Governments unite to combat international tax avoidance.
The OECD group of wealthy nations has proposed a new global corporate taxation regime to address issues that have arisen in a globalized and digital world. The existing rules date back to the 1920s and are judged inadequate since they allow digital giants such as Facebook, Amazon, Apple, Netflix and Google (FAANGs) to move accounting for their profits to offshore havens or low-tax jurisdictions.
Secretary-General Angel Garcia says the OECD “continues advancing towards a consensus-based solution to overhaul the rules-based international tax system by 2020.”
Ireland, Luxembourg, the Netherlands and Switzerland would likely see their taxes from multinationals shrink, as would offshore tax havens such as the Cayman Islands.
“The likely winners will be countries with large consumer bases like the United States, China and India,” says Ross Robertson, the London-based international tax partner at BDO. “Those most at risk are countries like Ireland that have built their economy around being a hub jurisdiction, attracting the HQs of large US businesses through low taxes on realized global profits.”
But setting global rules is not easy. “How significant should a company’s activity be within a jurisdiction to trigger inclusion in the new tax framework?” is a critical and unsettled question, Robertson explains. “Set the threshold too low and the costs of compliance could outweigh the tax uptake, while administrative complexity would also hinder startups. But a higher threshold would effectively create a two-tier tax system, and big business will oppose that.”
France and the United Kingdom have already moved to tax the FAANGs on the basis of profits generated within their jurisdiction. “If the OECD does not move fast enough more countries may move unilaterally,” says Robertson. “CFOs will need to be tuned into what’s happening in each market their company operates in.”
Gathering and sorting data by jurisdiction may require complex new systems. “This may not be straightforward for some businesses,” Robertson acknowledges, “and any systems change could take significant time.”