Why it matters: for years, technology giants have relied on careful tax planning strategies that use low-tax locations, but a new OECD initiative means that no less than 137 countries are willing to work together to update international tax rules for today’s complex, digitalized industry.
The governments of 137 countries have begun work on a major rewrite of international tax rules that target tech giants and other multinationals. The proposal is intended to prevent a new trade war, as many of the countries involved already have their own implementations in the works or have enacted them into law.
The plan was first announced in October 2019 by the Organization for Economic Cooperation and Development (OECD), after preliminary talks were concluded with an outline agreement to change tax regulations dating back to the 1920s.
The countries involved have started to send proposals, and officials will meet in Paris to negotiate where tax should be paid and “what share of profit should be taxed” when digital enterprises do not have a physical presence in a given market.
The OECD says there is an urgent need to compile a draft as quickly as possible, as a growing number of countries are scrambling to create their own “digital tax.” One prime example is France, whose digital tax invoked US President Donald Trump’s promise to levy import taxes on French products worth $2.4 billion.
Companies like Apple, Google, Amazon, Facebook and other tech giants have been using low-tax locations like Ireland over the years to avoid reducing their revenues, but they have done so to the point that there is now a strong consensus among countries to create a fair system that works in today’s context, where companies can book most of their income from countries where they sell their own.
France suggested earlier this month that, due mainly to the insistence of other EU members, it could proceed with its digital tax until the end of the year. Meanwhile, the OECD must at least present a tentative consensus-based solution that will apply to companies operating online search engines, social media platforms, online marketplaces, streaming services, cloud computing and advertisement.
Amazon and Apple have expressed their support for the efforts of the OECD to date, primarily because they are an important step towards preventing double taxation and “unilateral distortion measures.”
Apple CEO Tim Cook notes that, “logically, everyone knows that this has to be revamped, I’d certainly be the last to say that the current system or system in the past is the right one.