World Governments Lose Between $100 Billion and $240 Billion each Year in Taxes
The Paris-based Organization for Economic Cooperation and Development (OECD) has stepped into the debate regarding the tax rules which allows multinational corporations to build sizeable businesses in countries without necessarily having extensive offices or staff there. The have put forth proposals to come to term with the business world. The first test of whether governments back the proposals will come today and Friday when finance ministers from the Group of Twenty (G20) debate them at a meeting in Washington.
The OECD guidelines would would effect companies with revenues of more than 750 million euros ($830 million). Mining and oil and gas companies would be exempt, the OECD said.
“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 report said.
“It will change the global tax system to mean that big countries with large consumer markets get a higher portion of the tax base. And exporting countries, and particularly small exporting countries, will lose out relative to those,” Gerard Brady, chief economist at Ibec, Ireland’s largest business lobby group, told Fortune.
Experts say countries like the United States, China, Germany, France and Britain would greatly benefit from the proposal while countries with a low-tax model like Ireland would have to adjusts its laws to maintain their low tax strategies.
“It means that a lot of countries are going to have to move to other ways of competing, whether that be investment, trying to attract skilled workers or other inducements for innovation and R&D, that countries are going to have to change how they run their industrial model and particularly ones like Ireland,” he said.
Apple, Google and Facebook all have their European bases in Ireland, which has a corporate tax rate of 12.5 percent, and employ thousands of people there. In 2016, the European Union ordered Apple to pay Ireland $14 billion in back taxes, ruling the firm had received illegal state aid, but Apple and the Irish government are appealing the decision.
The OECD estimates that profit shifting costs governments between $100 billion and $240 billion in lost revenue each year, equivalent to between 4% and 10% of global corporate tax revenue.
A new urgency is spurring on the negotiations as governments around the world have vowed to go it alone with their own tax if a global accord isn’t reached.
France has instated a tax on big tech causing issues with U.S. President Donald Trump who promised to retaliate with a tax on French wine. Italy and Britain will most likely implement digital taxes next year and Spain is also considering one.
”Failure to reach agreement by 2020 would greatly increase the risk that countries will act unilaterally, with negative consequences on an already fragile global economy. We must not allow that to happen,” OECD Secretary-General Angel Gurría said last week.
Amazon said it welcomed the OECD proposals as “an important step forward.”
“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,” it said in a statement.
Google also said previously that it supports moves toward a new comprehensive, international framework for taxing multinational companies.
“Corporate income tax is an important way companies contribute to the countries and communities where they do business, and we would like to see a tax environment that people find reasonable and appropriate,” Karan Bhatia, Google’s vice president for government affairs and public policy said over the summer.
“While some have raised concerns about where Google pays taxes, Google’s overall global tax rate has been over 23% for the past 10 years, in line with the 23.7% average statutory rate across the member countries of the OECD,” he said.
“Realistically, while this proposal is not at this stage endorsed by any of the countries, on pillar one it’s the only proposal on the table at the moment, and there is a clear desire from a lot of large countries, and from the G20, to get an agreement and to make international reforms to deal with some of these issues. So I suspect that, come January, something will be agreed on a work program to move this to the next stage,” PwC’s International Tax Policy Director David Murray told Fortune.
“It’s a huge amount of work to try to get all the detail on this done next year but there is a political will to do that,” he said.
He said it was “hard to say” whether the U.S. would back the OECD’s approach “although it’s clear the U.S. Treasury has been very engaged in this process. There haven’t been a huge amount of public statements made by any of the large countries involved.”
“High income countries stand to receive around 80% of the redistributed profits as tax base. Upper-middle income countries are expected to see some benefit, but lower-middle income countries are projected to see their tax bases actually shrink by 3%,” the analysis by Alex Cobham, chief executive of the Tax Justice Network, said.
Brady said he believed there was political momentum behind the tax reform process and the changes would go through, though it might take until 2023 or 2024 to implement them.