Economies around the world are a step closer to imposing digital tax on multinational giants like Google, Facebook and Amazon. Paris-based the Organization for Economic Cooperation and Development (OECD), a global economic body, on Wednesday proposed overhauling the way multinationals are taxed to make sure they pay their fair share in countries where they do significant business.
The new rules would mean that such companies conducting significant business in places where they do not have a physical presence are taxed there. According to the proposals, some profits and tax rights would be reallocated to countries where companies make their biggest sales. The rules would dictate where tax should be paid and how much profit companies should be taxed on. Currently, multinationals tend to pay most of their tax in the country where they are based. That’s particularly true for business carried out online, such as ad revenue from online searches or social media.
The proposal will target the “excess profit” of sales made by digital multinationals in countries without having a commensurate presence there for tax purposes. The measure is in contrast to a flat 3 per cent tax on digital sales proposed by the European Union.
“We’re making real progress to address the tax challenges arising from digitalization of the economy, and to continue advancing toward a consensus-based solution,” said OECD Secretary-General Angel Gurra. The issue has become particularly big in the European Union, where multinationals with business across the continent pay taxes almost exclusively in the EU nation where their local headquarters are based, often a low-tax haven like Ireland, Luxembourg or the Netherlands. In some cases, the small countries have been accused of offering advantageous tax terms to multinationals who agree to establish headquarters there.
The approach gathers common elements of three competing proposals from member countries, it said, describing its new effort as a “unified approach”.
The proposals include ways to counter the tax-planning strategies used by large companies to exploit gaps in rules. OECD’s plan comes on the heels of France and the US agreeing in August to find a way to better tax digital businesses by mid-2020. The changes are part of the OECD’s base erosion and profit shifting (Beps) work. The proposals have been launched by the OECD for consultation on Wednesday.
The OECD’s proposal will be presented to finance ministers of the G-20 in Washington next week.
According to estimates by the OECD, up to $240 billion in revenue is lost to exchequers, which could be used to fund key government projects, welfare benefits and public services.
The proposed changes will target digital giants with global turnover of more than $1.23 billion. It is being considered as a key first step in establishing one of the most significant shifts in the international tax transfer system since the 1920s.
(With agency inputs)