Why it matters: Tech giants have been relying on careful tax-planning strategies using low-tax locations for years, but a new initiative by the OECD means 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 significant rewrite of international tax rules which target tech giants and other multinational corporations. The initiative is meant to prevent a new trade war, as many of the countries involved already have their own implementations in the works or passed into actual law.
The plan was first announced by the Organization for Economic Cooperation and Development (OECD) in October 2019, after preliminary talks concluded with an outline agreement on changing tax regulations dating as far back as 1920s.
The countries involved have started sending proposals, and officials will meet in Paris to conduct negotiations on where tax should be paid and “what share of profit should be taxed” when digital businesses 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 craft their own “digital tax.” One prime example is France, whose digital tax invoked a promise from US President Donald Trump to levy import taxes on $2.4 billion worth of French products.
Companies like Apple, Google, Amazon, Facebook, and other tech giants have been using low-tax locations like Ireland over the years to avoid cutting into their profits, but they’ve done so to the extent that there is now a powerful consensus among countries to establish a fair system that works in today’s context, where companies can book most of their revenue from countries where they sell their digital services without a physical presence.
France hinted earlier this month that it might hold off on its digital tax until the end of the year, mostly because of insistence from other EU members. Meanwhile, the OECD has to present at least a preliminary consensus-based solution that will apply to companies that operate online search engines, social media platforms, online marketplaces, streaming services, cloud computing, and advertising.
Amazon and Apple so far have expressed their support for OECD’s efforts, mainly because they would be an important step in preventing double taxation and “unilateral distortive measures.”
Apple CEO Tim Cook noted that “logically everybody knows it needs to be rehauled, I would certainly be the last person to say that the current system or the past system was the perfect system. I’m hopeful and optimistic that the OECD will find something.”