The Organisation for Economic Co-operation and Development is going to release a proposal for global corporate tax reform before the next meeting of G‑20 finance ministers and central bankers set for 17 Oct. in Washington, DC.
In an interview with Agence France-Press news agency, the OECD’s head of tax policy, Pascal Saint-Amans, said a political push was needed to relaunch the discussions.
In June, the 129 members of the OECD/G‑20 Inclusive Framework on Base Erosion and Profit Shifting agreed to devise a new global agreement for taxing multinational enterprises by the end of 2020.
The OECD is pursuing two avenues to target the issue that certain businesses, digital companies in particular, can have significant market share in a country where they do not have a physical presence, and as a result escape corporate taxation there.
“The first concerns how we tax companies that aren’t taxed currently, and how to reallocate tax assessment rights,” Saint-Amans said. “The other involves the creation of a minimum tax on profits.”
Asked how such a minimum global tax on profits would work, the OECD head of tax policy said, “The idea is if a company operates abroad, and this activity is taxed in a country with a rate below the minimum, the country where the firm is based could recover the difference.”
This would work in a similar way to the new category of foreign income, global intangible low-tax income (GILTI), introduced for US multinationals by the 2017 US tax reform. GILTI effectively sets a floor of between 10.5% and 13.125% on the average foreign tax rate paid by US multinationals. It was conceived with the aim of reducing incentives to shift corporate profits to low or no-tax jurisdictions by using intellectual property.
While this framework is based on an average global rate, Saint-Amans said the OECD is working on a country-by-country basis.
“Basically, if a French company earns half its profits in the US, taxed at 25%, and the other half in the Cayman Islands, with zero tax, that gives you an average of 12.5%. If you apply it country by country, you recover taxes on half the Cayman profits,” Saint Amans said.
Some have argued that this would infringe on the fiscal sovereignty of countries.
“Not at all,” Saint-Amans said. “Each state would remain sovereign and would watch what’s going on abroad so they could recover the difference. There wouldn’t be any international agency taking the place of national tax administrations.”
He concedes that getting this in place will not be easy and require a multinational agreement.
“But this was already done in 2015 with the deal on domestic tax base erosion and profit shifting (BEPS). And with the political support given at the G‑7, there’s a good chance things will move forward.”
There are still plenty of outstanding questions, he noted, regarding the tax rate for companies, which activities to tax and how to distribute the proceeds fairly.
“It’s a real negotiation. When European officials say, ‘We want to tax digital companies, even if they pay their taxes in the US’, it’s more or less what Indian officials are telling French, German or other companies. That’s to say: ‘These companies operate on our territory, but not enough of their profits are staying here, so we want the right to tax them.’”
France agrees tax deal with US
Unwilling to wait until an international consensus is found, France earlier this year became the first country to introduce 3% tax on digital businesses. This step drew the ire of US President Donald Trump, who regarded it as deliberate targeting of US tech companies and threatened to retaliate with tariffs on French goods.
At the meeting of G‑7 government leaders in Biarritz, France, last week, French president Emmanuel Macron agreed with President Trump that, from the date the OECD framework is in force, “France will do away with its national tax” and “everything that has already been paid under the French tax system will be reimbursed, as soon as international tax exists on digital services”.
According to the country’s Ministry of Finance, France will reimburse companies the difference between its tax and the future taxation currently under discussion at the OECD. “For example, if this solution comes into force in 2021, France will calculate the amount that Facebook or Google would have paid in 2019 and 2020, and if the result is less than 3% of the turnover required by the French tax, the groups will receive a tax credit,” the ministry told newspaper Le Monde.