France has hit back at the United States government amid a spiralling row on taxes.

Earlier this week, the US threatened tariffs and other trade restrictions on the French in retaliation for a new law that will impose taxes on Internet companies, most of which are American.

Nicknamed the Gafa tax - an acronym for Google, Apple, Facebook and Amazon - the measure, which became law on Thursday after receiving the approval of the French Senate, imposes a 3 per cent charge on the total annual revenues of the largest technology firms providing goods and services to French consumers.

"France is a sovereign country, its decisions on tax matters are sovereign and will continue to be sovereign," said French Finance Minister Bruno Le Maire. "Between allies, I believe we can and must resolve our differences in another way than through threats."

With Britain and a number of other European countries planning to follow France's lead by imposing similar levies, the pressure is mounting on the giants of California's Silicon Valley. And a bigger dispute is unfolding about the very nature of national taxation regimes in an increasingly digitalised world.

Although US Internet commerce giants face an increasingly stiff challenge from both regulators and local retailers, they continue to dominate European online markets. In the first quarter of this year, for instance, Amazon's share of French e-commerce went down slightly, but the American retail behemoth still controlled no less than half of France's online trade.

And as more trade migrates to online platforms, there is no question that the US retail giants are in a position to consolidate their advantage.

The snag is that Internet retailers pay next to no tax on their European profits because they channel almost all their financial transactions through European countries with low corporate tax rates, principally Luxembourg and Ireland. This means that they not only bypass the tax authorities of Britain, France and Germany - where most of their customers are, in Europe - but often do not even have to publicly disclose their tax returns.

In Britain and France, for instance, it is estimated that Amazon paid an effective corporate rate tax in the past few years of just 0.1 per cent on its turnover, an astonishing 20 to 30 times less than the tax burden of traditional retailers.

And earlier this year, Google won its legal case against a French tax demand of €1.1 billion (S$1.7 billion) for advertising revenue generated in France by successfully persuading judges that its practice of registering profits in Ireland exempted it from French liabilities.

Online retail giants have tried to minimise criticism by transferring a share of their business to their big European markets and by arguing that they are hiring lots of people in Europe to handle their operations.

Still, the backlash against them is serious. One of the early demands of the so-called Yellow Vest protesters in France, who shook the country's domestic politics, was to tame online retailers. These companies, protesters claimed, were destroying the country's traditional family-run shops.

Having failed to generate a Europe-wide consensus on taxing online retailers, France is now leading the way by imposing its own tax regime. The new levy is projected to earn the French authorities up to €500 million a year.

And Britain will follow. Mr Boris Johnson, the man most likely to become the country's new prime minister by the end of this month, vows to hit the companies harder. Always eyeing a catchy slogan, he prefers to call his levy a tax on "Fangs", an acronym for Facebook, Amazon, Netflix and Google. "We have got to find a way of taxing the Internet giants," he said.

The new French tax applies only to companies with a global turnover of more than €750 million and a national business in France exceeding €25 million, a bracket which also includes a handful of Chinese, British, German and Spanish retailers.

Furthermore, Paris has pledged to drop its tax as soon as an international agreement is reached at the Organisation for Economic Cooperation and Development to overhaul decades-old cross-border tax rules for the digital era.

Nevertheless, those most likely to be hit by the measure are largely American giants, and the Trump administration in Washington is determined to defend its online operators.

A trade dispute therefore looms. Still, the news is not all bad for the giants of Silicon Valley, who have some allies in their corner. Some of Europe's small producers and retailers, who rely on the large Internet platforms to reach their customers, are also unhappy with the new tax.

And the Internet giants will still be able to shop around for the most favourable tax regime. The French levy is 3 per cent, but the British plan to levy only 2 per cent tax, and the Germans have been noticeably silent altogether.