October 11, 2019
The Organization for Economic Cooperation and Development (OECD) has devised a proposal to prevent digital giants such as Amazon, Apple and Facebook from avoiding paying taxes. The proposal, which would allow countries to tax such big multinational firms even if they did not operate there, would enable new taxes on all kinds of multinational companies — not just tech firms — that operate online. As of now, many of these digital companies avoid heavier taxes by moving profits to countries with low tax rates.
The New York Times reports that, “many countries, particularly those in Europe, have moved to curb that practice by approving new taxes on large multinational companies that sell to their citizens but pay little or no tax to their countries.”
When France passed a new digital tax that would impact U.S. companies like Google, “the Trump administration responded by threatening tariffs on imported French goods, like wine.” The countries “agreed to pause their plans” and have turned to the OECD to find a “multilateral agreement.”
OECD’s 18-page “framework plan” would “fundamentally alter how and where companies that operated across national borders were taxed,” but doesn’t deal with actual tax rates, leaving that “to future negotiators.” The core rule — which applies to multinational firms with annual revenues of about $825 million and higher — is that companies should pay taxes where the sales occur.
“In a digital age, the allocation of taxing rights can no longer be exclusively circumscribed by reference to physical presence,” it states. “The current rules dating back to the 1920s are no longer sufficient to ensure a fair allocation of taxing rights in an increasingly globalized world.” The new rule “excludes manufacturing suppliers and resource extraction companies, like oil companies.”
The ruling appears to be “a loss for so-called tax havens, like Ireland” and a win for “large, consumption-heavy countries like the United States, China and much of Western Europe.” The giant digital companies also benefit because “even though a final deal could put them on the hook to pay more in taxes … the alternative appears to be a series of country-by-country digital taxes that could be expensive to comply with.”
In the U.S., a Treasury Department spokesperson said it is “studying the OECD Secretariat’s proposal and is actively engaged in the process aimed at forging a consensus on international tax issues.” But he also repeated the Trump administration’s opposition “to unilateral digital services taxes.”