Can’t Wait: “Google Tax” Marching the World while the OECD is Finalizing the Unified Approach

By Natalia Pushkareva


While the OECD is finishing its work on the Unified Approach introduced in late 2019, multiple countries around the world, including developing ones, are refusing to wait, introducing provisions allowing them to tax multinational enterprises’ (MNEs) profits now. This tendency signals rising independence in making international tax-related decisions and makes it clear that ensuring international consensus on taxing MNEs might be even more challenging than expected.

Technological developments of past decades together with globalization presented the international tax system with the challenges it never faced before, so complex that efforts of a single country would not be enough to address them. Having a reputation of the world’s main tax forum, the OECD has been working on such challenges for several years now, first in a context of “harmful tax practices”, and in recent years as part of the Base Erosion and Profit Shifting (BEPS) project. Being an epicenter of global tax policy work, the OECD has been arguing in favor of multilateralism and a need for a common effort of jurisdictions to fight against international corporate tax avoidance. It is believed that only a common effort might be effective against harmful international tax competition and engender mutually beneficial cooperation making countries – and ultimately the whole world – better off by returning significant funds to national systems of public finance where they belong. A need for international cooperation in tax became a true global consensus in recent years, widely supported by the international community.

Leaving aside discussions about possibility of achieving agreement on the way MNEs should be taxed and designing a perfectly fair international tax system, I would like to draw readers’ attention to something else, namely to consistency of behavior of some actors involved in international tax policy making, or rather a lack of it. Notwithstanding ongoing effort on building cooperation in international tax, it seems like we are still quite far from achieving real coordination and creating a fairer system of international taxation. While proclaiming desire to cooperate, countries are still motivated by self-interest when making decisions on their tax policies.

For instance, last year the Tax Justice Network released a research document arguing that even when observable actions of a country seem to align with the idea of cooperation in fighting tax avoidance, country’s actions and policies less observable to general public can actually facilitate increasing global economic inequality. In particular, evidence shows that some developed jurisdictions arguing for coordination and fair taxation are in fact abusing taxing rights of developing countries through dictating terms of Double Tax Treaties concluded between them.

Actors involved in international tax policy making deviate from international cooperation in a more open way when the benefits of their actions are rather immediate, personal and significant, and the costs are remote in time and not born by themselves, for example in face of elections. For example, the United Kingdom has been leading debate on creating a fair international tax system and enhancing international cooperation on tax matters for years, however, after Teresa May’s resignation all major candidates for the British PM office proposed making the UK tax system more “competitive” by dumping tax rates, abolishing VAT, offering additional benefits to business, etc. in their attempts to win electorate’s sympathy.

Finally, issues of cooperation can be illustrated by a process of finding an optimal way to tax multinational digital business. The OECD is working on a global solution for the issue, and in autumn 2019 it presented a Secretariat Proposal for a “Unified Approach” consisting of Pillar I introducing a brand-new three-steps formula for taxing consumer-facing highly digitalized business and Pillar II introducing Global Anti-Base Erosion measures (GloBE) i.e. global minimal tax.

The OECD is operating under significant political and public pressure and facing really tight deadlines: Organization aims to implement both Pillar I and Pillar II in 2020 already. One of the factors making the OECD to hurry is a series of unilateral actions taken by several jurisdictions worldwide who introduced their own legislation to ensure their taxing rights to MNEs profits. Often called “Google Tax”, such measures were introduced in France , Hungary, Czech Republic, India, Indonesia Italy, Kenia, Spain, Austria, Turkey, the UK, Canada and Zimbabwe amongst others, similar proposals being discussed in Belgium, Poland and Slovenia.

Starting with France, the trend spread quickly, demonstrating countries’ unwillingness to wait for achieving a global tax consensus. It’s understandable: the “Google Tax” provisions are usually relatively easy to implement and operate, so that the cost of their implementation is minimal, and, most importantly, they work NOW, giving countries an opportunity to get their “fair share” of MNEs’ income straight away (or even retrospectively, as in case of France).

After unilateral measures were introduced by some countries, others were quick to react, revealing their true position on the matter. For instance, when France introduced its digital tax, the US did not hide its irritation with France’s attempt to get its fair share of tech giants’ profits, openly calling it discriminative. Other countries introducing the “Google Tax”, for example, the UK, experiences similar pressure and accusations. Concerns of the American government grew as more and more countries followed France’s example, and recently the US trade representative Robert Lighthizer referred to the “Google Tax” as “growing protectionism” of European countries that “unfairly targets US companies”. This was followed by direct threats by the US to impose 100% tariffs on some popular French imports, using economic power to pressure country’s tax policy, which by definition is inefficient from economics point of view.

Over the years the US openly demonstrated support for the OECD BEPS project, actively participating in discussions in Paris, providing policy drafts reflecting country’s position on the issue and making supportive public statements, and now any attempt to make multinationals pay their “fair share” of tax is called “protective’. For years, decades in fact, multinational corporations originating in the US were concentrating market power, not least thanks to structuring their business in the most “tax efficient” way. Annual financial losses associated with their “aggressive tax planning” and manipulating tax rules of different countries are estimated at hundreds billion dollars. In many countries (including the US) such corporations are paying virtually no corporate income tax, clearly not complying with legislator’s intent, even though not breaking any laws formally. No doubt countries are free to set any tax policy as part of their sovereignty, and the US has every right not to tax its MNEs if it finds it appropriate, but its political choice should not stimulate harmful tax competition among countries.

Achieving international consensus on tax rules suitable for digital economy proved to be challenging. Negotiation is costly, and a reasonable balance of interests is hard to find. Interests of countries playing different roles in MNEs’ tax planning strategies differ, and often victory of one is a loss of another. It seems like many jurisdictions are losing their faith in achieving consensus on taxing digital giants and are going their own way.

In recent months we witnessed several countries, including a group of developing economies headed by India, announcing their own taxing rules, protecting their financial interests by themselves after not finding enough protection at the OECD. Countries implement unilateral tax measures for different reasons that seem to be important to understand. While some – like France – introduce “Google Tax” provisions as a temporary measure allowing to get a share of MNEs’ revenue now and not to wait until the OECD achieves an international consensus, others feel like the OECD does not truly represent their interests, and even if the OECD achieves a “global consensus”, such countries would not be willing to implement it. This difference is important for creating effective international tax policies.

If the OECD aim is to achieve an international cooperation in fighting tax avoidance by multinationals, an extra effort would be needed to motivate developing countries to cooperate. They are not following the OECD recommendations without reflection anymore, but are analyzing them critically, taking a stance if needed. To cooperate, developing economies need to be convinced that such cooperation will be beneficial for their economies, and that their concerns and interests are taken into account. Merely providing them with a “seat at the table” is not enough anymore, and policy recommendations on taxing digital business should account for differences in economies’ size and structure, as well as different roles they play in MNEs tax planning strategies. Achieving this will require further consultations and analysis, but will bring us closer to achieving a more cooperative and fair international tax environment.

 

 

 

 

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