Global Tax Proposal Widens Net Beyond Tech Giants -- 2nd Update

Data : 09/10/2019 @ 13:17
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Global Tax Proposal Widens Net Beyond Tech Giants -- 2nd Update

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By Paul Hannon in London and Richard Rubin in Washington 

The search for a new agreement on how countries should tax multinational corporations advanced Wednesday, as international negotiators proposed new rules that would force tech giants such as Facebook Inc., Amazon.com Inc. and Alphabet Inc.'s Google to pay more tax in countries were customers consume their products and services.

The proposal comes as tensions between the U.S. and other governments rise following the introduction or announcement of a series of special taxes on digital services that mostly fall on large U.S. technology companies. It appears likely to win the support of the U.S. administration, since the plan is partly based on White House suggestions.

Crucially, the new proposal wouldn't just target technology companies that are predominantly American, but would also affect makers of luxury goods and automobiles -- among other products -- that are based in Europe and other countries.

"We welcome the impressive progress to achieve consensus on global tax reform by 2020," said Christian Borggreen, European head of office at the Computer & Communications Industry Association, which represents a number of technology companies. "This historic reform must be ambitious and recognize that all businesses are digitizing. We agree that countries should not seek any unilateral taxes that would risk derailing global tax reform and damage global investment and growth."

The new rules would also give more taxing power to countries in which consumers are based, rather than where patents, licenses and brands are owned or where businesses have headquarters.

The new proposal comes from the Organization for Economic Cooperation and Development, which is guiding talks between 134 countries on how to rewrite company tax rules.

At issue is the growing digitization of the global economy. Decades ago, when companies sold their products abroad, their profits came mostly from manufactured goods. Digital services don't require a local physical presence, enabling tech companies to lower their tax bills by basing patents, licenses and trademarks -- to which their profits are attributed -- in low-tax countries.

In the U.S. case, the new rules would likely result in little overall change in taxation, since it is both a large host to intellectual property and a huge consumer market. China would likely be in the same position, while some large European countries may gain.

Those that are set to lose would include low-tax investment hubs such as Ireland and Switzerland, which are hosts to large amounts of intellectual property, but are relatively small consumer markets.

The OECD believes the proposal will prove acceptable even to those countries that stand to lose some tax revenue, since the alternative would be a free-for-all in which each country finds its own way of responding to digitization.

"It is in the interest of all countries that this work is successful at ensuring the continuation of a stable and consensus-based international tax framework into the future," said a spokeswoman for Ireland's Treasury department.

There is also a risk that differences over tax policy could become more entangled with the continuing trade disputes, heaping additional uncertainty onto a global economy that is already slowing. Significantly, the U.S. government is investigating a digital tax imposed by France under the same broad law the Trump administration relied on for its trade dispute with China.

"There will be massive unilateral measures if we don't find a solution," said Pascal Saint-Amans, the OECD's senior tax official.

Businesses fear that, without an international agreement, they may face an array of new taxes, and a much more complex environment for their international operations.

"Reaching broad international agreement on changes to fundamental international tax principles is critical to limit the risk of.... distortive unilateral measures and to provide an environment that fosters growth in global trade," Amazon, which welcomed the proposal, said.

Apple and Facebook didn't immediately comment while a Google spokesman referred to a previous statement supporting the OECD process.

The proposal was sent to finance ministers from the G-20 on Wednesday, ahead of their meeting in Washington on Oct. 17 and 18. OECD officials expect their plan to receive the G-20's blessing, although ironing out the details will be a big challenge.

That is because the OECD's proposal lays out the broad outlines of the new rules, rather than the specifics that will determine how much each government stands to gain or lose, and how much companies will have to pay.

"They've left a lot of challenging questions still to be answered," said Jesse Eggert, an international tax expert at business-services firm KPMG. "Developing an actual consensus that provides clarity and certainty for taxpayers will take time and substantial effort."

The new rules would only affect companies that have global revenue over EUR750 million ($823 million), but would exclude businesses in that category that extract raw materials, or which manufacture goods that are then used by other businesses, rather than sold to consumers. It would also include large technology companies that don't sell directly to consumers, but sell advertising to businesses that do.

The OECD is proposing that governments agree on a profit rate for a company's global operations that is routine, and a way to share out governments' rights to tax profits above that level based on the total sales accounted for by each country.

That would be a significant change to the way tax bills are decided. Levies are currently determined by a "bottom up" process in which businesses interact with each country's tax code and a series of international agreements intended to avoid taxing the same profit twice or giving companies too much leeway to avoid paying taxes altogether.

"If agreed the proposals announced would represent the biggest change in the international tax regime since it was agreed in the 1920s and fundamentally alter the balance of taxing rights between countries," said David Murray, international tax policy director at business services firm PwC.

But tax negotiators aren't taking a view on exactly how that formula for dividing up tax revenues should work and think it will likely come down to compromise.

"The truth is what countries can agree on," said Mr. Saint-Amans.

Sam Schechner contributed to this article.

Write to Paul Hannon at paul.hannon@wsj.com and Richard Rubin at richard.rubin@wsj.com

 

(END) Dow Jones Newswires

October 09, 2019 12:02 ET (16:02 GMT)

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