D I G I TA L D ATA TA X AT I O N :

THE SOLUTION FOR TAXING THE DIGITAL ECONOMYOR JUST ANOTHER PROPOSAL?
C O M M E N TA R Y f R O M A P C O W O R l d W i d E s PA R i s T E A M

KEY HIGHLIGHTS
It is likely that the fiscal framework for digital businesses in France will change by January 1, 2014. While the tax affairs of the digital economy are under close scrutiny across a number of EU countries, the French government is looking for new sources of revenue to reduce the public deficit. In France, the amount of tax these companies pay is perceived by many as too low compared to the revenues they generate in the French market. Although a solution has yet to be found, there is a growing belief among decision-makers that the current taxation system is inadequate. In addition, the new socialist-green parliamentary majority seems tempted to seize this opportunity to force greater transparency on Internet businesses. On January 182013, Nicolas Colin & Pierre Collin1 made public a report on the taxation of the digital economy, commissioned by the government2, which created turmoil among digital players in France and around the world. The authors offer two suggestions for adapting Frances tax system to the digital economys new economic models: At the international level: Creating a legal status for permanent virtual establishments including recognition that a percentage of the profits come from unpaid work by local users sharing their personal data in a specific country. At the national level: Creating a tax on collection of data through regular and systematic monitoring of user activity in France.

At this stage, the report has no legal status, but it will likely influence decision-makers in the near future. Certain measures may be included in the draft 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 will contribute to the introduction of a new tax. Nevertheless, today it is the most carefully argued proposal and will probably be used as a key tool in this complex economic debate. It must now be submitted for an opinion to the recently reshuffled National Digital Council, chaired by Benot Thieulin3, before 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 of online terminals and devices, all digital economy businesses regularly and systematically monitor user activities4. It argues that, when collected, stored and processed for direct integration into a production chain, the data collected from users blur the boundaries between production and consumption.

Nicolas Colin is a tax inspector and former businessman (Founder of start-ups 1x1connect and StandAloneMedia), co-author with Henri Verdier of Lge de la multitude (Armand Colin). Pierre Collin is a government advisor, specialising in tax affairs. 2 This report was commissioned on 24th July 2012 by the Minister of the Economy and Finance, the Minister of Productive Recovery, the Minister responsible for the Budget and the Minister responsible for Small & Medium sized enterprises, Innovation and the Digital Economy. 3 Founder and President of the digital communication agency called Netscouade 4 The concept of regular and systematic monitoring of users has been taken from EU regulations on personal data collection.
1

D I G I TA L D ATA TA X AT I O N :

THE SOLUTION FOR TAXING THE DIGITAL ECONOMYOR JUST ANOTHER PROPOSAL?
C O M M E N TA R Y f R O M A P C O W O R l d W i d E s PA R i s T E A M

The report states that although the digital economy is everywhere, we still dont know how to measure the constituents and profits properly. The fact that most data is available online (and free of charge) makes it difficult to assess the added value provided by its collection and use. Therefore, the productivity gains generated by the digital economy 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. The reports authors believe that it is now necessary to define a new tax framework so that countries can regain the right to levy taxes on profits generated by digital companies in their countries (Objective N1). Meanwhile, a tax on the use of data collected through regular and systematic monitoring of user activities in France could be anticipated (Objective N2). While the objective of the report is to propose appropriate methods of taxing new economic models associated with the growth of the Internet, it also aims to open various avenues for discussion on how to create a sustainable tax environment that leads to the growth of 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 for a permanent virtual establishment Acknowledge that a percentage of companies profits come from unpaid work by users based in a specific country

International tax law gives a country the right to levy taxes on the profits of a company if the company is headquartered in that market. Countries where companies operate have no right to levy taxes unless that company has a permanent establishment in a country other than the one in which it is headquartered. However, the definition of a permanent establishment is considered outdated by the authors of this report because it is largely tangible and implies the presence of offices, equipment and employees. The authors of the report recommend revising this definition at an international level to establish a legal status for a permanent virtual establishment: a company that provides services in a country through regular and systematic monitoring of data from online users in that country. This new definition must be debated and adopted at the Organisation for Economic Co-operation and Development (OECD) level. The authors urge the French tax authorities to strengthen its arguments by using the results of tax inspections on the most emblematic companies in this sector. France will also have to renegotiate its bilateral agreements with certain partner states, Ireland and Luxembourg in particular, to bring these into line with the terms agreed by OECD countries. In parallel with this redefinition of the status of permanent establishment, the authors also recommend restrictions on profit transfers that put a strain on the tax base through transfer pricing. They believe that the creation of value generated through the collection and analysis of data must be considered as the fruit of unpaid work and a percentage of these profits must be subject to declaration by the French authorities. However, the authors point to the fact that none of the economists interviewed were able to propose a principle whereby the percentage share of the value generated from regular and systematic monitoring of user activities could be separated from the total profits generated.

