As the French digital services tax (DST) is in effect from 1/1/2019, with the first payment due in November, there is considerable uncertainty how this tax will be repealed/refunded when/if an OECD DST model takes its place.
The politicians see this as a potential remedy to put out the fire which started with implementation of this tax. However, this issue becomes more complex from an international tax perspective as to how a refund/repeal would be treated: prospectively, retroactively, or some other method.
As this tax, similar to other provisions, was enacted unilaterally by the French administration anxious to improve their fisc, it is now shown to be disingenuous timing at the expense of multinationals which now have to pay this tax. Hopefully, other countries do not follow this lead in advance of the OECD DST proposals.
IRS indicated that it will no longer assert that taxpayers are precluded from claiming foreign tax credits for the contribution sociale généralisée (CSG) and the contribution pour le remboursement de la dette sociale (CRDS).
As a result, US citizens and resident aliens who pay the CSG and CRDS in France may now claim foreign tax credits to offset their US income tax. Additionally, they potentially may file claims for refund of US income tax by claiming foreign tax credits for CSG and CRDS paid in the last 10 years under Internal Revenue Code Section 6511.
The appeals court indicated the text of the Totalization Agreement required consideration of French law in evaluating whether CSG and CRDS amended or supplemented the French social tax laws in the Agreement.the US Government, represented by the Department of State, and the French Government now have a shared understanding that the laws enacting CSG and CRDS do not amend or supplement the French social tax laws listed in the Totalization Agreement. As a result, the IRS will no longer disallow foreign tax credits for CSG and CRDS.
EY’s Global Tax Alert provides additional details, for reference.
The French bill has approved the Finance Bill for 2019, subject to constitutional review for enactment generally effective 1/1/19. Some important provisions include:
- Interest deductibility, 30% EBITDA/debt-to-equity, limitaitons
- Favorable rate of 10%, vs. 15%, for patent related activities, aligning with the DEMPE/nexus provisions of BEPS Action Item 5.
- Royalty deduction limitation for beneficiaries with less than a 25% effective tax rate and it is listed as a harmful tax regime by the OECD
- For FYs beginning on or after 1 January 2019, a new anti-abuse provision will be applicable as a result of the transposition of article 6 of the ATAD. The main purpose, or one of the main purposes, anti-abuse test re: the EU ATAD will be used to determine if the anti-abuse rule applies for corporate income tax
- A new anti-abuse provision for all other taxes than CIT will allow the FTA to disregard acts which, by seeking to benefit from a literal application of provisions or decisions, against the initial objective sought by their authors, were driven by the main purpose of avoiding or reducing the tax burden which would have normally been borne by the taxpayers, due to their situation or their real activities, if those acts had not been entered into. This provision is effective in 2020
- French GAAR rule is retained (allowing flexibility to combat perceived abuse)
- The Finance Bill for 2019 transposes into French domestic law the provisions of the Directive 2017/1852 dated 10 October 2017 as regards mechanisms to settle double taxation arising as a result of the application of double tax treaties concluded between EU Member States.
- French tax consolidation group rules are modified
France is known for its proactivity in enacting anti-abuse legislation, and especially interesting is the royalty deduction limitation which a two-prong test, whereas Germany is also considering a harsher test to combat the US FDII benefit.
EY’s Global Tax Alert provides detailed summaries of the above provisions, among others.
The French Parliament has announced rules for the transmission of the French Country-by-Country (CbC) reports by US MNE’s, although it is yet not 100% certain whether such rules are penalty proof or 100% certain.
As the US has not formally named France as a partner exchanging such information, these dialogues apparently continue. Thus, all taxpayers should be monitoring this important area through year-end for future developments and additional certainty.
EY’s Global Tax Alert summarily describes the applicable procedures.