A New Gallic Idea: Taxing Google

The Monday Note covers the intersection between media and technology and the shift of business models. It is jointly edited by Frédéric Filloux, a Paris-based journalist and Jean-Louis Gassée, a Silicon Valley veteran currently general partner for the venture capital firm Allegis Capital in Palo Alto. Their column appears on CBSNews.com each Monday.

This time, the selected authors of the report titled "Création et Internet" (available here) are: Patrick Zelnik, a music producer, Jacques Toubon, a 69 year-old former all-purpose minister (including Culture in 1993-1995) and Guillaume Cerutti, the CEO of Sotheby's France. Not exactly digital front-runners. As a music producer, Zelnik has brilliantly missed the digital train; Toubon has seen more mice in government offices than on his desk and Cerutti is running an auction house where sales are concluded with a hammer blow, not a touchpad click.

One of the most spectacular strokes of inspiration involves the creation of a taxpayer-subsidized "Online Music Card". It could work like this: a young Internet user and compulsive music downloader buys a card for €20 to €25. But the card carries a face value of €50. After a while - expect a few years for roughly a million young people above the age of 24 - the magic happens: this crowd mutates into legal download addicts and forgets the appeal of illegal Net music (which, in France, is 20 times more important than the legal variety). That's a hell of a good piece of news for Apple as its iTunes cards could be bought by the bulk using French taxpayers' money. Bear with me: that's Christopher Columbus' Egg. How come we didn't think of it earlier? Flooding the young addicted-to-free generation with subsidies to reverse the anything goes, culture-copyright-looting tsunami! You know what? Sometimes, I'm proud of my country.

Second idea, my favorite: taxing Google. The concept, so to speak, is the following. Google is one of the biggest media buyers in the French market with an estimated 2008 revenue of €800 million. It comes from small text-ads that most of the sites carry. If we assume a net profit margin of 27% as in Q3′09 (gross margin is 35%), that leaves more than €200 million in profit for the French operation alone.

As a global company, Google optimizes its tax strategy; since France is afflicted with one of the highest corporate tax rates in Europe (34,4%), most companies choose to avoid declaring too much revenue here. As expected, Google leaves only about 5% (€40m) to the French tax system. The bulk of its profit is filed in Ireland where the tax rate is set at 12.5%. These practices, although legal, lay the ground for all sorts of criticism. Not only does Google suck up about 40% of the French Internet advertising market, but its huge position doesn't even benefit the French treasury. Hence, the idea of imposing a tax of 1% to 2% on revenue coming from Internet advertising. Of course, all big players would be targeted: Google, but also Yahoo, Facebook, Microsoft, AOL.

Nicolas Sarkozy, always prompt to jump on an opportunity for demagoguery when he spots one (those two were impossible to miss) not only endorsed the report, but also upgraded it. He mentioned a €200 face value for the Music Card instead of the proposed €50, and urged the French antitrust authority to investigate Google's position in advertising and see if distorts competition. Our "hyper president", also urged the Minister of Economic Affairs Christine Lagarde to take a serious look at a Google Tax. (Mrs. Lagarde, former chair of the Chicago law firm Baker & MacKenzie, must feel very lonely sometimes.) She, and the Minister of Budget will have a hard time coming up with a workable solution.

Google is not, by far, the only company to take advantage of the international tax system. Last fall, the French Accounting Office issued a survey of the tax system that triggered a national outrage. In short, when a small business pays 30% in corporate taxes (on average, deductions included), big industrial groups listed in the CAC 40 Stock Index, pay only 8% in taxes, thanks to optimization techniques elevated to an art. In addition, according to an investigation by the magazine Alternatives Economiques, this very same group of "French Champions" (L'Oréal, Danone, Total, major banks such as BNP or SocGen…) maintains about 1500 tax-optimizing subsidiaries in offshore tax heavens. Even la Banque Postale, the retail banking arm of the state-owned French Postal service is present in the controversial Luxembourg. Is Google really the bad guy in such a context?

The authors of the "Internet and Creation" report acknowledge that the implementation of such a tax will be tricky in the context of European regulation (then why are they floating such an idea in the first place?)

This could be funny but it's not.

This kind of idea propagates the image of France being a country that is unable to adopt, once for all, a sanely regulated pro-business attitude. Let's set aside the Online Music Card idea. It is merely a neuronal burst of imagination-challenged lobbyists. As for Google, the question is not the harm it could do - a mosquito bite on an elephant. Rather, the problem is the damage to France's image in the tech and media world.

By every measure, France is lagging behind the rest of the industrial world in terms of technological innovation. Of course, its elitist education system produces good engineers, but, as Jean-Louis Gassée puts it in a previous Monday Note (see The Other French Paradox), the French taxpayer ends up subsidizing Silicon Valley. More broadly, the rate of private research and development is about 2.1% of GDP; that is below the UE target of 3% and below the OECD average of 2.3%. In France, 38% of the R&D is state-sponsored vs. 29% in the OECD.

At the same time, large French companies tend to increase the share of their R&D performed abroad (it accounts now for 39% of the overall total). And to add insult to injury, the share of non-French multinational companies doing R&D outside of their country of origin is much lower in France (25,3%), as compared to Ireland, Belgium or Sweden, which enjoy a share of 40% of their R&D being done by foreign companies. Needless to say, Google maintains research facilities in Switzerland, UK, but not in France.

The French "Google Tax", as it is dubbed, generated its share of notoriety (156,000 pages indexed by Google as of Saturday). But there is no matter to rejoice here. Considered in the context of poor attractiveness for high-end tech jobs, this new subsidy/tax eruption is about to become a Gallic business joke as persistent as the beret and the bread baguette. And that's tragic.

By Jean-Louis Gassée and Frederic Filloux
Special to CBSNews.com