Tax Analysts Blog

France Struggles to Tax Corporate Profits

Posted on Dec 4, 2012

Some American cultural exports were big hits in France. Think blue jeans and jazz man Louis Armstrong. Even screwball comedian Jerry Lewis was famously adored by the French. Today, the dominant U.S. cultural exports are high-tech firms from Silicon Valley. But these multinational corporations are not so popular with French tax collectors.

Government officials recently claimed these four tech giants -- Google, Apple, Facebook and Amazon -- collectively earn annual online revenues in France of €2.5 billion, and should therefore be paying somewhere around €600 million in French taxes each year. Yet their combined tax payments are a mere €4 million. As French authorities see it, that's an underpayment of more than 100 times what is due. A French Senate report singled out Google as having an effective French tax rate of between 2% and 3%. The French statutory corporate rate is 33.3 percent.

Not surprisingly, news like this doesn't go over so well when much of Europe is facing austerity. More than ever before, politicians are desperate for tax revenue to shrink their deficits. And they find these outcomes particularly galling. But what to do about it? As we've learned, there's no easy fix. The outrage is not what laws have been broken, but what is permissible.

Each of the companies mentioned insist they are fully complaint with French tax laws, and there is little reason to doubt them. They hire adept tax advisors. These firms pursue aggressive, but legal, tax reduction strategies. They have a duty to shareholders to reduces costs and taxes wherever feasible. That's why iPads are made in low-wage Asian factories. That's also why holding companies are located in places like Ireland, with it's 12.5% corporate tax rate, and why so much transatlantic commerce is routed through Luxembourg for VAT purposes.

To be sure, France isn't the only country with a massive disconnect between the statutory corporate rate and the effective rate that companies actually pay. The same can be said of our own tax code. When it comes right down to it, the corporate tax -- both in France and the United States -- is premised on concepts of residence and source of income that don't necessarily fit the modern world. Those concepts may have functioned adequately in the 1950s; not so much in the age of globalization.

Corporate residence isn't necessarily where economic activity occurs. The source of income isn't necessarily where the sale transaction occurs. Increasingly, those factors can be controlled by a firm's tax department. Firms with lot of high-value intangible property are especially good at manipulating these outcomes, but the same is true to a lesser extent for all corporations. A friend of mine likes to joke that corporate residence, for tax purposes, is wherever the client wants it to be. Ditto for the source of income. These things can be "dialed in" by a competent tax department.

Some people joke that the corporate tax is acquiring a discretionary flavor ... it's morphing into a regime for those firms who can't be bothered to lawyer up and aren't able to elect pass-through treatment. Is that really the best we can do?

So the questions stands: How does a modern society tax corporate earnings in a manner that is economically efficient and conducive to growth and job creation? Today the French government is struggling with these issues. If that leaves you feeling excluded, don't worry. Our turn will come next year when the U.S. Congress -- hopefully -- takes up fundamental tax reform.

Read Comments (1)

Vivian DarkbloomDec 5, 2012

“In what may be Europe’s first such effort, President Francois Hollande’s
government says it will look into changing laws next year that will block the
ability of online companies to pay levies on French earnings in European
countries with lower tax rates.”

“These evaded amounts have caught our attention, especially at a time when
European countries are being asked to align their budgets,” Marini (head of the
Senate Finance Committee”) said at a Paris conference late last month.”

The Age of Reason apparently died in France along with Descartes.

If these companies really are “evading taxes”, one would think there would be
no need to change French law to rectify the situation. What Hollande is
apparently proposing is to re-define “French earnings” in order to tax a higher
amount.

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