TAX NEWS - January 2010

France: President paves way for more tax controls of French subsidiaries of MNCs

In a recent speech, President Sarkozy expressed his belief that France does not receive its fair share of tax from French subsidiaries of multinational corporations. He has therefore tasked the Ministry of Finance with launching, as soon as possible, an audit of the internet advertising activities of major international portals and search engines with a presence in France.

The President pointed out that internet companies derive significant revenue from the French market but pay very little in tax because they book most of the revenue and/or the margin in other jurisdictions. This situation has had a damaging effect on competition. Sarkozy stated, "[t]hese companies pay tax in their home country, although they capture a large part of our advertising market," and that "[t]his leaking of taxes is particularly damaging."

Although Sarkozy did not mention any companies by name, it appears his comments were primarily directed at Google™, the world's largest seller of online advertising space. The company is supposed to cash its French turnover (valued at EUR 800 million) in Ireland, its European headquarters, whereas Google's French branch only received commissions (estimated at EUR 39.8 million in 2008), leaving France with no way to collect tax the government considers related to Google's real activities in France.

The President's comments, which are significant because French presidents rarely discuss international taxation, were made during a meeting with members of the entertainment industry (e.g. writers, filmmakers, musicians, publishers, etc.) and in response to a report issued at the request of the French Ministry of Culture, which has proposed a new tax to help fund initiatives for the affected French industry.

It is likely that the French tax authorities will intensify their focus on transfer pricing and permanent establishment issues related to affiliates of international groups acting in France as agents, commissionaires and possibly limited risk distributors, particularly those compensated on a cost-plus basis. A significant wave of tax controversies relating to these issues is expected to ensue.

Separately, President Sarkozy has asked the European Commission to amend the VAT directive so that all cultural products (except for books) are taxable at the reduced rate (5.5% in France), rather than the standard rate (19.6% in France).