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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