Reform of multinationals’ taxes edges closer

11 Jun 19

The world’s leading economies are edging closer towards a consensus on reforming the global tax system to ensure that multinational corporations pay their fair share.

OECD finance ministers and central bank governors meeting in Japan discussed the latest report on efforts to shake up the way taxes are levied on huge digital companies that operate across borders.

While the plans being thrashed out target the digital giants whose business models and international operations make them difficult to tax fairly, they will have major implications for all multinationals.

“We welcome the recent progress on addressing the tax challenges arising from digitalisation and endorse the ambitious work program that consists of a two-pillar approach, developed by the Inclusive Framework on BEPS [base erosion and profit shifting],” the G20 finance ministers and central bank governors meeting in Fukoka said in a communiqué.

“We will redouble our efforts for a consensus-based solution with a final report by 2020.”

Questions about the taxes paid by large companies with overseas affiliates have been asked for years – but this issue has become pressing as giant multinational technology groups have emerged and transformed the way business is done.

Public concern had grown since the financial crisis about the apparently low levels of tax paid into public coffers by digital giants such as Amazon and Facebook – which are often accused of avoiding taxes by taking up residence in countries with lower corporate tax rates.

In 2017 in the UK, for example, Amazon paid just £1.7m ($2.2m, €1.9m) of tax on profits of more than £72m, and Facebook paid £15.8m in tax after making a profit of £62.7m on record sales of £1.27bn.

The levels at which large multinationals are taxed is a burning issue because of disquiet about the scale of revenues lost to cash-strapped treasuries when these corporations shift profits to low-tax jurisdictions.

This is a critical issue for Treasuries and public finance managers, with organisations such as the IMF pointing to “ample empirical evidence” that profit shifting – referred to as “base erosion”, or erosion of the tax base – is taking place.

One recent estimate put global revenue losses from corporate tax avoidance of this kind at about $500bn annually, with developing countries hit hardest.

The OECD is at the forefront of debates about the taxation of multinationals and in 2012, the G20 asked the organisation to investigate base erosion and profit shifting.

It has issued a number of interim reports and statements about its progress to date and is due to publish a final report in 2020 with long-term recommendations about how best to reform global corporation taxes.

The OECD/G20 Base Erosion and Profit Shifting Project said in the report discussed in Fukoka that it was mindful that if it does meet this deadline “there is a risk that more jurisdictions will adopt uncoordinated unilateral tax measures”.

It added that such “a proliferation of uncoordinated and unilateral actions would not only undermine the relevance and sustainability of the international framework for the taxation of cross-border business activities, but will also more broadly adversely impact global investments and growth.”  

Nonetheless, change is likely to be slow even if the OECD delivers concrete recommendations in 2020, as significant technical work would then be needed to turn these into reality.

  • Gavin O'Toole, expert on Latin America
    Gavin O'Toole

    A freelance journalist. He has written six books about Latin America and taught the politics of the region at Queen Mary, University of London.

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