Governments will get more power to tax big multinationals doing business in their countries under a major overhaul of decades-old cross-border tax rules outlined on Wednesday by the Organisation for Economic Co-operation and Development (OECD).
The rise of big Internet companies like Alphabet Inc’s Google and Facebook Inc has pushed current tax rules to the limit as these firms can legally book profit and park assets, such as trademarks and patents, in low-tax countries like Ireland regardless of where their customers are.
Earlier this year more than 130 countries and territories agreed that a rewriting of tax rules largely going back to the 1920s was overdue and tasked the Paris-based OECD public-policy forum to come up with proposals.
The issue of taxing big cross-border multinational firms has become all the more urgent, as a growing number of countries have adopted plans for their own tax on digital companies in the absence of a global deal.
“The current system is under stress and will not survive if we don’t remove the tensions,” OECD Center for Tax Policy and Administration director Pascal Saint-Amans told journalists on a conference call.
Finance ministers from the G20 biggest economies are due to discuss the proposals at their next meeting on the sidelines of the IMF/World Bank meetings on Thursday next week.
Then negotiations will begin among the 134 countries that have backed the principle of new rules with the aim of reaching a deal next year.
The OECD proposes that the companies that should be targeted by the changes would be those with annual revenues of more than 750 million euros (US$824 million).
They would also have a consumer facing business in a country to be taxed by it, even if they do not have a permanent established business presence there.
Therefore, not only would big digital companies like Facebook and Google be covered, but so would consumer goods companies like Apple Inc and automakers.
However, most business-to-business companies, like an auto parts maker for example, would not be covered. Nor would companies in extractive or commodities industries.
The proposal creates a new nexus rule that would say a company is taxable in a market when its sales exceed a certain level in the market, which remains to be negotiated.
For simplicity’s sake, the threshold would be based on a company’s sales and could be adapted based on the size of the country, the OECD says.
If a company is deemed to be taxable in a country, the OECD’s proposal calls for a formula to determine how much of the firm’s worldwide profit can be taxed in a given country where it does business.
The formula would apply to the portion of a company’s global group profit reported to financial regulators that is deemed to be above what routine operations earn.
The formula, whose parameters remain to be negotiated, would determine what portion of the remaining profit could be taxed in a country based on the size of the market.
The aim is to bring outsized profits, well above the market average and those of its competitors, within the taxman’s reach.
The OECD proposals also aim to simplify existing rules for pricing internal transfers from one part of a company to another, which are currently the source of more than half of international tax disputes.
The proposals would maintain rules requiring such internal transfers to be at market prices for routine transactions so companies do not undercharge or overcharge in order to cut their tax bills.
The OECD wants to have a blueprint agreement ready in January and a more detailed agreement in June for a final deal by the end of next year.
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