Taxation of multinationals: a crucial step taken
For the OECD, the challenge is to find a better way to tax the profits of multinationals, which too often escape taxation in the countries where they operate.
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The OECD took a crucial step towards a global agreement on the taxation of digital giants (Gafa) this week with the endorsement by nearly 130 countries of its roadmap, and is now awaiting “political support” from the G20. During a meeting held on Tuesday and Wednesday at the headquarters of the Organization for Economic Co-operation and Development (OECD), 129 countries endorsed the “Roadmap to solve the tax challenges raised by the digitalization of the economy”.
But the process still looks long. A new step could be taken in Japan, on June 8 and 9, with a presentation of the work program at the G20 finance in Fukuoka. Then the subject should be discussed again at the informal meeting of the G7, under the French presidency, on July 17 and 18 in Chantilly. The conclusion of a final agreement on this highly sensitive issue, because it affects the sovereignty of States, is not expected before 2020. Story of an international tax reform started ten years ago.
- 2009: attack on bank secrecy
“Until 2008, very little was happening in the area of international taxation. Tax treaties were aimed at eliminating double taxation (of companies), and that's about all that existed in terms of tax cooperation, “recalled, in early April, the Frenchman Pascal de Saint-Amans before the deputies of the Finance Committee of the National Assembly. The financial crisis has changed the situation. States first tackled tax evasion, particularly by individuals, by drawing a line under bank secrecy, a process that took years. The tax authorities of 130 signatory countries now automatically exchange information on the state of the bank accounts of their nationals. Masses of information that must now be exploited to track down those who try to conceal money in order to escape taxation.
- 2012: first battle to impose more multinationals
Then the gaze turned to corporate taxation, starting in 2012. tax havens where they had no activity and, on the contrary, locate all their expenses in the countries where they carried out their sales, their research and their development, where they had their headquarters, in order to ultimately pay little tax there “, told Pascal Saint-Amans, the gentleman fights against the optimization of the OECD, in front of the elected officials. At the end of 2015, the OECD proposed 15 measures, gradually adopted by states, to tackle the main holes in the global tax racket. According to him, this “base erosion and profit shifting” program, dubbed BEPS, has “produced quite significant changes”, but which unfortunately cannot be quantified before 2020.
- 2015: US Blocks Digital Tax Reform
But you would have to be blind to think that all the problems have been solved. There are countless attacks against the famous Gafam, Google, Apple, Facebook, Amazon and other Microsoft, these digital multinationals accused of not paying their fair share of tax in Europe. Take the example of Google (similar to that of Facebook). It is always enough for the American multinational to locate its teams responsible for selling advertising in France, thanks to the data of the user of the search engine, in a country with low taxation – Ireland, in this case – to avoid not have to pay taxes to the French tax authorities up to the profit nevertheless made in France. Pascal de Saint-Amans readily acknowledges this: four actions of the BEPS project have indeed “proved to be disappointing”, starting with that relating to the taxation of digital companies. For the good and simple reason that the United States got in the way. Barack Obama's America has put “a kind of veto on any change in the rules that would have made it possible to apprehend more taxable mass in countries where digital companies do business without being physically present there”, explained the French expert of the OECD in charge of the project, still before the deputies. Hence the lack of progress in this area in recent years. The rules of international taxation invented by a group of economists in 1928 provide that a foreign company is only taxable in a territory when it has a “permanent establishment”, which refers to a physical presence. .
- 2018: when Trump reverses Obama's position
Since then, the United States has turned around, with the arrival in business of… Donald Trump! The unilateralist American president in many areas is much more open than his predecessor to reforming international taxation. The change of American footing stems from its promised tax reform during the campaign, explained Pascal de Saint-Amans. The American president succeeded in imposing on Congress a reduction in the corporate tax rate from 35% to 21%. Except that it is very expensive for the federal budget in lost revenue. So the Republican-majority Congress wanted to compensate. So he found a way to broaden the corporate tax base.
