On November 8th, the Organization for Economic Co-operation and Development (OECD) released its second report detailing a prospective taxation system for multinational companies in the technology industry. It suggests that internationally orientated companies should be subject to a minimum corporate tax rate in 2020. The OECD believes this approach is integral to stopping the current practice of moving profits to tax havens.
The current international income tax system was developed in the 1920s. Considering it is nearly a century old, this system unsurprisingly fails to take into account the modernized operations of the global economy. Today, the breadth of multinational corporations knows no bounds. Companies have dispersed their production and distribution networks across the globe, and can now access a global market of consumers. In the past month, the OECD has presented two strategic responses to counteract some of the adverse outcomes produced by multinational operations. If enacted, these regulations would affect major firms like Amazon, Google, Netflix, and Apple.
This past week, the second report was presented by the OECD as a part of their two-pillar approach to modify the international tax policy. The two pillars were developed to combat the challenges posed by the digitalization of the global economy. In essence, digitalization is when companies in the digital technology industry maintain a substantial influence in a national economy without having a physical presence in said country. Digitalization has allowed companies to avoid taxation and effectively rob countries of deserved state revenue. These measures also hope to eliminate the incentive programs employed by states, wherein low taxes are used to attract business.
The first pillar, which was made public in October, advocates for the right of a state to tax corporations irrespective of the company’s physical presence in the state’s jurisdiction. In other words, countries would be able to tax all intangible corporate operations occurring within their borders. This pillar aims to remedy the problem of multinationals reaping the benefits of market access without paying due taxes. The second pillar likewise addresses the issue of tax evasion by proposing a minimum tax on all global revenue made by multinational corporations. This rule would mainly provide states with a cushion against all international corporate tax avoidance. An example presented in an article by the Financial Times clarifies that under the first pillar, if it chooses to do so, France could tax Google on the sales it makes to French advertisers. But, if France decides to waive this right, or if Google was actively moving profits to tax havens, under the second pillar, Google would still be obliged to pay a minimum tax on its global revenue to the United States (the location of its headquarters).
Although the quantitative details of the pillars have yet to be laid out, these two reports provide a framework for the elaboration of more terms in the future. Interested parties are invited by the OECD to send their comments on the second report by December 2nd, and comments on the first report are due next week. The OECD hopes to reach a political agreement on both pillars in 2020.