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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 
 
PARIS 00000029  001.2 OF 003 
 
 
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. 
 
PARIS 00000029  002.2 OF 003 
 
 
 
¶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 
 
PARIS 00000029  003.2 OF 003 
 
 
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