World’s Tax Collectors Look to Divvy Up Tech Giants’ Billions
World’s Tax Collectors Look to Divvy Up Tech Giants’
Billions
Nations to wrangle over where to assess profits of
Facebook, Google and others
By Sam Schechner, Paul Hannon and Richard Rubin Feb. 14,
2019 7:00 a.m. ET
The world’s tax collectors have been gunning for Silicon
Valley. Now they’re trying to figure out how to divide up the spoils.
For years, U.S. tech giants like Alphabet Inc. and
Facebook Inc. have shifted around profit so they pay little income tax in many
countries where they operate. More than $600 billion in profits, or 40% of
multinational profits, were shifted in 2015 to low-tax countries such as
Ireland, the Netherlands and Bermuda, according to one estimate.
But dozens of countries are now considering new taxes
aimed at the largest tech firms. That is putting pressure on the U.S. to cut a
deal that could give other countries a bigger share of American corporate
profits rather than see earnings taxed twice or become the subject of repeated
disputes.
On Wednesday, The Organization for Economic Cooperation
and Development began seeking public input on proposals, including one from the
U.S., to determine where digital companies’ profits should be allocated, and
therefore which countries get to tax them.
The public consultation process, likely to draw responses
from companies and their advisers as well as organizations seeking tougher tax
rules on corporations, is an early milestone in a process that will require
countries with competing interests to reach a consensus before taking any
coordinated action.
The OECD, a Paris-based research body that advises its
rich-country members on economic and social policy, said it aims to come back
with recommendations for countries’ tax officials in June, and wants to see a
deal by the end of 2020.
With or without a deal, one outcome is likely: Big tech
companies will pay more tax in countries where their users and customers live.
“There is a change of balance,” said Pascal Saint-Amans, the senior tax
official at the OECD.
At issue is the growing digitization of the economy.
Decades ago, when companies sold their products abroad, their profits came
mostly from manufactured goods. Digital services instead require no local
physical presence, enabling tech companies to lower their tax bills by basing
patents and trademarks—to which their profits are attributed—in low-tax
countries.
U.S. tech companies, for instance, have often sold into
countries via a unit based elsewhere, often in low-tax Ireland. The local unit
is tasked with marketing and support, and the unit that makes the sales
reimburses the local unit for expenses, leaving little taxable profit.
Countries such as France, Spain and the U.K.—frustrated
by years of slow progress in trying to get companies to report more profits
where their customers live—are planning to move unilaterally to tax tech firms.
In some cases, companies worry they could be taxed twice on the same income.
Spain’s government last month sent parliament a new bill,
nicknamed the “Google Tax,” that would slap a 3% levy on the gross revenue of
some digital services. France will later this month introduce similar
legislation.
The result: tech companies could pay tax once on revenue
from customers in a given country—and again on the profit derived from that
revenue, which may be reported in another country, such as Ireland or the U.S.
Such a scenario is pushing the U.S. Treasury Department
to offer an alternative that is focused on all companies, rather than just
digital ones. “The objective is to relieve some of the pressure from countries
to take unilateral approaches,” Chip Harter, the lead U.S. negotiator, said in
a speech this month.
Tech firms say they pay all the tax that they owe, and
have resisted unilateral national and regional taxes, such as a European
Union-wide one now being debated in Brussels.
“We run the risk of weakening the standard rules of
engagement that allow companies to work all over the world,” said Jennifer
McCloskey, vice president of policy for the Information Technology Industry
Council, which represents Amazon.com Inc., Facebook, Alphabet’s Google and
other tech companies.
But many tech executives say they are now open to a
broader reallocation of where they pay tax. Nick Clegg, the former U.K. deputy
prime minister who is Facebook’s top policy adviser, said last month that
Facebook’s tax bill, paid mostly in the U.S., is currently “unbalanced” given
that most of its users are overseas.
Companies have been trying to settle disputes with
national tax authorities under existing laws. Last week, Apple struck an
agreement with French authorities to pay additional taxes on multiple years of
corporate income that had not initially been allocated to France. In 2016,
Google settled a dispute over 10 years of back taxes for £130 million ($185
million at the time) though the deal attracted political criticism for being
too small.
At the same time, companies including Google, Facebook
and Amazon have also been changing their tax structures to declare more
revenue—and therefore potentially more profit—in the countries where they do
business. But it is unclear how much that is boosting their profit, or tax bills,
since companies also are generally booking associated costs in those countries.
The multiple proposals on the table at the OECD would go
further.
There are two main proposals for how to reallocate
profit. Traditionally, the international tax system allocates profit where
value is created—with more value assigned to where a product is conceived and
designed, rather than where it is sold.
The U.K. argues in its proposal that some of the value of
digital services comes instead from their users’ data, which can be mined, for
instance, to target ads. New tax treaties could effectively allocate more
profit to countries with large numbers of users of online services. However,
this position appears to have little support from other countries.
The U.S. argues against focusing only on digital firms
and is seeking a broader framework that would cover all industries. The U.S.
proposal would reallocate profit based on what it calls “marketing
intangibles,” which would assign value to heavy overseas marketing of products,
regardless of their use of data.
A third idea, supported by France and Germany, emulates a
new U.S. tax provision that tops U.S. companies’ taxes up to at least 10.5% if
they have low-tax foreign profits.
It isn’t going to be easy to reconcile the proposals,
officials say.
Meanwhile, some unilateral taxes may be enacted, even if
only temporarily. France says its soon-to-be-proposed digital tax could
generate roughly €500 million ($565 million) a year, but would be repealed if
the OECD comes up with an appropriate deal.
“We know that it’s because of the pressure at the
national level that things are moving internationally,” said a French official.
“We want to keep that pressure up so things continue to advance.”
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