also aims to open various avenues or discussion on how to create a sustainable taxenvironment that leads to the growth o the digital economy (Objective N° 3).

OBJECTIVE N° 1: REGAINING THE RIGHT TO LEVY TAXES ON PROFITS GENERATED BY DIGITAL COMPANIES IN THE COUNTRY  

Proposed methods:

• Creating a legal status or a ‘permanent virtual establishment’• Acknowledge that a percentage o companies’ prots come rom “unpaid work” by users based in a speciccountry

International tax law gives a country the right to levy taxes on the prots o a company i the company isheadquartered in that maret. Countries where companies operate have no right to levy taxes unless that companyhas a permanent establishment in a country other than the one in which it is headquartered. However, the denitiono a permanent establishment is considered outdated by the authors o this report because it is largely tangible andimplies the presence o oces, equipment and employees.

The authors o the report recommend revising this denition at an international level to establish a legal status or a permanent virtual establishment: “a company that provides services in a country through regular and systematicmonitoring o data rom online users in that country”.

This new denition must be debated and adopted at the Organisation or Economic Co-operation and Development(OECD) level. The authors urge the French tax authorities to strengthen its arguments by using the results o taxinspections on the most emblematic companies in this sector.

France will also have to renegotiate its bilateral agreements with certain partner states, Ireland and Luxembourg inparticular, to bring these into line with the terms agreed by OECD countries.

In parallel with this redenition o the status o permanent establishment, the authors also recommend restrictionson prot transers that put a strain on the tax base through transer pricing. They believe that the creation o valuegenerated through the collection and analysis o data must be considered as the ruit o “unpaid wor” and apercentage o these prots must be subject to declaration by the French authorities.

However, the authors point to the act that none o the economists interviewed were able to propose a principlewhereby the percentage share o the value generated rom regular and systematic monitoring o user activities couldbe separated rom the total prots generated.

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OBJECTIVE N° 2: AN INTERIM SOLUTION COULD BE TO TAX THE USE OF DATA OBTAINEDFROM REGULAR AND SYSTEMATIC MONITORING OF USER ACTIVITIES IN FRANCE

According to Colin and Collin, this tax would be dened by the ollowing criteria:

• It would only concern data collected through “unpaid work”• It would only apply above a certain user number threshold• It would be payable in the orm o a fat rate per user monitored• The rate would be determined according to the company’s attitude to privacy laws.

The authors o the report analysed the various economic models used by players in the digital economy. They varyso much, however, that it is impossible to create a common tax policy.

Having said this, there is a common denominator at the heart o the dierent models in every sector: data. Theauthors believe it oers three advantages as it is neutral in terms o: business model (every digital economic player collects and exploits data); technology (data is totally independent rom technology changes, which are continual inthis sector); and corporate strategy (since there is no ambiguity about where it is collected).

Colin and Collin suggest, thereore, that data is used as a tax base, based on volume: their objective is not so muchto generate revenues as to incite companies to adopt behaviours that conorm to online privacy laws.

This tax would be applicable to any given company that uses the data they collect rom users based in France. Itwould only concern user data collected through “unpaid wor.” And, nally, it would only apply above a certainthreshold, dened in terms o number o users. This means that start-ups would not be at a disadvantage.

This tax could tae the orm o a fat rate per user monitored. This rate would be determined depending on thecompany’s attitude to our points o general interest:

1. Strengthening online privacy laws by giving users greater access to their personal data2. Facilitating access to new services3. Supporting innovations in digital trust5 in the maret4. Promoting productivity gains and generating value or the national economy

The principle o “maing predators pay” implies that the more closely the taxpayer ‘complies’ with these our objectives, the lower the rate o tax.

Taxation would be determined based on a double set o tax returns:

• A corporate tax return, submitted to the tax authorities to determine the volume o data monitored• External audits conducted by independent sources (such as statutory auditors) paid or by the company to veriy

its attitude and practices and thereore establish a rate

Where companies ail to submit these returns, the authors propose taing action at the telecommunications networlevel to assess their data fows.

