Gary Parkinson Media

View Original

Pay up, Google and Facebook: Why all the tech giants may soon have to pay more tax

Multinational tech giants like Facebook, Amazon and Google may be forced to pay more tax in countries where they sell products and services, under a proposed new global shake-up to avoid companies shifting profits to low-tax locations. 

The Organisation for Economic Co-operation and Development (OECD) has proposed a worldwide restructuring of taxation rules. They say the existing system, which dates back to the 1920s, no longer reflects the realities of a globalised world and marketplace. 

The aim is to combat tax avoidance, which is legal under current frameworks. “This plan brings together common elements of existing competing proposals, involving over 130 countries, with input from governments, business, civil society, academia and the general public,” said OECD secretary general Ángel Gurría. “It brings us closer to our ultimate goal: ensuring all multinational enterprises pay their fair share.”


What is the OECD?

The OECD has 36 member countries, most of them toward the richer end of the development scale. Its origins stretch back to 1948 when French politician Robert Marjolin formed the Organisation for European Economic Co-operation (OECC) to help administer US financial aid to countries recovering from World War II. 

In 1961, following the formation of the European Economic Community, the OECC reformed into the OECD and invited countries from outside Western Europe, starting with Canada and the USA. Current membership extends geographically as far as Japan, New Zealand and Chile, and its member countries collectively comprise about half of global GDP. 

As its name suggests, the OECD promotes intergovernmental discussion of economic problem-solving, specifically around taxation and best practise. Indeed, it has a long-running campaign against what it calls BEPS (base erosion and profit-shifting); this new system is the OECD’s grand scheme to combat such tax avoidance. 

What is the big idea?

The plans, which the OECD announced for consultation on Wednesday, would set out where multinationals should pay tax, and how much profit they should be taxed on. The aim would be to redistribute tax income to countries in which the multinationals make the most money, rather than the ones which offer the best rates of tax. 

The plans are perhaps wider than they are deep: they are targeted specifically at the hugely lucrative multinationals at the top of the market, rather than the majority of medium and small companies. Indeed, the OECD suggests the companies affected must have annual revenue over $826m. 

Taxes would apply in any country where they have a consumer-facing business, even if they do not have a permanent established business presence there - a clause clearly targeting internet-based brands. However, the formula which determines how much of a company’s global profit should go to each country.

Who would be the winners and losers?

The biggest benefits would be to established economies whose populations have higher purchase power, but whose taxation systems don’t always receive the benefit - in short, the larger Western Eruopean nations. They have long been agitating for change: France proposed a digital services tax of three percent for 30 elite firms like Google, while a new UK law will from April 2020 effectively target Google, Facebook and eBay, unless the OECD framework replaces it.

Among the losers would be those countries whose existing tax laws encourage multinationals to base themselves there, such as Luxembourg and the Republic of Ireland; initial estimates suggest the latter could lose up to 10 percent of its corporation tax revenue, totalling around $1.1bn. 

But more notably, the global supercompanies would have to pay more: the OECD estimates tax avoidance alone costs up to $240bn per year. For example, Facebook’s UK revenue in 2017 was $1.59bn, but it paid tax of just $19.3m; Amazon, registered in Luxembourg, paid $1.34m UK tax on $2.81bn revenue; while Netflix, registered in Amsterdam, recorded $849m UK revenue but paid zero tax and even got a rebate

What has the initial reaction been?

Mixed. Politicians have loudly applauded the idea of taxing the big companies; for example, Markus Ferber, a German conservative MEP on the European parliament’s economic and monetary affairs committee, said: “It is high time to adapt the corporate tax rules for the digital age. The OECD standards finally move away from the antiquated idea of physical presence.”

Amazon was the first of the big companies to react, in a lukewarm fashion. Calling the proposals “an important step forward,” it said that “Reaching broad international agreement on changes to fundamental international tax principles is critical to limit the risk of double taxation and distortive unilateral measures and to provide an environment that fosters growth in global trade, which is vital for the millions of customers and sellers that Amazon supports around the globe.”

Some pressure groups were scathing. The Tax Justice Network’s chief executive Alex Cobham said that “Given a once-in-a-century opportunity to reform and reinvigorate a broken international tax system that loses $500bn in government revenue to corporate tax abuse every year, the OECD has decided to tinker around the edges.”

Oxfam’s tax campaign lead Susana Ruiz was concerned that developing countries would not benefit: “Unfortunately, what the OECD has come up with today is very disappointing... developing countries will only see a very small increase in their corporate tax revenues.”

Jesse Eggert, an international tax expert at business-services firm KPMG, perhaps summarizes the main issue: “They’ve left a lot of challenging questions still to be answered. Developing an actual consensus that provides clarity and certainty for taxpayers will take time and substantial effort.”

What happens next?

Initial discussion of the proposals should take place at next week’s Washington summit of the G20, while finance ministers will be expected to discuss the plans within their own national governments. As ever, there is plenty of room for disagreement over how the proposals might be implemented. 

Even so, the OECD wants agreement reached by the end of January. “Failure to reach agreement by 2020 would greatly increase the risk that countries will act unilaterally,” said secretary general Gurria, “with negative consequences on an already fragile global economy. We must not allow that to happen.” 

Originally published by CGTN Europe, 11 Oct 2019