One of the solutions found is to apply a minimum tax: if American companies make profits abroad below the minimum rate of 13.125%, they must pay the difference. A mechanism with the acronym that fits: “Gilti”, like the English word “guilty”, “culpable” in French. It is this idea which is today taken up in international discussions to apply it on a large scale, but in an orderly fashion, under the impetus of France and Germany, it is argued in the entourage of the Minister of Economy and Finance Bruno Le Maire. Trump's US “told its OECD partners willing to tax Google, Facebook and others that they were right. I remember the Chinese delegate checking the translation given to him”, underlined Pascal de Saint-Amans, who seemed to be amazed himself. The United States is now pushing to strengthen the right to tax “market” countries, where the consumers or service users are, not only for digital companies but for all companies! “Look, it's the same problem for McDonald's, Nike or Starbucks! “The American delegate would have exclaimed, according to Pascal de Saint-Amans.
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How to explain such a reversal of the United States? Not out of pure altruism vis-à-vis countries like France, of course. “The United States has a structural trade deficit; their production is therefore less than their consumption. Consequently, it is in their interest, especially in the absence of VAT, to give corporation tax the broadest possible base, in this case consumption rather than production, and to consider that it is necessary remunerate the market more than production. But transfer pricing rules, as vaguely fixed by BEPS, say that a company's residual profit – what remains after the various entities have been paid – goes where the intellectual property is located. , in principle rather where the company has its headquarters. In reality, alas, it will rather not be in a tax haven, but in a small open economy – like that of Switzerland, the Netherlands or Ireland. The United States, because it is fundamentally their interest, consider that this rule must be changed and are ready for multilateral negotiation”, deciphers Pascal de Saint-Amans.
- 2019: France and Germany call for minimum taxation
It is therefore once again under the impetus of the United States that discussions on the fight against tax optimization of multinationals were held this week, under the aegis of the OECD. After a very theoretical report produced by the OECD in 2018, “we are getting into the concrete”, we welcome in the French camp.
Pushed in particular by France and Germany, the first pillar of the discussion is based on the principle of minimum taxation, in the American wake. But it must be done in a coordinated way and not unilaterally, as the United States has done. “We must not be 40 States to tax the same subsidiary at a minimum rate”, we explain to Bercy. This should make it possible to circumvent the problem of the existence of tax havens, which cannot be forced to change their taxation. Such a rule “will attenuate the tax interest in going to a tax haven, even if it will not discourage going there”, acknowledges a source at the Ministry of Finance.
- Towards a new distribution of rights to be taxed?
The second pillar of the discussion, much less consensual, relates to a new distribution of the rights to be imposed on multinationals. France, like the United Kingdom, wants to tackle digital companies as a priority. It has also done so at the national level by introducing a temporary tax on the turnover of large digital companies, pending a more lasting international solution.
The idea is to tax where targeted advertising was shown to the consumer rather than where Facebook or Google marketing teams sold the space to advertisers. Several technical solutions are on the table to achieve this. One is to determine the “overall residual” profit made by a company located, say, in Ireland, and operating in the rest of Europe. This profit would be allocated and taxed according to a distribution key according to the number of users in each country or the turnover achieved in the countries. But the United States and China do not want to target only certain companies. They want to broaden the discussion to other types of companies, in particular distribution, considering that tomorrow all the value will come from data, including for companies that are not digital companies. France is not, it seems, too hostile.
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This would involve taxing more the countries where the consumption takes place rather than where the company's intellectual property is housed. This would be an upheaval, the consequences of which are difficult to measure for the tax revenues of the various States. In this very theoretical model, to put it simply, France would lose rights to tax its own multinationals established abroad, but conversely would recover more taxes on the digital sector but also on traditional activities because it is a country of 70 million consumers of traditional products from subsidiaries of large American groups. For Paris, the gain is not obvious, specified Pascal de Saint-Amans. “A country like France legitimately raises the question of the budgetary impact of granting more taxing rights to large markets, such as China, India or the United States. We are in the process of carrying out impact studies to see what the distribution of the rights to tax would be. An agreement is far from certain. Some countries could block, in particular small open economies such as Denmark, Switzerland, Singapore, which have in common to be small open countries. They fear losing a great deal if the rights to tax are reallocated to the major consumer countries.