Emerging economies will gain if OECD’s proposals to shake up global corporate tax system win the day

The Organisation for Economic Co-operation and Development (OECD) has proposed a global shake-up of corporate taxation, overturning a century of rules that had allowed digital groups such as Facebook, Apple, Amazon, Netflix and Google to shift profits around the world to minimise their tax bills.

The proposals were unveiled on Wednesday after months of behind-the-scenes negotiations. They are aimed at extracting more tax from large multinationals, whether they are digital or own highly profitable brands, such as luxury goods makers or global car companies.

The winners would be large countries including the US, China, UK, Germany, France and Italy — and developing economies. The rights of these countries to levy tax on corporate income earned from sales in their territories would increase. The companies themselves, tax havens and low-tax jurisdictions such as Ireland would lose.

The aim, the OECD said, is to create a new and “stable” international corporate tax system because “the current rules dating back to the 1920s are no longer sufficient to ensure a fair allocation of taxing rights in an increasingly globalised world”.

The OECD had indications earlier that its proposals are likely to win support from the leading global economies and this, it hopes, will persuade countries not to go down a unilateral route with domestic digital sales taxes, such as that proposed by France and the UK, which would further inflame global trade tensions.

The Paris-based international organisation is seeking agreement in principle from the Group of 20 by end-January so it can develop detailed rules.

The main problem it seeks to address is that multinationals, whether they are digital giants or have very profitable intangible brands, could shift the profits to low-tax jurisdictions, leaving little corporate tax revenue for large economies to collect despite most of their business activity taking place in these economies.

It has proposed breaking a taboo in international corporate taxation that countries only have a right to tax activities from companies that have a physical presence on their soil.

Instead, the OECD proposed that countries should have a right to tax a proportion of the global profits of highly profitable multinationals wherever these might have been shifted around the world.

It would enable France, for example, to tax an element of the sales of Google to French advertisers and the US to have greater taxing rights over the profits attributable to the brands of French luxury brand company LVMH related to sales in the US.

Emerging and developing economies would gain taxing rights over these companies for the first time because though the multinationals sell and market products widely in their jurisdictions, they often have no physical presence.

“The allocation of taxing rights can no longer be exclusively circumscribed by reference to physical presence,” the OECD said in a consultation document on Wednesday.

The proposal would give countries two new taxing rights. For consumer-facing companies and digital businesses, they would allow countries to tax a proportion of the global profits of large multinationals, ending the ability to shift profits to escape taxation.

For emerging economies in which multinationals sell but have no presence, there would also be a right to tax the distribution activities of products on an assumption of a reasonable fixed rate of return.

Countries and the affected large multinationals should have access to “legally binding and effective dispute prevention and resolution mechanisms”, the OECD proposed.

It envisaged there will be big international fights to come on the exact parameters of the new rules, which would have thresholds for size and profitability before companies would face these new rules. But officials in Paris said there is now an emerging consensus in favour of the approach.

It made the proposals as a response to the US, Europe and emerging economies seeking to promote three incompatible and contradictory solutions to the same problem.

The trick to secure the outline agreement is to ensure the world’s most powerful economies will all gain, so they will be willing to give up their proposed solutions, while the losers will be the owners of big multinational and tax havens.

A French finance ministry official said on Wednesday that the OECD’s proposal “is a promising basis for further work. The principles and the unified approach follow the approach we decided upon with the Group of Seven ministers last July in Chantilly.”

Amazon welcomed the publication of the OECD proposals on Wednesday as “an important step forward”.

“We continue to support the work of the OECD and to make an active contribution to it, with a view to achieving a common solution for the taxation of a constantly changing international economy,” Amazon said.

IT ENVISAGED THERE WILL BE BIG INTERNATIONAL FIGHTS TO COME ON THE EXACT PARAMETERS OF THE NEW RULES