US blocks crackdown on tax avoidance by net firms like Google and Amazon
US blocks crackdown on tax avoidance by net firms like
Google and Amazon
France fails to win backing for tough new international
rules targeting online companies in run-up to G20 summit
The Guardian, Sunday 14 July 2013 19.28 BST
France has failed to secure backing for tough new
international tax rules specifically targeting digital companies, such as
Google and Amazon, after opposition from the US forced the watering down of
proposals that will be presented at this week's G20 summit.
Senior officials in Washington have made it known they
will not stand for rule changes that narrowly target the activities of some of
the nation's fastest growing multinationals, according to sources with
knowledge of the situation.
The Organisation for Economic Co-operation and
Development (OECD) has been told to draw up a much-anticipated action plan for
tax reform at the gathering of G20 finance ministers this Friday, but the US
and French governments have been at loggerheads over how far the proposals
should go.
While the Americans concede that the rules need to be
updated, they are understood to be pushing for moderate change. They are
believed to want tweaks to the existing wording of international tax treaties
rather than the creation of wholly new passages dedicated to spelling out how
the digital economy should be taxed.
This has put the US at odds with several G20 nations,
particularly France, which in January published radical proposals for new
concepts in international tax treaties designed to counter some of the
avoidance measures deployed by internet firms. Officials at the G20 governments
have been working closely with the OECD, a club for the world's industrialised
nations, over the proposals.
Despite opposition from the US, the French position –
which also includes a proposal to link tax to the collection of personal data –
continues to be championed by the French finance minister, Pierre Moscovici.
The OECD plan has been billed as the biggest opportunity
to overhaul international tax rules, closing loopholes increasingly exploited
by multinational corporations in the decades since a framework for bilateral
tax treaties was first established after the first world war.
The OECD is expected to detail up to 15 areas on which it
believes action can be taken, setting up a timetable for reform on each of
between 12 months and two and a half years.
Among the areas expected to take longest to produce
results is in which jurisdiction a multinational group should pay tax on its
business activity, under "permanent establishment" rules. Many
internet firms' tax structures, such as those of Google and Amazon, exploit
loopholes in this area.
While the case for broad reform of the international
rules has been made repeatedly by top politicians around the globe, in many
areas there is limited common ground on what shape new rules should take.
As a result, because of its consensus-driven nature, the
OECD action plan is expected to contain watered-down recommendations in some
areas.
Nevertheless, the OECD has already made clear it regards
aggressive tax engineering by internet multinationals to be among six "key
pressure areas" it will address.
In a report to the G20 in February it said:
"Nowadays it is possible to be heavily involved in the economic life of
another country, eg by doing business with customers located in that country
via the internet, without having a taxable presence therein.
"In an era where non-resident [corporate] taxpayers
can derive substantial profits from transactions with customers located in
another country, questions are being raised as to whether the current rules
ensure a fair allocation of taxing rights on business profits, especially where
the profits from such transactions go untaxed anywhere."
However, tensions are thought to have surfaced in the
OECD working party looking at how to address the permanent establishment rules
in the light of the burgeoning internet economy. This working party is being
jointly led by US and French teams – representing the extremes of opinion among
G20 nations.
France has been among the most aggressive in responding
to online businesses that target French customers but pay little or no French
tax. Tax authorities have raided the Paris offices of several firms including
Google, Microsoft and LinkedIn, challenging the companies' tax structures.
In the case of Google, in 2011 French tax officials demanded
€1.7bn (£1.47bn) in back taxes. In February this year Google settled the case,
agreeing to paying €60m to help France with digital innovation and other
issues. The French president, François Hollande, said it was "a model for
effective partnership and is a pointer to the future in the global digital
economy."
In the UK, outcry at internet companies routing British
sales through other countries reached a peak in May after a string of
investigations by journalists and politicians laid bare the kinds of tax
structures used by the likes of Google and Amazon.
Margaret Hodge, the chair of the public accounts
committee, called Google's northern Europe boss, Matt Brittin, before
parliament after amassing evidence on the group's tax arrangements from several
whistleblowers.
After hearing his answers, she told him: "You are a
company that says you do no evil. And I think that you do do evil" – a
reference to Google's corporate motto, "Don't be evil".
Last month, the Treasury minister David Gauke told
backbench MPs who had called a short debate on multinationals and tax avoidance
that the government did still hold out hope that shortcomings in international
tax guidelines – specifically in what constitutes a business taxable in the UK
under permanent establishment rules - would be addressed by the G20.
"We are leading the way in encouraging the OECD to
look at what needs to be done to ensure that the tax rules are brought up to
date for the internet world," he said.
Writing in the Observer in May, the Google chairman, Eric
Schmidt, appeared to drop his previously unapologetic defence of existing
international tax rules.
In the face of building public anger, he conceded that
rather than taking up tax incentives offered by governments, his firm and
others had built tax structures that had not been foreseen by those who drafted
the rules decades ago before the advent of the internet.
"Given the intensity of the debate, not just in the
UK but also in America and elsewhere, international tax law could almost
certainly benefit from reform," he wrote, describing this week's OECD
action plan as "hotly awaited".
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