Will Ad Tech Get Caught in the Tech Tax Crossfire?

Emmanuel Macron

France’s new tech tax, approved by the government earlier this year, is quite explicitly aimed at the US tech giants, who have for the most part proven been quite adept at avoiding taxation. So much so, that the new taxes are often referred to as the ‘GAFA tax’ (Google, Apple, Facebook and Amazon).

The legislation itself doesn’t name specific companies of course, rather it’s a tax of three percent tax on French revenues for tech companies with global sales of over €750 million, and French sales of over €25 million per year.

But these specific thresholds mean it’s mostly US companies that will be affected. Indeed US President Donald Trump has interpreted the tax as a direct attack on US companies, threatening a new tax on French wine in response.

But the reality is that it’s not just the Googles, Facebooks and Amazons of the world that will be hit – French Finance Minister Bruno Le Maire told Le Parisien that Chinese, Spanish and British companies would also be affected, as well as one French company – ad tech business Criteo.

All of which raises a potential worry for the ad tech industry. Whilst it might be tempting for those concerned by the tech giants’ dominance of digital advertising to welcome GAFA taxes, ad tech companies might be concerned that measures which hurt Google, Facebook and Amazon will end up hurting them as well.

Giuseppe de Martino, president of ASIC (the French Association of Internet Community Services), told VAN that while the government’s intentions might be to reign in the tech giants, it may not have really appreciated how wide an effect the tax could have. “We already know that thirty tech companies will have to pay the tax and that several French firms are very close to reaching the amount,” he said. “There has been no impact study by the government.”

TECH IN France, another French tech trade body, similarly said that the tax will hit companies already paying substantial amounts of tax in France, rather than just the international companies who are avoiding paying much tax. It also warned that since the tax is based on turnover, it will more significantly affect the profitability of companies like ad tech businesses whose business models are built on intermediation (since the same money may be taxed multiple times).

Sarah Simon, an analyst at Berenberg Bank, a German investment bank, is less concerned. ”Obviously they reduce the amount of profits that can be generated in the markets where the taxes are imposed. But they’re applied to everybody generating those revenues in France, so it’s just an extra cost of doing business. It’s not something that we spend a lot of time sweating about.” And ad tech companies like Criteo may choose to pass on these extra costs to advertisers, similarly to how Amazon plans to pass the cost on to businesses which use its marketplace platform.

Criteo itself has not said much about the impact of the tax, but CFO Benoit Fouilland did briefly mention the French tax, as well as a similar tax in Italy, on a call with investors earlier this year (before it was approved by the French government). “We were hopeful that we will not be impacted by the digital tax in France,” he said. “And it looks like now that it’s passed the first step in Parliament that we are going to be impacted to the extent of total for the France and Italy of around $7 million that are accounted for in our cost of sales,” he added.

So the French tech tax might not be a huge concern – while an extra three percent tax on French revenues isn’t ideal, it’s not a crisis for a company like Criteo either. And Criteo is the only ad tech company known to be affected – there are few others (whose accounts are publicly available) who would come close to meeting both the €750 million global revenue threshold, and the €25 million French revenue threshold, any time soon.

Following the French Example

But the bigger worry might be the emergence of similar taxes in other markets. As Criteo’s Fouilland alluded to, Italy is adopting a similar tax, as are Spain and Austria. As more of these taxes emerge, there will be a cumulative impact on many ad tech companies.

And some of these tech taxes may have lower thresholds than France’s. For instance, the UK’s proposed tax would hit companies with global revenues of over £500 million (€542 million for comparison) and UK revenues over £25 million (€27 million). Lower thresholds like these would see more companies affected as the likes of The Trade Desk and MediaMath could come close to falling within these bounds (according to filings and data from business intelligence platform Owler).

There’s two possible takes on the ramifications of taxes that are implemented in some countries but not others. On the one hand, they may act as disincentives for smaller tech companies when it comes to building their businesses in those markets, either because they may one day be hit by those taxes, or because of the signal they send out to international investors about the business environment. On the other hand, it’s also possible that local European start-ups might feel the global tech giants have an unfair advantage when it comes to finding tax loopholes, which adds to their pre-existing advantages when it comes to data and resources. So some might feel these taxes will level the playing field a little.

But ASIC’s de Martino, takes the former view. “A sectoral tax is the worst signal for an economic sector,” he said. “It is the end of President Macron’s promise to make France a ‘start up nation’. The Brexit context was a great opportunity for France, which was a popular destination for tech companies’ investments in Europe. ASIC considers this to be a negative signal given to the tech ecosystem.”

But while these piecemeal taxes are coming into effect in various markets, the overall goal is to agree coordinated tax changes either at the EU level, or even more broadly via the G20 and OECD. French President Macron, for example, has said that he will remove France’s unilateral tax once the OECD decides on a new tax system.

Whilst agreements at this level would affect more markets, and would place a larger burden on ad tech companies, they would at least be easier to comply with. And they would avoid the problem of tech companies facing disincentives to grow or expand into specific markets.

“You’re never going to have consistency across the US and Europe,” said Berenberg Bank’s Simon, “but if you could have a consistent approach across the Eurozone, that would make life simpler for the perspective of managing all these things”.

And even with these taxes applied more widely, Simon believes they won’t be too much of a worry, so long as their applied evenly across the sector. “What would be really worrying would be if the playing field were unbalanced, and these taxes applied to some people but not others”.

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