Should nations tax tech companies on profits they earn in that country, even if the companies don’t have a physical location there?
And is it fair for multinational companies to shift their income to low-tax nations to avoid paying higher rates elsewhere?
The Organization of Economic Cooperation and Development hopes to answer these questions with new tax rules by mid-year, Pascal Saint-Amans, director of OECD’s Center for Tax Policy and Administration, told the New York State Bar Association’s Annual Meeting.
“We are now, hopefully, in the last mile of improving the international rules,” said Saint-Amans, who was the keynote lunch speaker Jan. 26 at the Annual Meeting.
The OECD, at the request of the G20, began talks on a range of international tax rules after the 2008 financial crisis. More than 135 nations have joined the talks, which have already resulted in a higher level of tax cooperation among nations, Saint-Amans said. More than 100 nations have signed a multilateral agreement to update tax rules and lessen opportunities for tax avoidance by multinational enterprises.
The OECD is still working on two key issues, which it calls Pillar 1 and Pillar 2:
– A debate over where taxes are paid in a digital world because many companies are actively engaged in a market without having a physical operation there. France, Great Britain and other European countries have made plans to tax the profits earned in their countries by digital companies like Facebook, Amazon and Google, even if the companies have little or no physical presence there.
– A proposed minimum tax for multinational companies to reduce the incentive to shift income to lower-tax nations. The OECD estimates that such profit-shifting costs more than $100 billion a year in lost corporate tax revenues.
The OECD had originally aimed to have an agreement on the two questions by the end of 2020, but it was delayed by the COVID-19 pandemic and a proposal by the Trump administration to make the rules optional for companies. Saint-Amans said that he expects the Biden administration to be more open to negotiations.
Saint-Amans said an international agreement is necessary for the world economy.
“There is a recognition that there is a need for a global solution,” Saint-Amans said. “Otherwise, we have trade sanctions, we have tariffs, we have trade wars, and we lose growth, and we can’t afford this, especially post-COVID.”
For example, when France announced plans to tax American tech companies 3% on their earnings in France, former President Trump threatened to slap high tariffs on French imports. France has recently said that it plans to go forward with the tax, but the U.S. said this month that it would delay the threatened tariffs indefinitely.
While taxes historically have been largely a domestic concern, the growth of international trade and an increasingly global economy have sharpened the importance of international tax rules, Saint-Amans said.
He said he hopes the OECD efforts will help increase trust in international tax rules — a belief among both governments and the public “that they are not unfair, or abused, or manipulated by a handful of rich or well-advised companies.”