No place to hide

After years of freewheeling on light taxes, a global effort is closing in on big tech to extract a pound of flesh, writes Freny Patel

It’s been an open-ended abuse and one that irks most of us who dutifully pay our annual tax charges. Big tech companies, bloated with global profits, have been minting tax-free dollars for many years, eluding any obligations via loopholes due to their limited physical presence and lack of hard assets in the jurisdictions they suckle from.

According to a Fair Tax Foundation report from May 2021, the so-called “silicon six” – Facebook, Apple, Amazon, Netflix, Google and Microsoft – grossed more than USD6 trillion in revenue in the past decade (2011-2020). Combined, they have booked profits in excess of USD1.36 trillion.

But in terms of taxes, they have paid a mere 3.6% cash tax rate on revenue and 16.1% on booked profits. This is much lower than the revised US tax rate of 21% and nowhere close to India’s corporate tax rate imposed on foreign companies at above 42%.

Countries are vying with each other to ensure that adequate taxation of profits is paid in the right jurisdiction and that their economies don’t suffer just because there is no permanent establishment on the ground.

India alone loses in excess of USD10 billion in taxes annually thanks to “global tax abuse” by multinational corporations, the majority of which are headquartered in the US, according to UK-based research and advocacy group, the Tax Justice Network.

But governments around the world have had enough and are now looking to get their pound of flesh.

Pillar one, pillar two

On 1 July, significant progress was made when members of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) met, and 130 countries and jurisdictions agreed to a two-pillar proposal to address tax challenges arising from the digitalisation of the world economy.

At the end of October, the stage has been set to finalise the remaining elements of the framework in Rome, which will see the remainder of the 139 countries that have yet to give their assent to the changes haggle over a solution to reform international taxation rules.

Pillar one is about the reallocation of an additional share of profit from the home countries of multinational enterprises to market jurisdictions, while pillar two consists of the introduction of a global minimum corporate tax, subject to tax rules.

The US has played a “tremendously important role in promoting the negotiations that have led to this breakthrough,” says Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration in Paris.

India is in favour of a consensus solution that is simple to implement and comply with, the government has said, adding: “The solution should result in allocation of meaningful and sustainable revenue to market jurisdictions, particularly for developing and emerging economies.”

China has also agreed to the international tax reform, but nine members of the inclusive framework – including a few low-tax EU member states, namely Ireland, Estonia and Hungary – have yet to accept the proposal.

The proposed global digital tax, presented to about 140 countries and regions, will be imposed on around 100 companies that have at least EUR20 billion (USD23.9 billion) in revenue, and a 10% profit margin.

“All countries will benefit from the recently reached multilateral agreement for bringing international taxation rules into the 21st century,” says Saint-Amans. The new agreement reinforces the international tax system and reduces the risk that countries will take unilateral measures that provoke trade tensions, he says.

“We have been facing a global challenge for some time – the international tax rules were no longer working,” says Saint-Amans. The proposal will allow countries to tax part of the profits that multinationals make in their markets, even when those multinationals have no physical presence.

All countries, including in Asia, stand to benefit if companies stop using aggressive tax optimisation strategies to move profits to low or no-tax jurisdictions, says Saint-Amans.