The authors emphasise that they “can only hope to test these new tax measures on a small number of tax payers.”

Without dened limits, this tax would apply equally to players in the digital economy and standard economy, suchas bans and insurance rms. For this reason (and to comply with the French constitutional right o equality beorethe law), it would be necessary to select specic criteria restricting elds o application, such as the regular and

5 NDA: The authors dene the “digital trust” maret on page 60 and give examples such as tools or measuring trac, managing reputations or cooies.

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THE SOLUTION FOR TAXING THEDIGITAL ECONOMY…OR JUSTANOTHER PROPOSAL?

systematic monitoring o user activities (in accordance with the terms dened by drat European data protectionregulations) or hosting status, or criteria relating to the nature o the data (observed, submitted or inerred).The authors also recommend introducing a test phase involving only the largest taxpayers.

Colin and Collin also suggest, without actually recommending, that a specic version o the tax be explored to applyto mobile application platorms such as the AppStore or Google Play Store.

OBJECTIVE N° 3: CREATING A TAX ENVIRONMENT THAT LEADS TO THE EMERGENCE OFNEW BUSINESSES BY REFORMING TAX ON R&D AND STIMULATING FUNDING BY THE

MARkET.

The digital economy is conducive to the emergence o eco-systems that revolve around a dominant platorm due tothe networ eect, lower riction due to the partially immaterial nature o the business and the existence o severalvariations on a single economic model in dierent countries.

The authors call or the introduction o an industrial policy that avours the growth o the digital economy in Franceand or an organisation to be put in place so that its productivity gains can be spread throughout the rest o theeconomy.

To this end, the authors recommend:

• Adapting the denition o R&D to the characteristics o the digital economy• Reorming and simpliying the existing ey systems (tax credit or research and innovative start-up status)• Promoting maret unding or the digital economy

HOW HAS THIS BEEN RECEIVED IN FRANCE?

The our ministers who had commissioned the Colin-Collin report welcomed its publication in a joint press release:

• “Within the European ramework, France is determined to move orward on the adoption by all Europeanmember states o mechanisms to prevent oshoring, to make it more difcult or multinationals to use ‘tunnel states’ to transer their profts to countries with lower taxes.”

• “On a national level, the government intends to continue its eorts to identiy and combat raudulent behaviour using digital technologies.”

• “The government also wants to consult with proessionals and or experts to consider at length the innovativeproposals outlined in this report on national taxation based on data collection.”

Fleur Pellerin, the minister responsible or the Digital Economy in France, approached the report’s proposals withcaution while rearming her wish to introduce a new tax system (January 18, 2013 press conerence):

• “This is a totally new approach [to tax data]. Data is what drives the virtual economy. We cannot allow this plunder to continue orever.”

• “The Colin-Collin Report gives us some ideas and approaches or local solutions.”• “The proposals must also be examined and compared to others already being debated (such as taxes on

e-commerce, taxes on bandwidth amongst others).”

Members o Parliament welcomed the report and the Colin & Collin Report ndings. However, some expressedtheir doubts about the easibility o the proposed measures6:

• Senator Philippe Marini, president o the Senate’s Finance Committee: “I Marx had lived in the 20th Century,

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this would have been the basis or his theory o alienation. These networks are not public assets. They are amodern day drug. Public opinion has an important role to play i we want to move orward. […] We are involved in a major debate over public fnances. I would have preerred something less intellectual and more practical.”7  

• Senator Bruno Retailleau, rapporteur on the drat bill ‘neutral and air digital taxation’ or the Senate’sEconomic Committee: “This report is intellectually sound, but is likely to be difcult to implement.”

• Senator Jean Germain, member o the Senate’s Finance Committee: “Progress on taxing the digital economy requires progress on EU taxes. It’s not Google’s ault i the EU does not have standard rates o taxation.” 

