G-20 must rise to the challenge of tax rules for the digital age

Officials from the Group of 20 economies agreed recently in Japan to set common international rules meant to stop tax avoidance by the world's biggest tech companies, whose profits have grown far faster than their payments into government coffers. Policymakers need to move quickly to avoid a scenario where a proliferation of unilateral rules disrupts business.

The lack of common digital tax rules could disrupt the business of tech titans such as Apple.   © Reuters

The lack of common digital tax rules could disrupt the business of tech titans such as Apple. © Reuters

"We will redouble our efforts for a consensus-based solution with a final report by 2020," G-20 finance chiefs and central bankers said in a communique at the conclusion of their June 8-9 meeting in Fukuoka.

Tackling this problem has been an ongoing challenge for the G-20. A policy paper put forward by the Organization for Economic Cooperation and Development, a group of mostly advanced economies, before the Fukuoka conference calls for revising tax rules based on physical offices and factories to take into account the rise of borderless digital transactions.

The OECD paper discusses three proposals, each differing in how they allocate profits for the purpose of taxation. A U.K.-backed proposal weighs the number of users a social media platform or other online service has. A proposal favored by the U.S. focuses on "intangibles," such as corporate brand power. An India-backed proposal is based on such factors as sales in the jurisdictions where users are.

The British proposal takes implicit aim at such American technology giants as Google, Apple, Facebook and Amazon, or GAFA. The U.S., where these companies are based, favors broadening the tax rules to multinationals in sectors beyond tech. Little sign of compromise is apparent.

While Asian countries and regions have not produced a tech titan of GAFA proportions, they are not isolated from the consequences of this debate. Any proposal that expands the tax net would threaten to catch manufacturers such as automakers in countries where their products are used with digital services.

The OECD policy paper also proposes that multinationals pay a minimum level of tax, an idea meant to thwart competition among countries to attract corporations with low tax rates.

The G-20 and OECD aim to reach an agreement on the framework for the new digital tax rules in January 2020, and compile a final report by the end of that year. Still, conflicting national interests stand in the way of a consensus on the rules, and reconciling these differences will prove no small challenge.

Even as they work with their G-20 partners on common rules, certain European nations -- notably the U.K. and France -- are moving to impose their own taxes on digital companies based on their sales and other metrics.

These steps are described as stopgaps until a broader agreement is reached. But if the negotiations drag on, businesses risk entering a thicket of unilateral rules posing the risk of double taxation and other problems.

Japan, which holds the G-20 presidency in 2019, has placed importance on the digital tax debate and should continue to play an active role in addressing the matter in 2020 and beyond.


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