Global Tech Firms Brace for Tax Rules

OECD recommendations aim to stop multinational companies from avoiding billions in taxes

Wall Street Journal: Oct 5, 2015

PARIS—Multinational companies are girding for new rules designed to force them to pay greater corporate income taxes in more countries where they operate, setting up potential clashes between Silicon Valley giants and European governments angling for tax revenue.

The Organization for Economic Co-operation and Development on Monday issued a series of recommendations aimed at stopping large companies in many industries from avoiding paying hundreds of billions of dollars in taxes every year through baroque structures that are legal, but have come under increasing political pressure, particularly in Europe.

The new rules could eventually redirect to European government coffers billions of euros in non-U.S. profits earned by companies such as Facebook Inc.and Google that are funneled to tax havens such as Bermuda and the Cayman Islands. The rules could also hasten structural change at some of the world’s biggest technology companies, including Inc. and Apple Inc.

Executives at several tech companies say they are already considering relying less on some offshore tax havens, while declaring more income in countries such as France, Germany and the U.K.

“We’re seeing the beginning of the end of structures that are deemed artificial,” one of the tech executives said. Apple, Facebook, Amazon and Google, now a subsidiary of Alphabet Inc., either declined to comment or didn’t immediately have any comment on Monday. They have all said in the past they pay the tax they owe.

While the new rules don’t explicitly target tech firms, the companies have come in for special scrutiny because they generate significant revenue in many European countries but pay relatively little income tax in them. Even though tech companies have lobbied hard to push back new rules that would have targeted them specifically, many of the broader recommendations will have an impact on taxation in the digital economy.

How broad an impact the new rules will have on companies and how much tax they will pay remains unclear. While the recommendations represent a consensus view among OECD member countries, they will need to be enacted through tax treaties. National tax authorities will then need to interpret the new rules.

Several tech executives say they worry that the new rules might be implemented differently by countries and companies. That could lead to new disputes among countries over how to allocate revenue, and legal wrangling between companies and tax authorities over how much to pay whom.

“It will be a period of increased compliance costs and increased controversy,” said Manal Corwin, head of the international tax practice of KPMG LLP in Washington, D.C.

Earlier this year, for instance, the U.K. implemented what it calls a diverted profit tax, in anticipation of the new OECD recommendations. Proponents say it is in line with where the think tank was heading, but an OECD official warned at the time that the U.K.’s approach could undermine its multilateral plan.

Ireland also said it would, by 2020, phase out one of the most widely used tax loopholes, dubbed the double Irish, in anticipation of the new rules. Indeed, Monday’s recommendations include changes to certain types of national legislation like that in Ireland that made the loophole possible.

Changes to a legal concept called permanent establishment could also lead more money to be taxed in countries where companies do business than had previously been the case. Under tax treaties, the profit of a foreign company is usually only taxable in a country if it has a permanent establishment there.

The concept has helped shape corporate structures across Europe. Many tech companies, such as Google, maintain a single headquarters in a tax-advantaged country where they collect all their revenue from external clients. The companies don’t declare external revenue in other countries because they claim various exceptions to the permanent-establishment definition under current tax treaties. It is exactly that kind of structure that has led to a fight between Google and France.

Amazon, which is facing a tax inquiry at the European Union, is the first tech giant to change its structure. Earlier this year, it started collecting revenue from customers in several European countries, including the U.K., Germany and France, rather than funneling all of its sales through low-tax Luxembourg.

But it is unclear how much more—if any—taxes Amazon will pay under the plan because it attributes costs, such as the wholesale purchase of books, to individual countries as well, according to a person familiar with Amazon’s vendor contracts. That could largely offset the new revenue, given Amazon’s razor-thin margins.

Paul Hannon in London contributed to this article.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s