The International Tax System enters the digital age in 2020

A photo from the G-20 meeting in 2019

The G-20 has agreed on the need to tax digital businesses, amid claims that digital giants, including Apple and Amazon, are not paying their fair share of taxes.

It is an issue of growing concern that such businesses are growing in size and scope without benefiting the State Treasury. Although there is still no agreement on what to do, financial officials have agreed that the G-20 and the Organization for Economic Co-operation and Development (OECD) will work together to design common rules to close the tax gaps of global technology companies by 2020.

World Digital Tax

There has been talk of imposing a new tax on technology companies such as Facebook, Apple, and Google in recent years. Many countries feel they are paying relatively little taxes on their huge revenues. The need for such a tax has been confirmed by a draft of G-20 statement, last Saturday.

The G-20, composed of the world’s largest economies, is committed to accelerating its efforts to raise taxes more effectively than multinationals digital companies. The group is moving ahead with plans to close international gaps used by technology giants to cut tax bills.

The group said it support the ambitious legislation known as “Digital Taxation” and would redouble its efforts to reach a consensus solution by a final report by 2020.

The initiative was discussed last Thursday at a G20 ministerial meeting in Fukuoka, Japan, where the world’s leading industrialized countries came out in favor of a new tax model adapted to the digital economy.

Representatives of Japan, the United States, China, France, and the United Kingdom supported the amendment of their current regulations to implement a tax policy based on the basis of its revenue and the number of users in each market.

“The G20 leaders agreed to work towards a consensus solution to address the effects of digitization on the international tax system,” Japanese Finance Minister, Taro Aso said.

Fair Taxation System

The head of OECD, Angel Gurria, said that the initiative will include two main pillars: the first is based on ending the tax principle according to the physical presence of the country, while the second aims to stop tax competition and turn companies into countries with lower taxes.

“We will continue our cooperation for a just, sustainable, and modern international tax system, and welcome international cooperation to promote pro-growth tax policies,” the group said in a draft statement published ahead of the G-20 meeting in Fukuoka. The group is trying to set up global tax bases based on where these companies achieve their sales compared to the location of their offices.

The G-20 group include Argentina, Australia, Brazil, Britain, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United States and the European Union.

According to the group, the new legislation consists of two important elements; the first is to tax companies based on the place of sale of their goods and services instead of where the company is located, and secondly it will impose a global minimum tax rate even if a company transfers its sales to a country that imposes Lower taxes, such as Luxembourg, so the benefits will be limited.

Referring to recent OECD proposals on tax rules in the digital age, the statement says: “We welcome the recent progress in addressing the tax challenges posed by digitization and support the ambitious program of work,” adding: “we will redouble our efforts to reach a consensus solution through a final report by 2020”.

Global Breakthrough

The G-20 will be an important starting point for the OECD goal of approving the new tax policy by the end of next year, after the G-20 commissioned the research body to find a technical solution to the problem of heavy weights on the Internet that benefits from low-tax jurisdictions such as Ireland to pay a small amount of its profits and revenues in other countries.

The G-20 countries plan to impose a new tax policy based on the size of the company’s business in a country rather than its headquarters. The OECD road map is based on two main routes: one to determine where to pay taxes and the other to ensure minimum taxes.

The United Kingdom and France already impose taxes on digital services, based on local sales of search engines and digital markets, but because they target sales rather than profits, there is a risk of double taxation. While both pledged to eliminate their digital taxes once reaching an agreed G-20 approach. There are also significant differences to resolve with the United States.

In this context, the OECD has recommended a two-pronged approach to taxing digital giants. The first approach focuses on the allocation of tax rights by reviewing the allocation of profits. While the second approach is to establish rules allowing the judicial authorities to “refund the taxes” in the event that “Other jurisdictions have not exercised their basic tax rights or that the payment is subject to low levels of the actual tax”.

Application requirements

There is an increasing pressure to make the global tax solution come into effect after the collapse of the EU’s proposed digital tax, earlier this year in the light of the Nordic bloc’s opposition. The EU plans to reopen the debate if the planned reforms of the OECD. Separately, the UK has submitted its plans for a “digital service tax” in light of the OECD’s “slow” progress towards tax reform, due in April 2020.

The amount of tax paid by the world’s largest technology companies has long been a source of frustration for both the head-office countries and those where their end customers are located. In 2018, a report claimed that Google saved up to $3.7bn in taxes in 2016 from the transfer of funds between Ireland, the Netherlands, and Bermuda.

In 2017, it was reported that Apple had moved two of its branches from Ireland to Jersey after the EU pressed Ireland to close the tax loopholes, and in the meantime, Amazon did not pay any tax on federal companies at all in 2018 despite its profit of $11.2bn.

Despite the importance of adopting the digital technology approach, there is still a long way to achieve consensus on these new regulations, where the United States is concerned that any digital tax can discriminate against local technology companies, while members of the G7 disagree with the second corner of the legislation.

In order for the G-20 to apply the new approach to controlling tax evasion, it will need to manage a number of difficult issues, including the definition of digital work, and the problem of having a final say on corporate taxes when it extends to multiple countries.