Why it matters: Big tech companies have been using low-tax locations to optimize their worldwide profits for a while now. However, the wealthiest countries are now discussing a new initiative that will have tech giants pay more tax wherever they sell most of their products and services. The reasons mostly have to do with an increasingly globalized world where governments want to establish a fair tax system that targets revenue instead of profits, among other things.
The Paris-based Organization for Economic Cooperation and Development (OECD) is targeting large internet companies that have been using every opportunity to pay lower taxes with a new initiative that will see the current corporate tax system get the first major overhaul since the 1920s.
Next week, the finance ministers of the 20 wealthiest countries in the world are expected to meet in Washington, where they'll review the OECD proposal. More than 130 countries and territories have shown their support for a rewriting of the tax rules, as a result of a race to the bottom where many governments have seen a steady decrease in rates for corporate income tax over the last 40 years just to keep companies from taking their business elsewhere.
The new rules could make tax havens like Ireland a thing of the past, as they include a minimum tax that would apply globally. Furthermore, governments in developed countries would get more power to tax big companies based on sales made on their territories. This includes internet companies as well as holdings that own profitable brands or distributors of luxury goods.
The OECD proposal also aims to simplify the global tax system and prevent countries from implementing their own digital sales taxes and similar measures that only add to the current global trade tensions. The organization wants to get the approval of the G20 by the end of January 2020 so that it can finalize the rules as soon as possible.
It's worth noting that emerging and developing countries stand to win from the new rules, as more often than not big companies sell products and services in their territories but pay little tax in return. The OECD notes that "in a digital age, the allocation of taxing rights can no longer be exclusively circumscribed by reference to physical presence."
Amazon told the Financial Times that it sees the proposals as "an important step forward," but also emphasized the need to achieve "a broad international consensus is crucial in order to limit the risk of double taxation and unilateral distortive measures." Naturally, the OECD will have to work up the fine details that will ensure companies can adapt to the new rules in a way that allows them to stay profitable.
To put things in perspective, the OECD is looking to prevent companies from shifting profits and using tax-planning strategies and welfare benefits as a way to avoid paying their fair share. The organization estimates that up to $240 billion are lost every year, which could be used to fund welfare benefits and other public services.
The improved tax rules would also lower the need to levy hefty fines at companies that practice tax avoidance. Just last year, Apple had to pay Ireland a whopping $16.7 billion in back taxes.