The G20’s finance ministers agreed this past weekend to go ahead with its plan to impose a digital tax on large tech multinationals.
During their meeting in Fukuoka, Japan, finance ministers of the world’s largest economies opted to close the loopholes available to large multinational tech companies such as Google, Apple, Facebook and Amazon (GAFA) and used to circumvent some of their corporate tax obligations.
As explained by Reuters, the G20’s plan will rely on the application of two main pillars, which the organization expects to have finalized by 2020.
The plan’s first component will “divide 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 this fails to collect the correct tax from pertinent companies, then the second part of the plan will kick in and “countries could then apply a global minimum tax rate to be agreed under the second pillar.”
There are several points of contention, however, on how exactly to tax the GAFA group of companies.
As highlighted by The Financial Times, “One idea is to calculate the “non-routine” profits made by a digital company,” while “Another approach is to use existing calculations of profits and then reallocate part of them to different countries.”
“A third possibility,” the Financial Times explained, “is to specify a ‘baseline profit’ for marketing and distribution in any given country.”
Overall, however, the meeting led to the important decision to move forward with the taxation of the digital economy.
The event’s final communiqué said: “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… We will redouble our efforts for a consensus-based solution with a final report by 2020.”
Finance Ministers & Others Speak Out on G20’s Digital Tax Decision
Plenty of opinions were shared by the many finance ministers and other actors involved in the negotiations.
“At the moment we have two pillars and I feel we need both pillars at the same time for this to work,” Japanese Finance Minister Taro Aso said, adding that “the proposals are still a little vague, but they are gradually taking shape.”
However, another Japanese finance ministry official who was in attendance remarked that not all participants fully embraced the two pillars.
“There are differences between the United States and United Kingdom over pillar one. As for pillar two, there are also differences in views within the Group of 7,” the official said.
Still, most finance ministers were on board with the plan and agreed that there’s an overall need to work together to iron out the details and effectively tax digital tech companies.
Pierre Moscovici, who heads the EU’s Commission for Economic Affairs, said, “I see a high degree of willingness to work together on this issue that few could have anticipated a year ago.”
“We truly believe that the tech giants, which are not only the GAFA, must pay their fair share of tax where they create value and profits,” Moscovici concluded.
The UK’s Philip Hammond agreed and said, “Global tax rules should still aim to tax businesses based on where they create value, not just on where they make sales.”
Hammond also remarked, however, that countries “need to ensure the reformed international tax system continues to reward countries for creating attractive business environments.”
On the other hand, French Finance Minister Bruno Le Maire urged the G20 countries to move forward quickly with this plan.
“We have to hurry up," said Le Maire. “The right schedule is to find a compromise by the end of this year.”
Steven Mnuchin, the US Secretary of Treasury, while disagreeing with parts of the proposal being pushed to tax the digital economy, commended the G20’s overall efforts.
“I would say the US has significant concerns with the two current taxes that are being proposed by France and the UK but let me give them some good credit for proposing them in the sense (that) they have created an urgency to deal with this issue,” said Mnuchin.
“Although I don't like them, I do appreciate the impetus for these issues,” he said, adding that it’s pointless to pursue “a fragmented tax approach” as it’s “not good for any of us.”
“We are not looking to rewrite the entire tax code, but we do need to look at the balance between what may be the issue in digital and perhaps how this new environment affects non-digital companies as well,” Mnuchin concluded.
What are your thoughts on the OECD and G20’s two-pillar plan to tax the digital economy? Will this ultimately work?
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