Paying taxes in the digital economy

 •  Filed under fiscal policy and taxation, digital markets

Tax worldwide profits

A policy proposal from the Economist:

Keeping [the current] approach, but toughening up the policing, means creating yet more rules—and loopholes. Better to think of each firm as a single entity. Then countries could ... agree to share the tax on companies’ worldwide profits according to a formula that takes account of their sales, employees, assets and so on.

An overlooked aspect of globalization?

In his keynote speech U.S. Economic Statecraft and the Global Order, Lawrence Summers has asked:

Why do we devote so much effort to the protection of the intellectual property of a small number of corporations whose owners are only in part American and whose products are produced with minimum American labor input, while treating tax cooperation that avoids a race to the bottom in taxation or in financial regulation as a kind of second-order issue [emphasis added] not worthy of the same degree of attention that is devoted to trade agreements? This seems to me to be a legitimate question that the critics of trade agreements ask.

Recent developments

Mutual suspicions make cooperation difficult: Tax Conflict Splits U.S. and EU Over Apple, McDonald's Probes - Bloomberg Politics:

Lew wrote Juncker Thursday saying the tax probes are hurting international efforts to crack down on corporate tax evasion. He said European Union inquiries are creating “disturbing international tax precedents” and seem to target U.S.-based firms without sufficient justification. The letter raises the U.S. concerns to a higher level, building on previous comments from a senior Treasury tax official.

The Guardian reports that “US multinationals such as Google, Facebook and Amazon will be forced to publicly disclose their earnings and tax bills in Europe, under legislation being drafted by the EU executive.”

Economist reports:

Google won’t be the last firm targeted. Facebook is said to be resisting efforts to recoup back tax from 2010-14. The social-media firm paid just £4,000 in British corporation tax in 2014. The companies argue that they comply with all relevant laws. Maybe so, but only because the laws have failed to keep up with the globalisation of business. The mishmash of national laws and bilateral treaties covering corporate taxation dates back to when manufacturers ruled.

... Ireland is banning the notorious “Double Irish”, a structure that has helped Google and others shave billions off their tax bills.

FT editorial: Google’s tax deal should face a proper legal test

Google’s UK operation brings in revenues of £4bn a year. Apply the same 25 per cent margin the business achieves worldwide and you accrue £1bn in profit. Plug in £30m and that is a corporation tax rate of a piffling 3 per cent. George Osborne, the chancellor, was unwise to describe this paltry and opaque increase as a “major success”. Far from being a cause for celebration, the outcome should prompt some serious reflection about the way the UK handles corporate tax.

The mood in 2014 was described by the FT like this:

Tech companies, including Microsoft and Amazon, were said to face similar bills in France that amounted to about €5bn. One US multinational executive decried this as “mafia-style shakedown tactics” — but by now international co-operation to tackle tax avoidance was gathering momentum. The OECD began drawing up proposals to tackle “profit shifting”. The UK joined five other countries — Australia, Canada, France, Germany and Japan — to share information about the tax strategies of high-tech groups.