D I G I TA L D ATA TA X AT I O N :

THE SOLUTION FOR TAXING THE DIGITAL ECONOMYOR JUST ANOTHER PROPOSAL?
C O M M E N TA R Y f R O M A P C O W O R l d W i d E s PA R i s T E A M

OBJECTIVE N 2: AN INTERIM SOLUTION COULD BE TO TAX THE USE OF DATA OBTAINED FROM REGULAR AND SYSTEMATIC MONITORING OF USER ACTIVITIES IN FRANCE
According to Colin and Collin, this tax would be defined by the following 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 form of a flat rate per user monitored The rate would be determined according to the companys attitude to privacy laws.

The authors of the report analysed the various economic models used by players in the digital economy. They vary so much, however, that it is impossible to create a common tax policy. Having said this, there is a common denominator at the heart of the different models in every sector: data. The authors believe it offers three advantages as it is neutral in terms of: business model (every digital economic player collects and exploits data); technology (data is totally independent from technology changes, which are continual in this sector); and corporate strategy (since there is no ambiguity about where it is collected). Colin and Collin suggest, therefore, that data is used as a tax base, based on volume: their objective is not so much to generate revenues as to incite companies to adopt behaviours that conform to online privacy laws. This tax would be applicable to any given company that uses the data they collect from users based in France. It would only concern user data collected through unpaid work. And, finally, it would only apply above a certain threshold, defined in terms of number of users. This means that start-ups would not be at a disadvantage. This tax could take the form of a flat rate per user monitored. This rate would be determined depending on the companys attitude to four points of general interest: 1. 2. 3. 4. Strengthening online privacy laws by giving users greater access to their personal data Facilitating access to new services Supporting innovations in digital trust5 in the market Promoting productivity gains and generating value for the national economy

The principle of making predators pay implies that the more closely the taxpayer complies with these four objectives, the lower the rate of tax. Taxation would be determined based on a double set of tax returns: A corporate tax return, submitted to the tax authorities to determine the volume of data monitored External audits conducted by independent sources (such as statutory auditors) paid for by the company to verify its attitude and practices and therefore establish a rate

Where companies fail to submit these returns, the authors propose taking action at the telecommunications network level to assess their data flows. The authors emphasise that they can only hope to test these new tax measures on a small number of tax payers. Without defined limits, this tax would apply equally to players in the digital economy and standard economy, such as banks and insurance firms. For this reason (and to comply with the French constitutional right of equality before the law), it would be necessary to select specific criteria restricting fields of application, such as the regular and

NDA: The authors define the digital trust market on page 60 and give examples such as tools for measuring traffic, managing reputations or cookies.

D I G I TA L D ATA TA X AT I O N :

THE SOLUTION FOR TAXING THE DIGITAL ECONOMYOR JUST ANOTHER PROPOSAL?
C O M M E N TA R Y f R O M A P C O W O R l d W i d E s PA R i s T E A M

systematic monitoring of user activities (in accordance with the terms defined by draft European data protection regulations) or hosting status, or criteria relating to the nature of the data (observed, submitted or inferred). The authors also recommend introducing a test phase involving only the largest taxpayers. Colin and Collin also suggest, without actually recommending, that a specific version of the tax be explored to apply to mobile application platforms such as the AppStore or Google Play Store.

OBJECTIVE N 3: CREATING A TAX ENVIRONMENT THAT LEADS TO THE EMERGENCE OF NEW BUSINESSES BY REFORMING TAX ON R&D AND STIMULATING FUNDING BY THE MARkET.
The digital economy is conducive to the emergence of eco-systems that revolve around a dominant platform due to the network effect, lower friction due to the partially immaterial nature of the business and the existence of several variations on a single economic model in different countries. The authors call for the introduction of an industrial policy that favours the growth of the digital economy in France and for an organisation to be put in place so that its productivity gains can be spread throughout the rest of the economy. To this end, the authors recommend: Adapting the definition of R&D to the characteristics of the digital economy Reforming and simplifying the existing key systems (tax credit for research and innovative start-up status) Promoting market funding for the digital economy

HOW HAS THIS BEEN RECEIVED IN FRANCE?

The four ministers who had commissioned the Colin-Collin report welcomed its publication in a joint press release: Within the European framework, France is determined to move forward on the adoption by all European member states of mechanisms to prevent offshoring, to make it more difficult for multinationals to use tunnel states to transfer their profits to countries with lower taxes. On a national level, the government intends to continue its efforts to identify and combat fraudulent behaviour using digital technologies. The government also wants to consult with professionals and for experts to consider at length the innovative proposals outlined in this report on national taxation based on data collection.

