Taxman eyes digital giants

MULTINATIONALS: CHECKING WAYS TO TAX LARGE COMPANIES LIKE GOOGLE, AMAZON

With Democrats elected in the US, there may be a greater spirit of cooperation.

How can large multinationals such as Amazon, Google and a host of others get away with paying very little tax on their immensely profitable global operations?

It’s a niggling conundrum that has so far taken up over seven years of tax research and consultation – and sparked much debate and argument between tax authorities at the various Organisation for Economic Cooperation and Development (OECD) platforms.

With the digital giants in mind, tax authorities have also been debating how to tax the data that consumers freely part with in order to obtain some services for free, as when downloading a “free” app.

For irritation value, a tax authority may view this as a “barter transaction”.

Technically, it is a barter transaction – and the authorities haven’t been able to come up with a method of taxing the personal data exchanged.

Besides, does that five-year-old who is downloading an app onto a cellphone care that some faceless offshore organisation is now going to track their likes and dislikes? The parents should care, but that is a different matter. And good luck to any tax authority that tries to tax the personal data exchanged in this manner.

Trying to solve the problem of allocating tax revenues derived by the digital economy to the various jurisdictions that have been watching their fiscal bases erode was given heightened attention in 2013 when it became part of the base erosion and profit shifting (Beps) project coordinated by the OECD, with G20’s blessing.

It was soon agreed that the digital economy is the whole economy, in that it doesn’t only comprise digital tech companies.

For example, a South African company leases a forklift truck from an overseas supplier, which requires specialist servicing from an offshore provider, which results in servicing fees paid offshore – most likely to a company in a low-tax jurisdiction.

The software licence fees on the software downloaded by the truck’s onboard computer are also payable to a low-taxed offshore company.

SA is one of the first countries to reach consensus on charging value-added tax (VAT) on imported services from a foreign supplier. This is a “better than nothing” tax. But VAT is payable by the consumer, which still leaves the offshore profits of the tech giants and other companies selling services untouched.

Debates have raged (tax authorities get emotional) around how to change the tax rules in order to tax a share of those offshore profits that are made in the jurisdiction of the consumer.

The overlooked item

Tax authorities seem to have no idea how large the offshore advertising giants are, or how complex their tax structures are.

The Beps project has now morphed into the Inclusive Framework and the OECD has expanded its outreach with many more countries joining the discussion.

The Inclusive Framework recently came out with a unique solution, Pillar One and Pillar Two. This is possibly the most aggressive tax reform proposal in 100 years.

However, there are convergent views on many of the key policy features. And some key technical, administrative and policy issues are still unresolved.

Because this is a global discussion, it is hampered by competing political agendas, with mainly US technical giants being the innovators and owners of valuable intellectual property and the rest of the world being the consumers. Now that the Democrats have been elected in the US, there may be a greater spirit of cooperation.

It is more convenient to agonise over Amazon and Google, and not a massive forklift truck manufacturer and service provider. Therefore, most discussions seem to focus on those companies paying very little tax on the profits made in the rest of the world. –