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Cablegate: France Proposes "Google Tax" for Ipr

VZCZCXRO4815
PP RUEHIK
DE RUEHFR #0029/01 0111436
ZNR UUUUU ZZH
P 111436Z JAN 10
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC PRIORITY 8038
RUCPDOC/USDOC WASHDC PRIORITY
INFO RHEHAAA/WHITE HOUSE WASHDC
RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHGV/USMISSION GENEVA 3079

UNCLAS SECTION 01 OF 03 PARIS 000029

SENSITIVE

SIPDIS

BUSINESS SENSITIVE INFORMATION NOT FOR INTERNET DISTRIBUTION

WHITE HOUSE FOR USTR

E.O. 12958: N/A
TAGS: ECPS EFIN ETRD EIND KIPR SCUL FR
SUBJECT: France Proposes "Google Tax" for IPR

Ref: A) Paris 1729

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Summary and Action Requested
----------------------------

1. (SBU) President Sarkozy announced plans to tax internet
advertising revenue generated by Google and other major internet
sites (the examples of which all happen to be American)to fund
revenues lost from internet piracy. This measure and others to
counter piracy and encourage legal downloading were included in the
report of a special Commission directed by the French First Lady's
music producer, Patrick Zelnick. The Commission report identifies
22 measures to protect the music industry, but also include ideas on
improving legal access to movies and books. The Commission
estimates its proposals will require approximately 50 million euros
of financing in 2010, then 35 to 40 million a year in 2011 and 2012.
Embassy requests instructions on a rapid response to this
initiative. End Summary.

2. (U) President Sarkozy used the occasion of presenting New Year's
greetings to the cultural community January 7 to announce his broad
endorsement of the recommendations of the Zelnick Commission and to
call for the internet advertizing revenues generated in France to be
taxed. The Commission's report, released the day before following
months of work, proposes a variety of measures to compensate rights
holders for piracy and to encourage legal downloading. The costs of
these measures would be offset largely by a tax on internet
advertising by major websites.
The "Google Tax"
---------------

3. (SBU) The Zelnick Commission proposed a "modest" tax of one to
two percent of Internet advertising revenues generated from France
by companies established in the EU. In his statement, President
Sarkozy asked Minister of Economy Lagarde to appoint an expert group
on "capturing tax revenue from advertizing activity by major web
portals and search engines present in France." He further noted his
intention to ask French competition authorities for a ruling on
Google's online ad revenue activities on the grounds of "abuse of
dominant position." The tax could raise up to 20 million euros (USD
29 million) per year, according to the Zelnick report.

Hard To Implement
-----------------

4. (SBU) The Commission report notes the difficulty in implementing
such a tax, which would be modeled on French taxation of insurance
contracts that cover French risk, notwithstanding the location of
the insurer or insured. Similarly, the "Google" tax would apply to
companies established in the EU, regardless of the location of
either the website operator or advertiser. The report claims the
tax complies with EC rules, which only restrict territoriality to
the VAT, but acknowledges it would require cooperation by EU member
states. (Note: Ireland, where Google's advertising operations and
1,000 jobs are located, may be particularly unenthusiastic. End
note.) Website operators would self-report online ad revenue
generated from France, which would in turn require spot checks from
third party verification companies.

5. (SBU) The report proposes two exemptions that may cover the
majority of French businesses: companies with modest online ad
revenue; and companies, such as broadsheet newspapers, whose online
activities contribute the most to remuneration of rights holders
whose content is placed online, and who "suffer the most from the
current advertising market situation." The text of the Zelnick
report noted that the tax would be levied mostly on "Google,
Facebook, Microsoft, AOL or Yahoo!".

Supporting the Music Industry
-----------------------------

6. (SBU) The Commission's recommendations for support focus on music
which Zelnick stated is the most vulnerable to online piracy.
Zelnick proposed that the GOF subsidize 50 percent of the cost of
legal online music sales for young people up to a maximum of 200
euros. The online music debit card would be available as early as
summer 2010, priced at half of its face value. It is unclear which
sites or what products would be included. Sarkozy claimed that this
would accustom young people with paying for music, and would be
accompanied by an ambitious communication campaign targeted at young
Internet users. Sarkozy also approved the establishment of a new
regime for collective management of copyrights for online music
services, to be achieved voluntarily within one year through an
industry agreement, or imposed by law if negotiations failed.

