The OECD has proposed a global shake-up of corporate taxation, overturning a century of rules that have allowed digital groups such as Facebook, Apple, Amazon, Netflix and Google to shift profits around the world to minimise their tax bills.
The proposals, which were unveiled on Wednesday after months of behind-the-scenes negotiations, are aimed at extracting more corporate tax from large multinationals whether they are digital or own highly profitable brands, such as luxury goods makers or global car companies.
The winners would be large countries including the US, China, UK, Germany, France, Italy and developing economies. These would see an increase in their rights to levy tax on corporate income earned from sales in their territories, while the companies themselves, tax havens and low tax jurisdictions such as Ireland would lose.
The aim, the OECD said, was to create a new and “stable” international corporate tax system because “the current rules dating back to the 1920s are no longer sufficient to ensure a fair allocation of taxing rights in an increasingly globalised world”.
In a digital age, the allocation of taxing rights can no longer be exclusively circumscribed by reference to physical presence
The OECD had indications over the summer that its proposals were likely to win support from the leading global economies and this, it hopes, will persuade countries not to go down a unilateral route with domestic digital sales taxes, such as that proposed by France and the UK, which would further inflame global trade tensions.
The Paris-based international organisation is seeking agreement in principle from the G20 by the end of January so that it can work up detailed rules and stop countries feeling the need to lower their corporate tax rates just to keep business located in their jurisdictions.
The main problem it sought to address was that multinationals, whether they were the digital giants or had very profitable intangible brands, could shift the profits to low-tax jurisdictions, leaving little corporate tax revenue for large economies to collect despite most of their business activity taking place in these economies.
It has proposed breaking a taboo in international corporate taxation that countries only had a right to tax activities from companies that had a physical presence on their soil.
Instead, the OECD proposed that countries should have a right to tax a proportion of the global profits of highly profitable multinationals wherever these might have been shifted around the world.
It would enable France, for example, to tax an element of the sales of Google to French advertisers and the US to have greater taxing rights over the profits attributable to the brands of the French luxury brand company LVMH related to the sales in America.
Emerging and developing economies would gain taxing rights over these companies for the first time because, although the multinationals sell and market products widely in their jurisdictions, they often have no physical presence.
“In a digital age, the allocation of taxing rights can no longer be exclusively circumscribed by reference to physical presence,” the OECD said in a consultation document published on Wednesday.
Businesses and tax experts on Tuesday generally welcomed the OECD’s proposals.
If the vast majority of countries implemented such a system, it would make corporate tax more predictable and end the recent trend of countries seeking unilateral fixes to domestic tax problems.
The representatives of business at the OECD welcomed the “attempts to balance levels of accuracy and simplicity for both taxpayers and tax administrations”.
Saying there still needed to be rapid further work on the technical details, Will Morris, chair of business at OECD’s committee on taxation and fiscal policy, said: “We remain committed to constructively engaging in the OECD/G20 process as the only forum for reaching a practical and sustainable global outcome.”
The OECD’s proposal would give countries two new taxing rights.
First, for consumer-facing companies and digital businesses, they would allow countries to tax a proportion of the global profits of large multinationals, ending the ability to shift profits to escape taxation.
The OECD is consulting on what would count as a “residual profit” that would be open to this form of taxation, but the tax base would be the sales of the global group in any country. This would be particularly valuable for emerging economies, where multinationals sell but have no presence.
Achieving a broad international consensus is crucial in order to limit the risk of double taxation and unilateral distortive measures
The second element proposes that for countries which hosted multinationals with a physical presence, there should be a formula to generate a fixed rate of return on local activity in the country because many disputes arose in the area of distribution.
There could be a top-up if these two elements produced revenues that were less than a country would have received under existing rules.
Countries and the affected large multinationals should have access to “legally binding and effective dispute prevention and resolution mechanisms”, the OECD proposed.
In a statement, Amazon said it welcomed the publication of the proposals as “an important step forward”.
“Achieving a broad international consensus is crucial in order to limit the risk of double taxation and unilateral distortive measures, while creating an environment conducive to the growth of world trade, which is essential for millions of people, clients and companies that Amazon accompanies worldwide,” Amazon said.
The OECD envisaged there would still big international fights to come on the exact parameters of the new rules, which would have thresholds for size and profitability before companies would face these new rules, but officials in Paris said there was now an emerging consensus in favour of the approach.
A French finance ministry official said on Wednesday that the OECD’s proposal “is a promising basis for further work. The principles and the unified approach follow the approach we decided upon with the G7 ministers last July in Chantilly.”
The official added: “We will have a discussion on this basis next week at the G20 in Washington DC. I would like this discussion to give the needed political steer in order to achieve an agreement on international taxation in 2020. Of course, we’ll have to look into the details of this proposal to make sure it tackles the challenges brought by the digitalisation of the economy.”
Ross Robertson, tax partner at BDO, said the proposals were a sensible political compromise although there was still much work to be done.
“There are many definitions and technical mechanisms to be agreed: for example, the threshold at which the new rule would apply and the fixed profit element for local activity,” he said.
“And there will be many practical administrative problems to be resolved — not least as the OECD recommends the new rules take effect globally from one agreed date.”
Additional reporting by Harriet Agnew in Paris
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