How to best tax multinational enterprises in a rapidly digitalising economy?


According to the Organization for Economic Cooperation and Development (OECD), there is a growing consensus among Member States on the support of a proposal for a global corporate tax reform and standardized regulation.

At first glance, the end of January OECD meeting seems to be an ordinary event involving bureaucrats, but in fact it is of utmost importance as the richest countries in the world present new proposals for taxing digital multinationals such as Google, Amazon, Facebook, Apple, Netflix and Uber.

When in 2012, tax evasion practices by Apple, Amazon, and Google triggered public outrage and made G20 to act, the OECD was requested to reform the international corporate tax system. Three years later, this led to the BEPS reform package (BEPS stands for “base erosion and profit shifting”, which means the depreciation of corporate tax base resulting from the transfer of profits to another country). The reform process was led by the OECD member states and was only opened to developing countries after the first initial plans. Currently, 125 countries participate in the negotiations, forming a group called Inclusive Framework.

Only Google itself put 19.9 billion euros to Bermuda through a Dutch front company in 2017. In the same year, Facebook paid a corporate tax of £ 7.4 million in the UK, while it generated revenue of £ 1.3 billion. Multinational companies can legally do so by applying transfer pricing, meaning that parent company determines the prices of transactions between its subsidiaries to guarantee the registration of profits in low-tax countries, rather than considering where the activity resulting in profit was actually conducted.

Tax evasion can be observed in all sectors of the economy; however, the example of digital companies is the best evidence of how outdated the international tax system is. The marginal cost of the production of these companies is zero, thus the income generated is an annuity income, which is why it is important to tax it accordingly. Moreover, contrary to what these companies claim, this taxation would not negatively affect the supply of digital services.

According to a proposal embraced by an organization in 35 countries around the world, companies would pay tax in the future where they trade. This would be a very serious change compared to the current situation, where corporate taxation generally depends on where the headquarters, employees or offices of each company are located.

In an organization that brings together the richest countries in the world, the need for reform is a result of the fact that multinational companies move their profits around the world, often towards countries with more favourable tax opportunities, irrespective of where this profit was realized. In Europe, for example, France has been against American tech giants for some time, claiming that large web companies do not pay enough on the market where their digital services are sold.

OECD presented four proposals in January, all of which would all re-interpret the functioning of corporate taxation under the changed circumstances of the digital economy. One of the four proposals would fundamentally transform the way the multinationals pay taxes to each country.

The proposal is also supported by countries with very significant economies, which are not members of the OECD, but their opinion is very important, including Brazil, China and India.

According to the proposal, multinational companies would not be able to move their profits any more, depending on where the corporate tax rate is more favourable to them. The proposal would not only affect tech companies, but all multinational companies. The expected result is that the revenues of multinational companies would not be realized in tax havens and in some exporting countries but rather in countries where many consumers live.

The OECD proposal was supported by 127 countries; however, some European countries would only impose such reforms on digital companies. According to the OECD, the proposal is closely in line with the proposals made by the European Commission last year. The announcement was also praised by the French Minister of Economic Affairs, Bruno Le Maire.

Pascal Saint-Amans, Director of the Centre for Tax Policy and Administration | Photo: OECD

“The international community has taken a significant step forward toward resolving the tax challenges arising from digitalisation” said Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration.

“Countries have agreed to explore potential solutions that would update fundamental tax principles for a twenty-first century economy, when firms can be heavily involved in the economic life of different jurisdictions without any significant physical presence and where new and often intangible drivers of value become more and more important.”

“In addition, the features of the digitalised economy exacerbate risks, enabling structures that shift profits to entities that escape taxation or are taxed at only very low rates. We are now exploring this issue and possible solutions”
Mr. Saint-Amans said.

According to current plans, an agreement could be reached by the end of 2020.

Source: OECD, José Antonio Ocampo via Project Syndicate