Internet groups face global tax crackdown
A looming global crackdown on aggressive tax avoidance is set to stop internet companies slashing bills by routing profits to havens.
Plans to “restore taxation” in the countries where digital companies make their sales and base their headquarters were set out on Monday in the first international response to the worldwide political row over the sector’s low tax payments.
Targeting the sector with specific tax rules has been deemed “difficult if not impossible” because of the ubiquity of the digital economy which “is increasingly becoming the economy itself”, according to a discussion document published on Monday by the Paris-based OECD, which aims to promote sustainable development. Instead, it recommended tackling the taxation of the digital economy through broader brush changes undertaken as part of its base erosion and profits shifting (Beps) project.
The findings have big implications for the e-commerce industry, which was worth more than $13tn in 2012 and accounted for nearly a fifth of companies’ turnover in European countries such as Finland, Hungary and Sweden. They will particularly affect India, Ireland, the US, Germany, the UK and China, which account for about 60 per cent of the world’s exports of information and communication technology services.
Chris Morgan, head of tax at professional service group KPMG, said tackling the fast-moving digital economy presented an “enormous challenge” to tax authorities around the world, making it probably the hardest issue faced by the OECD.
The OECD is determined to eliminate structures popular with digital companies such as the “double Irish” which exploit differences between the US and Irish tax codes to move profits from Ireland to zero tax countries such as Bermuda. It said: “Structures aimed at artificially shifting profits to locations where they are taxed at more favourable rates, or not taxed at all, will be rendered ineffective by ongoing work in the context of the Beps project.”
Much of the impetus for the planned overhaul of international tax rules has been the dramatic growth of internet groups, now among the world’s largest companies, which can do billions of pounds worth of business in countries where they have little or no physical presence.
The report said “the fact that it is possible to generate a large quantity of sales without a taxable presence” raised questions about whether the current rules were fit for purpose in the digital economy. It put forward options for changing the rules determining whether a company has a taxable presence including instances where a company had “fully dematerialised digital activities”.
The OECD also highlighted the role played by intellectual property in digital companies saying under current rules, the legal ownership of intangible assets can easily be separated by the activities that led to their development. It has consulted on planned changes to rules concerning intangibleswhich will drastically reduce the profits that can be attributed to countries where there were no real activity, other than the legal ownership of intellectual property.
It is also considering other changes to the rules on “transfer pricing” – which determine how taxable profits are allocated between countries – that would make it easier to achieve a reasonable split of profits between countries in cases where conventional techniques did not give the correct result.
The Beps project is moving at a rapid pace in an attempt to reduce the pressure on governments to take uncoordinated unilateral measures. Comments on the discussion document must be lodged by April 14, before a September deadline for its completion.
Credit: Financial Times