France and the U.S.: Heading for trade war over a tech tax?

• France has adopted a new tax on big internet companies like Google, Amazon and Facebook.
  
• The move comes despite threats from the Trump administration that it would slap tariffs on France in retaliation.
• The roughly 3% annual levy applies to digital companies with at least 750 euros (about $845 million) in global revenue, with 25 million euros or more in France.
• Other countries including Australia, Austria, Italy and even the U.K. have similar proposals in the works.

France is the U.S.'s oldest ally and formal trading partner. Now it's a pioneer in taxing the world's biggest digital companies -- most of them American.

France on Thursday adopted a tax on internet giants like Google, Amazon and Facebook despite U.S. threats to use a favorite tool of the Trump administration: tariffs. The administration says it could invoke the same 1970s-era laws it used to slap tariffs on imports from China and other trading partners, including traditional U.S. allies. 

France's roughly 3% annual levy applies to digital companies with at least 750 euros (about $845 million) in global revenue with 25 million euros or more in France. It would affect about 30 companies in total.

"Between allies, we can, and we should, solve our differences without using threats," French Finance Minister Bruno Le Maire said in defense of the measure just ahead of the final vote in the French Senate. "France is a sovereign country. It will make its own sovereign decisions on fiscal measures."

But such a tax may unfairly discriminate against U.S. companies, the U.S. Trade Representative argued late Wednesday as it opened its investigation under section 301 of the U.S. Trade Act, a decades-old law Mr. Trump used to impose tariffs on $250 billion of Chinese imports.

Consumers could pay

If the administration decides to tax French imports using the law as a countermeasure, consumers could end up paying more, Daniel Bunn, director of global projects for the right-leaning Tax Foundation in Washington, wrote on Thursday.

"U.S. tariff policy has already imposed serious costs on U.S. businesses and consumers and further tariffs would increase those costs," Bunn wrote. That's because U.S. companies, not countries like China, pay import tariffs, and some businesses have passed that cost onto consumers.

For the U.S, though, it's not just about France's right to tax revenue in its own country, Gary Clyde Hufbauer of the Peterson International Institute of Economics recently wrote. Countries including Australia, Austria, Italy and even the U.K. also have similar proposals in the works.

"From a U.S. perspective, the stakes are an order of magnitude larger than whatever tax France might collect," Hufbauer wrote. "Few tax measures could be more appealing to legislators than taking a bite out of U.S. tech giants."

OECD looks for a plan

How to tax internet-based companies is under discussion at the Organization for Economic Cooperation and Development, which helps set international policy in areas like taxation. The body aims to have a plan by year-end and an international agreement in 2020. An effort by the 28-nation EU to adopt a uniform policy failed earlier this year.

The Information Technology Industry Council, which lobbies for the tech industry in Washington, said it welcomed the USTR's investigation. But it remains against using tariffs as a negotiating tool.

"We support the U.S. government's efforts to investigate these complex trade issues but urge it to pursue the 301 investigation in a spirit of international cooperation and without using tariffs as a remedy," ITI's Jennifer McCloskey said in a statement. ITI urged France and other nations considering similar taxes to "recommit" to the OECD process.

French officials previously said the country wants the U.S. to work with Europe through the OECD, and Le Marie repeated that France would abandon its revenue tax if an OECD agreement is reached, Bloomberg noted. An OECD solution would be "much better," the Tax Foundation's Bunn wrote.   

"Clearly protectionist"

The White House's investigation has bipartisan support from the top members of the Senate Finance Committee. "The digital services tax that France and other European countries are pursuing is clearly protectionist and unfairly targets American companies in a way that will cost U.S. jobs and harm American workers,"  Republican Chuck Grassley of Iowa, committee chairman, and Democrat Ron Wyden of Oregon said in a joint statement.

The White House could also use opt to use part of the Internal Revenue Code called section 891 to double income tax rates on non-U.S. citizens and corporations, PIIE's Hufbauer said.

The French tax is retroactive to Jan. 1, and the first payment from affected businesses is due in October,  Bunn pointed out. It expires in 2021 and is forecast to raise about about 500 million euros, or $564 million,  a year for France.

--The Associated Press contributed to this story.