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7. (U) Other music proposals include the extension of the "equitable
remuneration" regime (used for radio) to rights holders whose
content is offered online, and an increase in the tax deductibility
of expenses related to developing digital markets. Another proposal
is to increase funding for the online music industry through the
Institute for Financing Cinema and Cultural Industries (IFCIC), a
private lending institution owned by French banks, large public
financial institutions, and the GOF.

Supporting Film
---------------

8. (SBU) The Zelnick Commission attributed much of the impetus for
movie piracy to the delay between a film's theatrical and on-demand
release. To close this gap, new measures would accelerate release
to video-on-demand services of French films co-financed by French
television groups. Sarkozy also endorsed the idea of a single
website to group the catalogue of French films available for legal
download. Finally, in a reference to Google's efforts to digitize
French libraries (Ref A), the report proposes a licensing fee for
all commercial exploitation "by multinational businesses" of French
films in the public domain. (Note: Within the next week, we expect
the report of another French commission led by Marc Thessier on how
to digitize France's cultural heritage. The Thessier report was
triggered in response to backlash over Google's controversial
agreement to digitize the French National Library's collection.)

Supporting Publishing
----------------------

9. (SBU) The Commission report proposed, and President Sarkozy
endorsed, a uniform price for digital books, similar to what exists
in France for hard-copy books, and a reduction of the VAT rate on
all cultural products, including digital books. Sarkozy also
highlighted Zelnick's proposal to finance publicly the digitization
of France's cultural heritage. The GOF has already committed 753
million euro (USD 1.1 billion) in funding for this effort in the
"grand emprunt," France's special debt offering to fund
future-oriented investment. Finally, the report recommends the
development of a single online book sales portal to which all the
publishing companies would contribute. Zelnick claimed this measure
is necessary in order to redirect market share away from "outside
operators" (such as Amazon) and toward "traditional actors."

French Industry Reaction: Robin Hood Lives!
--------------------------------------------

10. (SBU) Electron Libre, a popular IT blog, sarcastically
characterized Zelnick as a modern-day Robin Hood. Most French
businesses, however, expressed little concern since they would
likely be exempt. Google claims Daily Motion, the French version of
YouTube that has less online advertising, is secretly pleased with
the idea. But a January 8 op-ed in Les Echoes, France's primary
business newspaper, argued it made no sense to tax a growing,
successful company like Google in order to underwrite businesses
weakened as much by their own strategic errors as by the digital
revolution. Another Les Echoes op-ed argued high-speed internet
service providers (ISPs) should be taxed instead, since they benefit
the most from the explosion of internet traffic due to piracy.

11. (SBU) For French industry, the most controversial proposal in
the Zelnick report is the collective rights management regime. This
measure is designed to favor small and medium-sized music producers
against larger, international labels (the report cites as examples
Universal, Warner, Sony, and EMI) when negotiating distribution
rights with online platforms. A collective regime would eliminate
or lessen the price disparity between what major and minor music
labels could command, ostensibly allowing development of additional,
legal French online music sites. But larger producers rejected
Sarkozy's claim that "everyone do their share," saying collective
rights management undermines their property rights. SACEM, France's
premier rights-holder licensing entity equivalent to the U.S.-based
ASCAP, claims the report's proposals insufficiently address
remuneration to rights holders harmed by piracy and argued that ISPs
and Web 2.0 services (citing YouTube, FaceBook, and Myspace) should
be forced to contribute.
12. (SBU) Comment. Econoff discussed the impending announcements
just with Patrick Zelnick while waiting for President Sarkozy to
speak. We noted our surprise since Zelnick told both us and Google
that he had abandoned the tax proposal (reftel.) He hinted that the
tax was not his idea but noted that "it was the start of the
negotiation." Also waiting for the President's remarks, Econoff
heard, the Commission co-chair and Sotheby's France CEO Guillaume

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Cerruti tell Google reps that a tax was "inevitable" as Google had
"become too big and has to be regulated." Google's reaction was
understandably circumspect. A senior Google official told us he was
relieved the debate was finally public and Google could now
demonstrate its value to the cultural sphere rather than silently
suffer unilateral GOF attacks. End Comment.
Action Request: Next Steps for France and the U.S.
--------------------------------------------- -----

13. (SBU) Zelnick told Econoff the report's measures will be
implemented quickly, with an interministerial meeting planned for
mid-January. Post requests interagency guidance on a USG response
to these proposals, which appear to us to be intended to tax
primarily U.S. companies in order to subsidize the French music
publishing, film, and publishing industries (and not, we note, the
artists and creators allegedly impacted by piracy.)

PEKALA

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