• Senator Yvon Collin, rapporteur or the Senate’s Finance Commitee on the drat bill ‘neutral and air digitaltaxation’: “This approach deserves in-depth analysis with a view to developing additional or alternative proposals to the legislation on neutral and air taxation presented by Philippe Marini.”

AND ABROAD?

• The rst oreign publication to cover the report was The New York Times , “France Proposes an Internet Tax.” Thearticle is neutral, but served to report the inormation in the United States. It was then taen up by numerousU.S. tech blogs (the next web, Tech web, etc.).

• Forbes , on the other hand, published an article, “France, Google And The Internet Tax: It’s Just Not Going ToFly,” in which the journalist states that he is sure this tax is unrealistic. “Because taxing the cash is so difcult they’re thinking o taxing the data. Which is, I’m araid, not going to work either. For a start, there is no current monetary value to this inormation: not an explicit one that is. So what rate or number would any tax be based upon? It gets worse though: i they try to defne the tax by how much inormation is provided then suppliers will simply ask or less inormation. The result being zero tax revenue but a large cost to the state in attemptingto collect that nothing.” Following the publication o this article, Nicolas Colin published an opinion columndeending his proposal, “Corporate Tax 2.0: Why France and the World Need a New Tax System or the DigitalAge.”

• The Guardian in the Uk published an article, “Your body isn’t a temple, it’s a data actory emitting digitalexhaust,” querying whether this tax proposal would ever pass into law. The article does, however, emphasisethat such a proposal highlights the growing desire to quantiy the personal data collected and used bybusinesses.

• The Times o India puts the French proposal to tax personal data collection into perspective and compares it toother initiatives taen by European governments in an article entitled, “Google, Faceboo tax: France assessingnew measures.” It recalls how tax avoidance is a hot topic internationally as governments struggle to combatmajor decits in the allout o the baning crisis. According to this Indian daily, the proposed French legislationollows the same logic as other countries, such as the Uk and Germany, where there is a strong stream o public

opinion that wants to see multinationals subjected to “air” taxation.

6 Speeches during or about the presentation by Messrs. Pierre Collin and Nicolas Colin to the Senate Finance Commission and presentation o M. Yvon Collin’s reporton his proposal or the Marini Act7 Opinion published by Sandrine Cassini in her article Internet; doubts on the easibility o introducing the Colin & Collin taxes, La Tribune, 24 January 2013

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THE SOLUTION FOR TAXING THEDIGITAL ECONOMY…OR JUSTANOTHER PROPOSAL?

NEXT STEPS IN FRANCE

The National Digital Council will submit its opinion to the government during the next ew months. Depending ontheir decision, the government may decide to introduce certain measures in the Drat 2014 Finance Law that will beprepared in the summer o 2013.

Other parallel initiatives will also have an impact on the government’s choice o direction:

A proposed bill rom Senator Philippe Marini on air and neutral taxation was submitted on 19 July 2012 and the

Senate’s Finance committee (ocially in charge) released a report on it on 23 January 2013. The motion o reerralvoted in committee will be discussed in an open session o the Senate on 28 February.

Pierre Lescure’s mission on Act 2 o the cultural exception or the Minister o Culture and Communication, AurélieFilipetti, which will also consider ideas about new sources o nance rom the digital economy. The conclusions, andproposed tax measures, will not be published until March 2013.

On an international level, it will be important to monitor OECD activities, particularly ollowing the reerral by Uk,German and French Finance Ministers o a BEPS (Base erosion and prots shiting) project. A statement was releasedollowing the G20 Finance Ministers meeting on 15 February which raises issues such as combating aggressive scalstrategies, problems o distortion between taxable sums and prots in transer pricing, redening the concept o apermanent establishment and dealing with tax regimes that are “too lenient” 8.

8 Yvon Collin Report on the proposed law or “neutral and air taxes”, http://www.senat.r/rap/l12-287/l12-2871.pd 

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