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Breakingviews - Path out of global tax combat is slowly emerging

WhatsApp and Facebook messenger icons are seen on an iPhone in Manchester , Britain March 27, 2017.

LONDON (Reuters Breakingviews) - A long slog to make international corporate tax rules fit for the digital age is nearing a breakthrough. Obstacles remain, but a path that gets around them is slowly emerging.

The key development came late on Wednesday with a new U.S. proposal for how taxation rights should be allocated between countries. President Joe Biden’s administration wants about 100 of the world’s largest companies, including technology giants like Facebook, to pay some tax based on where sales are generated rather than just where profits are declared, the Financial Times reported.

That sounds similar to a blueprint proposed last year by the Paris-based Organisation for Economic Co-operation and Development, which is overseeing negotiations between around 135 governments on the corporate tax revamp. When a French company buys Google search advertising to target a local consumer, for example, the proposed rules would mean that France’s finance ministry would get a bigger cut of the price paid to Alphabet rather than watching much of the profit flow to Ireland and the United States.

The new proposal would probably also catch consumer groups like LVMH, which could owe some tax on their U.S. sales. But digital companies account for a sizeable 30% to 40% of the corporate profits under discussion at the OECD, a person familiar with the talks told Breakingviews.

Biden’s concession could unlock the much bigger prize of a minimum global corporate tax rate. Most major governments participating in the OECD talks agreed that this was necessary, but U.S. intransigence on digital taxation under former President Donald Trump halted progress. New momentum means possible holdouts like Ireland, the Netherlands or Luxembourg, would have little hope of avoiding a hit. Countries can effectively impose minimum taxes unilaterally by demanding companies hand over the difference between this minimum and the corporate levy that the firm is already paying. By getting Britain, France, India, Germany and others on board, Biden can corner the havens.

Internal politics could scupper the talks. French President Emmanuel Macron will try to sell Biden’s new proposal as a major U.S. retreat, while the American president will have to argue the opposite in Congress. One or both of those efforts may fail. But for the first time in a while, the heads of major Western governments seem to be on the same page on global corporate tax reform. That’s already progress.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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