OECD: special tax rules for internet cos ‘unviable’

Internet companies are running rings around our governments, free-riding on the backs of ordinary taxpayers and reaping large fortunes for relatively small numbers of well-connected insiders, some of them rich enough to buy entire global newspapers with their pocket change, and thus potentially influence us all.

Anyway, the Financial Times is carrying a story today entitled “Special tax rules for internet companies ‘not viable’.” This is a story about how the OECD, which is supposed to be drawing up new global rules to tax transnational corporations, seems to have partly given up on internet companies.  More specifically:

Pascal Saint-Amans, the leading tax official at the Paris-based Organisation for Economic Co-operation and Development, said: “The findings are that there is no such thing as digital companies rather than digitalisation of the economy. There may not be therefore a solution for the digital economy but we will need to draw on features of digital economy when we revise the system.

The FT quotes us as having basically said this all along about the OECD’s project (called BEPS: Base Erosion and Profit Shifting):

“Tax campaigners including Tax Justice Network have agreed that rule changes could not be focused on the digital economy, which was “a feature that has permeated all business sectors” but called for a rethink of the rules whereby a multinational’s subsidiaries would no longer be treated as independent entities.”

In fact, the submission to the OECD by the BEPS Monitoring Group (which includes TJN) said:

“In our view, these challenges do not arise from a specific sector or group of firms which might be described as `the digital economy’. . .  Rather, the challenges result from the general effects of digital technologies on business models. The digital economy is a feature that has permeated all business sectors.”

This has created two particular problems:

• digitisation creates many new opportunities for multinationals to reorganise themselves and to separate out functions, which are then attributed to affiliates resident in tax havens – even though the reality is that they are centrally controlled. This is particularly easy for purely digital firms like Google and Apple, but it’s not just them.
• the shift creates many new relationships between firms and their customers and users

Each creates fiendish new problems for tax authorities and, by extension, for the schools and roads that are financed out of corporate tax contributions. Don’t forget: the corporation tax is a particularly precious tax, and it is under heavy attack.

We have heavily criticised the very foundations of the international tax system jealously guarded by the OECD, a club of rich countries. We have shown that the OECD’s first fiction – that corporations are merely loose collections of separate entities  – is no basis for a 20th Century tax system, let alone a 21st Century one. Related to this ‘separate entity‘ principle is the OECD’s “Arm’s Length” method, which presumes that the many affiliates of Transnational Corporations trade with each other as if in a free and open market.

And another core OECD principle known as Permanent Establishment – is also clearly untenable. Among other nonsenses, this rule makes it easy for all kinds of multinationals, especially internet companies, to avoid having a taxable presence (Permanent Establishment) in the countries where its customers are located.

Or, as Lee Sheppard so caustically put it recently:

“(Permanent Establishment) is a rather nonsensical concept that says, ‘well, if you, multinational, are operating in a country and making money in a country, but you have any presence that is short of, oh, a full automobile assembly plant, then you are not taxable in that country at the level of the owner of this plant. This thing has a little circle drawn around it, and it cannot be taxed in a normal way
. . .
you do not want to sign a document that has got that in it.”

Stepping back a pace, Richard Murphy, also commenting on the new FT article, asks:

“Might the consequence [of the OECD saying it cannot make special tax rules for internet companies] be that the groundwork is being laid for no change at all?”

Perhaps so. But there could, of course, be hope in that. As Sheppard noted last October:

“Someone else’s multinationals are unfairly skipping out on their corporate tax obligations to OECD member and observer countries. That was the genesis of the OECD base erosion and profit-shifting project, which has produced an action plan that is designed to repair and preserve the fragile international consensus in the short run, but may end up upsetting it in the long run. In the long run, the international consensus is dead, and everyone knows it, but BEPS has to be tried and allowed to fail first.”

Our emphasis added.

Already, there is a rising tide of voices calling for the OECD standards to be overturned. Take this news from Australia today:

“A quick way to fix tax avoidance of US multinationals in Australia would be to terminate the Irish treaty and implement domestic source rules, whereby income derived by Irish companies from Australian customers has an Australian source,” he said.”

We would strongly support such a move.

And the big long-term alternative?

As we have long explained: by far the best alternative: a practical, rugged and economically realistic solution is unitary taxation with profit apportionment.