Fleur Pellerin, the minister responsible for the Digital Economy in France, approached the reports proposals with caution while reaffirming her wish to introduce a new tax system (January 18, 2013 press conference): This is a totally new approach [to tax data]. Data is what drives the virtual economy. We cannot allow this plunder to continue forever. The Colin-Collin Report gives us some ideas and approaches for 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 of Parliament welcomed the report and the Colin & Collin Report findings. However, some expressed their doubts about the feasibility of the proposed measures6: Senator Philippe Marini, president of the Senates Finance Committee: If Marx had lived in the 20th Century,

D I G I TA L D ATA TA X AT I O N :

THE SOLUTION FOR TAXING THE DIGITAL ECONOMYOR JUST ANOTHER PROPOSAL?
C O M M E N TA R Y f R O M A P C O W O R l d W i d E s PA R i s T E A M

this would have been the basis for his theory of alienation. These networks are not public assets. They are a modern day drug. Public opinion has an important role to play if we want to move forward. [] We are involved in a major debate over public finances. I would have preferred something less intellectual and more practical.7 Senator Bruno Retailleau, rapporteur on the draft bill neutral and fair digital taxation for the Senates Economic Committee: This report is intellectually sound, but is likely to be difficult to implement. Senator Jean Germain, member of the Senates Finance Committee: Progress on taxing the digital economy requires progress on EU taxes. Its not Googles fault if the EU does not have standard rates of taxation. Senator Yvon Collin, rapporteur for the Senates Finance Commitee on the draft bill neutral and fair digital taxation: This approach deserves in-depth analysis with a view to developing additional or alternative proposals to the legislation on neutral and fair taxation presented by Philippe Marini.

AND ABROAD?
The first foreign publication to cover the report was The New York Times, France Proposes an Internet Tax. The article is neutral, but served to report the information in the United States. It was then taken up by numerous U.S. tech blogs (the next web, Tech web, etc.). Forbes, on the other hand, published an article, France, Google And The Internet Tax: Its Just Not Going To Fly, in which the journalist states that he is sure this tax is unrealistic. Because taxing the cash is so difficult theyre thinking of taxing the data. Which is, Im afraid, not going to work either. For a start, there is no current monetary value to this information: not an explicit one that is. So what rate or number would any tax be based upon? It gets worse though: if they try to define the tax by how much information is provided then suppliers will simply ask for less information. The result being zero tax revenue but a large cost to the state in attempting to collect that nothing. Following the publication of this article, Nicolas Colin published an opinion column defending his proposal, Corporate Tax 2.0: Why France and the World Need a New Tax System for the Digital Age. The Guardian in the Uk published an article, Your body isnt a temple, its a data factory emitting digital exhaust, querying whether this tax proposal would ever pass into law. The article does, however, emphasise that such a proposal highlights the growing desire to quantify the personal data collected and used by businesses. The Times of India puts the French proposal to tax personal data collection into perspective and compares it to other initiatives taken by European governments in an article entitled, Google, Facebook tax: France assessing new measures. It recalls how tax avoidance is a hot topic internationally as governments struggle to combat major deficits in the fallout of the banking crisis. According to this Indian daily, the proposed French legislation follows the same logic as other countries, such as the Uk and Germany, where there is a strong stream of public opinion that wants to see multinationals subjected to fair taxation.

Speeches during or about the presentation by Messrs. Pierre Collin and Nicolas Colin to the Senate Finance Commission and presentation of M. Yvon Collins report on his proposal for the Marini Act 7 Opinion published by Sandrine Cassini in her article Internet; doubts on the feasibility of introducing the Colin & Collin taxes, La Tribune, 24 January 2013
6

D I G I TA L D ATA TA X AT I O N :

THE SOLUTION FOR TAXING THE DIGITAL ECONOMYOR JUST ANOTHER PROPOSAL?
C O M M E N TA R Y f R O M A P C O W O R l d W i d E s PA R i s T E A M

NEXT STEPS IN FRANCE

The National Digital Council will submit its opinion to the government during the next few months. Depending on their decision, the government may decide to introduce certain measures in the Draft 2014 Finance Law that will be prepared in the summer of 2013. Other parallel initiatives will also have an impact on the governments choice of direction: A proposed bill from Senator Philippe Marini on fair and neutral taxation was submitted on 19 July 2012 and the Senates Finance committee (officially in charge) released a report on it on 23 January 2013. The motion of referral voted in committee will be discussed in an open session of the Senate on 28 February. Pierre Lescures mission on Act 2 of the cultural exception for the Minister of Culture and Communication, Aurlie Filipetti, which will also consider ideas about new sources of finance from the digital economy. The conclusions, and proposed tax measures, will not be published until March 2013. On an international level, it will be important to monitor OECD activities, particularly following the referral by Uk, German and French Finance Ministers of a BEPS (Base erosion and profits shifting) project. A statement was released following the G20 Finance Ministers meeting on 15 February which raises issues such as combating aggressive fiscal strategies, problems of distortion between taxable sums and profits in transfer pricing, redefining the concept of a permanent establishment and dealing with tax regimes that are too lenient8.

For more information about this and related issues, please contact: APCO Worldwide 15 rue de Marignan 75008 Paris 01 44 94 86 66 Nicolas Bouvier managing director

Yvon Collin Report on the proposed law for neutral and fair taxes, http://www.senat.fr/rap/l12-287/l12-2871.pdf