OECD proposes new tax rules based on undetermined revenue threshold

It proposes for the physical locations of companies to no longer be the key factor for determining tax.

The Organisation for Economic Cooperation (OECD) on Wednesday unveiled its proposal to update tax rules applicable to multinational tech companies in order to address the challenges of a globalised, digitalised economy.

The proposal [PDF] takes on a "unified approach", by merging the commonalities of previous proposals, in an attempt to bring countries together despite their conflicting approaches to tax. 

"This plan brings together common elements of existing competing proposals, involving over 130 countries, with input from governments, business, civil society, academia, and the general public. It brings us closer to our ultimate goal: ensuring all multinational entities pay their fair share," said OECD secretary-general Angel Gurría. 

The proposed changes would redefine the nexus -- the key factor for determining where a company is taxed -- so that it is largely based on sales instead of where the company has a physical presence. According to the proposal, a company would be taxed by a country if its sales exceeded a certain threshold in the market, with the specific amount yet to be finalised.

The revenue threshold would take into account certain activities, such as online advertising services, which are directed at non-paying users in locations that are different from those in which the relevant revenues are booked. This would also give countries the right to tax a portion of the "deemed non-routine profits" that are associated with the sales, such as streaming services. 

Historically, the nexus for where a company is taxed has been the physical location of companies, which allowed tech companies to pay less taxes by basing their offices in jurisdictions with lower tax rates

The new rules would target "large consumer-facing businesses" that generate annual revenues from supplying consumer products or providing digital services, even if they do not have a permanent established business presence there. The OECD said it would consider the €750 million revenue thresholds that some countries have adopted for their reporting requirements.

The proposed changes are an attempt to recognise that the current global economy has become increasingly digitalised, the OECD said, as businesses can now project themselves into the daily lives of consumers without necessarily having a traditional physical presence -- an office -- in the market.

The proposal follows on from the G20 in June agreeing to plans to have technology giants such as Facebook and Google pay more taxes.

Governments have been pushing for the OECD to make progress on an international tax framework for multinational tech companies as it has become an important factor for resolving trade issues between countries. 

Specifically, the French government in July passed laws to apply a tax on tech giants which was immediately met with disapproval from US President Donald Trump, who took to Twitter to both complain and promise a retaliation against France. The laws require tech companies that make €750 million globally and €25 million in France from public advertising and digital intermediary services to consumers to pay a 3% tax of total annual revenues.

Since the passing of the French tax laws, the countries have agreed on a compromise whereby the tax will continue to be applied to tech giants, but France has promised to scrap the tax -- and any taxed amounts paid by US companies would be deducted -- once the OECD creates an international tax framework.

Other countries, such as the UK, have also implemented tax laws that address large multinationals. The UK government's tax, nicknamed the Google Tax, was implemented in 2016 after the search engine giant was ordered to pay £130 million in back taxes. Australia has also implemented similar tax laws, while New Zealand is currently in the process of doing the same in order to "more effectively" tax the digital economy.  

The G20's finance ministers will meet to discuss the proposal on October 17. 

The OECD is also seeking public consultation for the proposal until November 12, and wants to have an outline of the solution by January 2020, with a finalised consensus solution by the end of 2020.

"Failure to reach agreement by 2020 would greatly increase the risk that countries will act unilaterally, with negative consequences on an already fragile global economy. We must not allow that to happen," Gurría said.

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