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Tech Giants Shift Profits to Avoid Taxes. There’s a Plan to Stop Them.

Many countries, particularly those in...

Many countries, particularly those in Europe, have moved to curb that practice by approving new taxes on large multinational companies that sell to their citizens but pay little or no tax to their countries. France approved a new digital tax this year that would hit large American tech companies like Google. The Trump administration responded by threatening tariffs on imported French goods, like wine, before the countries agreed to pause their plans in hopes of finding a multilateral agreement through the Organization for Economic Cooperation and Development.

Wednesday’s release brought an 18-page framework plan[1] that officials hope will form the basis of an international agreement on digital taxation as early as next year. That framework would fundamentally alter how and where companies that operated across national borders were taxed, though it leaves the details of those tax rates to future negotiators. It suggests new rules on where companies should pay taxes — largely based on where their sales occur — and on which profits are subject to taxation.

“In a digital age, the allocation of taxing rights can no longer be exclusively circumscribed by reference to physical presence,” the framework states. “The current rules dating back to the 1920s are no longer sufficient to ensure a fair allocation of taxing rights in an increasingly globalized world.”

The framework applies only to multinationals with annual revenues of about $825 million or higher. It excludes manufacturing suppliers and resource extraction companies, like oil companies.

As it stands, the framework appears to be a victory for large, consumption-heavy countries like the United States, China and much of Western Europe, and a loss for so-called tax havens, like Ireland. Advancing the negotiating process is a win for large multinationals, even though a final deal could put them on the hook to pay more in taxes, because the alternative appears to be a series of country-by-country digital taxes that could be expensive to comply with.

References

  1. ^ 18-page framework plan (www.oecd.org)

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