Facebook, Google, Amazon, and other large technology firms face criticism for cutting their tax bills by booking profits in low-tax countries regardless of the location of the end customer. Such practices are seen by many as unfair.
The new rules would mean higher tax burdens for large multinational firms but would also make it harder for countries like Ireland to attract foreign direct investment with the promise of ultra-low corporate tax rates.
“We welcome the recent progress on addressing the tax challenges arising from digitization and endorse the ambitious program that consists of a two-pillar approach,” the draft communique said. “We will redouble our efforts for a consensus-based solution with a final report by 2020.”
Britain and France have been among the most vocal proponents of proposals to tax big tech companies that focus on making it more difficult to shift profits to low-tax jurisdictions, and to introduce a minimum corporation tax.
Of course, this put the two countries at loggerheads with the United States, which claims that US Internet companies are being unfairly targeted in a broad push to update the global corporate tax code.
“The United States has significant concerns with the two corporate taxes proposed by France and the UK”, US Treasury Secretary Steven Mnuchin said on Saturday at a two-day meeting of G20 finance ministers in the Japanese city of Fukuoka. However he said later that there was a strong consensus about the goals of tax reform.
“So now we need to just take the consensus across here and deal with technicalities of how we turn this into an agreement.”
Big internet companies say they follow tax rules but have paid little tax in Europe, typically by channelling sales via countries such as Ireland and Luxembourg, which have light-touch tax regimes.
The G20’s debate on changes to the tax code focus on two pillars. The first is dividing up the rights to tax a company where its goods or services are sold even if it does not have a physical presence in that country.
If companies are still able to find a way to book profits in low tax or offshore havens, countries could then apply a global minimum tax rate to be agreed under the second pillar.
The path to a final agreement is still fraught with difficulty because of disagreement on a common definition of a digital business and on how to distribute tax authority among different countries.
Several finance ministers at the G20 meeting said they needed to act quickly to correct unfair corporate tax codes or risk being punished by voters.
“We cannot explain to a population that they should pay their taxes when certain companies do not because they shift their profits to low-tax jurisdictions”, French Finance Minister Bruno Le Maire said during the panel discussion.
