Top world economic officials are expected to agree this weekend on a major push to tighten global tax laws, touching off what could be a sensitive debate as nations vie to protect their favored industries and maintain tax breaks they’ve used to court investment.
In theory, the 40-page work plan to be endorsed by the Group of 20 economic powers in Moscow is about shaping the international tax system so it reflects how global companies now operate — and ensures that the Apples and Amazons pay a fairer share of tax in the nations where they do business.
But the more detailed discussion that will follow over the next two years or so, as countries try to develop changes to tax laws and treaties, could take on far more political tones.
The general recommendations developed by the Organization for Economic Cooperation and Development (OECD) set as a top priority the need to develop clear tax rules for the digital economy — a goal that U.S. officials are concerned could single out leading American companies. While some, such as Apple, have been taken to task at home for sheltering profits overseas, a U.S. Treasury official said there are also legitimate issues that Internet companies face as they try to sort out, for example, how to apportion expenses incurred at development labs in Silicon Valley against revenue earned worldwide.
Likewise, countries that have used tax laws to court investment — such as a recent United Kingdom tax break extended to earnings from some patents — may fight to hold onto policies they think they need to create jobs.
As the discussion plays out, “nobody wants to be first to become the inhospitable place” where tax rules have been tightened, said a U.S. Treasury official, who was not authorized to speak for the record. “At the same time, they want to be first to say come get a great tax deal.”
As the G-20 finance ministers reviewed the plan, U.S. Treasury Secretary Jack Lew said he regarded the proposal as an important step in allowing national tax systems to capture “stateless income.”
The Moscow session, to be followed by a summit among the heads of state in the fall, is being held amid heightened concern that the world economy may be slowing and that a potential shift in U.S. monetary policy could cause problems if it leads to rising interest rates.
The corporate tax issue is sensitive in this era of fiscal austerity and budget cutting in the developed world. At stake are tens of billions of dollars in revenue lost under current rules in which companies lawfully apportion profits, expenses and investments to subsidiaries across complex global supply chains to limit the taxes they pay.
Officials at the OECD, a group of mostly developed nations, say there is momentum to close many of the most commonly used loopholes.
“There is agreement on where we will be landing in 18 to 24 months. We need to do the technical work, but there is political agreement,” said Pascal Saint-Amans, director of the OECD’s Center for Tax Policy and Administration.
With nations such as Greece struggling to enforce even basic tax collection, the finances of larger nations such as Italy being undermined by a massive off-the-books economy, and technologically sophisticated nations such as the United States struggling with how to adequately tax global companies, the issue has become a central one for the G-20. At an earlier session, the group agreed to an information exchange that would crack down on tax shelters used by individuals. Bit by bit, traditional tax havens such as Switzerland, Luxembourg and the island nations of the British Commonwealth are agreeing to provide data as well.
The proposals being considered this weekend target an arcane world in which sprawling multinationals have deployed a variety of tactics to choose where and how they are taxed.
The cost of unfinished goods or materials transferred between subsidiaries for processing can be used to determine where expenses are charged or profits are booked. The expansion of the Internet and e-commerce has opened a set of issues about where economic “value” rests when an electronic product or information is beamed across borders. Complicated finance and investment arrangements might allow a company to, in effect, loan money to itself, record the interest payments as an expense that lowers profits in a high-tax jurisdiction, while recording the income on the books of a subsidiary where it is lightly taxed.
Overseas tax treaties have their roots in agreements that tried to limit double taxation, so companies that did business in more than one country would not have to pay tax on the earnings of a foreign subsidiary both abroad and in their home country.
But the situation has evolved into one of “double non-taxation.”
“This has led to a tense situation in which citizens have become more sensitive to tax fairness issues,” the OECD wrote in its paper. “It has become a critical issue for all parties.”