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Global Tax Proposal Widens Net Beyond Tech Giants – The Wall Street Journal

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The new proposal would also affect makers of luxury goods and automobiles—among other products—that are based in Europe and other countries.


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franziska kraufmann/Shutterstock/european pressphoto agenc

By

Paul Hannon in London and

Richard Rubin in Washington

The search for a new agreement on how countries should tax multinational corporations advanced Wednesday, as international negotiators presented a way of rewriting the rules that they expect finance ministers from the Group of 20 leading economies will support.

The proposal comes as tensions between the U.S. and other governments rise following the introduction or announcement of a series of special taxes on digital services that mostly fall on large U.S. technology companies. It appears likely to win the support of the U.S. administration, since the plan is partly based on White House suggestions.

Crucially, the new proposal wouldn’t just target technology companies that are predominantly American, but would also affect makers of luxury goods and automobiles—among other products—that are based in Europe and other countries.

The new rules would also give more taxing power to countries in which consumers are based, rather than where patents, licenses and brands are owned or where businesses have headquarters.

The new proposal comes from the Organization for Economic Cooperation and Development, which is guiding talks between 134 countries on how to rewrite company tax rules.

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At issue is the growing digitization of the global economy. Decades ago, when companies sold their products abroad, their profits came mostly from manufactured goods. Digital services don’t require a local physical presence, enabling tech companies to lower their tax bills by basing patents, licenses and trademarks—to which their profits are attributed—in low-tax countries.

In the U.S. case, the new rules would likely result in little overall change in taxation, since it is both a large host to intellectual property and a huge consumer market. China would likely be in the same position, while some large European countries may gain.

Those that are set to lose would include low-tax investment hubs such as Ireland and Switzerland, which are hosts to large amounts of intellectual property, but are relatively small consumer markets.

The OECD believes the proposal will prove acceptable even to those countries that stand to lose some tax revenue, since the alternative would be a free-for-all in which each country finds its own way of responding to digitization.

There is also a risk that differences over tax policy could become more entangled with the continuing trade disputes, heaping additional uncertainty onto a global economy that is already slowing. Significantly, the U.S. government is investigating a digital tax imposed by France under the same broad law the Trump administration relied on for its trade dispute with China.

“There will be massive unilateral measures if we don’t find a solution,” said Pascal Saint-Amans, the OECD’s senior tax official.

The proposal was sent to finance ministers from the G-20 on Wednesday, ahead of their meeting in Washington on Oct. 17 and 18. OECD officials expect their plan to receive the G-20’s blessing, although ironing out the details will be a big challenge.

That is because the OECD’s proposal lays out the broad outlines of the new rules, rather than the specifics that will determine how much each government stands to gain or lose, and how much companies will have to pay.

The new rules would only affect companies that have global revenue over €750 million ($823 million), but would exclude businesses in that category that extract raw materials, or which manufacture goods that are then used by other businesses, rather than sold to consumers. It would also include large technology companies that don’t sell directly to consumers, but sell advertising to businesses that do.

The OECD is proposing that governments agree on a profit rate for a company’s global operations that is routine, and a way to share out governments’ rights to tax profits above that level based on the total sales accounted for by each country.

That would be a significant change to the way tax bills are decided. Levies are currently determined by a “bottom up” process in which businesses interact with each country’s tax code and a series of international agreements intended to avoid taxing the same profit twice or giving companies too much leeway to avoid paying taxes altogether.

But tax negotiators aren’t taking a view on exactly how that formula for dividing up tax revenues should work and think it will likely come down to compromise.

“The truth is what countries can agree on,” said Mr. Saint-Amans.

Write to Paul Hannon at paul.hannon@wsj.com and Richard Rubin at richard.rubin@wsj.com

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