In recent years, many countries have wondered how to deal with technology giants. Many of these major companies have a reputation for taking advantage of tax havens by storing their profits offshore to get lower tax rates. Many countries have felt for years that tax giants do not pay their fair share of taxes due to these havens. This led to a recent decision by the G20 countries to implement a digital tax on those tech giants.
The most recent conversation regarding plan implementation took place in Japan in early June. There, the G20 finance ministers went over the plan that the Organization for Economic Cooperation and Development created. Although that organization created the proposal to ensure tech giants pay their fair share, it will also affect other multinational corporations, including traditional ones.
The Result of Discussions
Following discussions among the G20 finance ministers, the ministers released a statement indicating that they had made progress on taking care of the “tax challenge” related to the increase in digitization. They also indicated endorsement for the two-pillar approach. The statement indicated that the ministers will increase their efforts so they can create a final report and a consensus-based solution by 2020.
Steve Mnuchin, U.S. Treasury Security, also indicated that the plan has broad support but is not complete. The group still needs to iron out details and technicalities to make the proposal become an agreement the G20 countries can follow.
Why the Change
Those in favor of updates to the taxes on digital giants, including the OECD Centre for Tax Policy and Administration director, Pascal Saint-Amans, feel that this is required in response to the growth of internet commerce. Specifically, we need to revise taxation policies and practices in response to changes in how we conduct e-commerce.
Making changes will also ensure that big tech companies pay the taxes that people feel they should. This is particularly important in a world where companies like Apple and Amazon pay minimal taxes and face extreme pushback.
The change is also necessary due to the complicated nature of the current e-commerce network. Saint-Amans used Netflix as an example: That company is based out of the United States but has millions of customers across the world. Countries with Netflix clients face frustration from the inability to tax the company if they do not have a physical presence there.
It is also worth noting that if a global framework does not come into existence, a patchwork system will likely arise between various countries. This could hurt investment and trade.
What the Overhaul Will Do
An overhaul to taxes on digital giants would primarily result in a two-part solution. There would be a framework that helps clarify when taxes need to be paid, including whether the country collecting the tax should be that of the buyers or the sellers. The other portion is an assurance that multinational companies pay a certain minimum quantity of tax. This second part should discourage those companies from moving profits to tax havens with lower tax rates. With this part of the overhaul, businesses that pay less than the agreed-upon minimum could be asked to pay the difference.
The Implementation Is Still in the Future
While it is clear that the G20 finance ministers want and plan to implement a digital tax on tech giants, these companies still have time. At the earliest, the G20 prime ministers and presidents will sign off on the overhaul in 2020. In reality, however, a great deal of work is required before anything can be implemented. This means that there are not likely to be changes implemented for a few years.
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