Tax our tech and we’ll blacklist your bubbly
“UNACCEPTABLE”, harrumphed France’s finance minister. Worthy of a “pugnacious” response, thundered a colleague. The object of this Gallic ire was the Trump administration’s threat this week to impose 100% tariffs on some of France’s tastiest exports, from cheese to champagne, in response to its government’s planned digital-sales tax.
Corporate tax has become a major source of transatlantic tension since various European countries began to cook up levies to capture more revenue from the likes of Google and Facebook, whose effective European tax rates often look suspiciously low—sometimes a mere percent or two. France has gone furthest, with a 3% levy on sales that will be backdated to the start of 2019. Britain’s version, levying 2%, is set to kick in next April. America’s Treasury calls such taxes “discriminatory”.Both sides accept there is an underlying problem. The IMF reckons governments lose at least $ 500bn a year from multinationals shifting profits to tax havens. This siphoning has become a gush with the growth of tech and other businesses whose assets are mostly intangible, and thus easier to move.
Most large economies—including America—accept that the treaty-based international corporate-tax system, which dates back to the 1920s, needs a refit. But negotiations, led by the OECD, have dragged on for six years. Frustrated by the delays, the Europeans began working on unilateral taxes (as well as a European Union-wide one, which has gone nowhere), aiming to force the issue in multilateral talks. They view their taxes as stopgaps that would be scrapped if a global deal is reached.
The OECD, prompted by the G20, has stepped up efforts to forge one by the end of 2020. It wants new rules that better capture profits of firms that do business in places where they have no physical presence, and an agreed minimum global tax rate for multinationals.
Even before anything has been agreed, however, critics are circling. A French assessment found that the OECD plan would bring in little extra revenue. ICRICT, a group of economists focused on corporate tax, laments the OECD’s reluctance to abandon transfer-pricing, under which multinationals should account for cross-border transactions between subsidiaries at market rates, as if they were unrelated to each other—a principle built on fiction, they complain.
ICRICT and the G24 group of developing countries, which includes China and Brazil, are among those who would prefer a new, “unitary” approach, whereby companies’ worldwide operations would be lumped together, and taxing rights divided up according to a range of metrics, including the location of staff and customers. But any global deal, if one can be agreed, is likely to be more modest. Those hoping for a radical overhaul should keep the champagne on ice.