Will Google dispute spark global tax war, despite OECD tax agreement?

29 January 2016

On Wednesday, 31 countries formally agreed to support and implement one of the main recommendations put forward by the OECD to reduce tax avoidance by transnational corporations, the BEPS (Base Erosion and Profit Shifting) recommendations. This major initiative has been somewhat sidelined by media hype around Google tax payments. Have OECD governments missed the opportuntiy for more substantial measures to reduce scope for profit shifting by transnational companies? 

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There was not much of a fanfare. This is partly of course because international tax rules are intrinsically unexciting, and rarely headline material. But there were other reasons why the BEPS agreement did not elicit more enthusiasm. 

OECD recommended measures far from adequate

One was that most of the people involved had already realised that the measures recommended by the OECD are very far from adequate.

There has been progress, notably in the introduction of the principle that transnational corporations should henceforth report their finances separately for each country where they have operations (country by country reporting). Wednesday’s ceremony was for the signing of a framework agreement allowing those 31 countries to exchange such reports. The OECD has at the same time, and formally outside the BEPS process, taken some useful steps forward in making it easier for national tax authorities to exchange information with one another about taxpayers who are suspected of not meeting their obligations. 

Absence of legal authority over tax havens

The second reason for the muted reception for the ratification of the OECD recommendations is that it has already become clear that implementation is going to be difficult in some cases. 

For example, as part of the broader international package of which BEPS is the largest component, the British government agreed to “encourage” various small islands within the Commonwealth that constitute some of the world’s most significant tax havens to improve the information they have on the actual ownership of companies registered in their jurisdictions, and to make these registries public.

Neither the British government nor any other agency has the legal authority to enforce these changes, though of course political pressure can be applied. But tax havens are fighting back, arguing that they are already doing a good job - often better than is done by some other OECD governments – and that they have good reasons not to make their registries publicly available.

BEPS agreement sidelined by media hype around Google tax avoidance

There is a further reason. The BEPS recommendations have in effect been sidelined by the recent headlines in the European media about tax avoidance by large U.S.-based technology firms, notably Google, Facebook and Apple. 

Google recently reached an agreement with the British tax authority that would involve it paying a little extra tax covering the last few years. There has been almost an uproar in response. Many commentators have pointed out that this extra tax is indeed very little.

The Prime Minister’s office seems to have explicitly refused to support the Chancellor of The Exchequer (Finance Minister) by endorsing this agreement.

At the same time, the the European Commission is very actively pursuing its enquiries into the tax arrangements of these big global tech companies.  

Why are Europe’s political leaders being so assertive about taxing the big transnational tech companies now?

The answer is not hard to find.

They are faced with the steady rise of populism on both the left and the right of the political spectrum.  This populism is propelled by a range of factors:

  • rising economic inequality
  • economic slowdown
  • slow or no growth in daily wage rates for low income people
  • the effects of public spending cuts
  • the perception of uncontrolled immigration
  • the presence of the European Commission and other European institutions as a focus of anger for nationalists on all kinds of grounds
  • widespread perception of gross avoidance of taxes by (American) transnational companies.

Among that list, tax avoidance is almost the only thing on which individual governments could plausibly take effective action.

Governments often promise to do something about tax avoidance by companies and wealthy individuals, and end up introducing measures that are largely short-term and cosmetic. It is easy to do that because of the complexity of international tax rules. 

Many people can be fooled by promises that have no value until translated into effective, implementable rules. This time might be different. Desperate for some achievements to report when next facing the electorate, many European ruling parties might be very tempted to lay the grounds for making the very credible claim that “we made Google (Apple, Facebook etc) pay their taxes". The companies are not giving in.

Potential for a global tax war?

The headline story in the Financial Times yesterday was  “Google and Apple hit back over tax deal allegations”. In the centre pages, FT Columnist John Gapper suggests that the appetite of European and other governments for the share of the (so far undertaxed) profits of the big tech companies is leading us toward a “global tax war”.

To the extent that there is a war, developing countries will not be involved. It will be a war within and among the OECD countries.

There are real threats here. Even if there is no overt ‘tax war’, so many governments are now taking or considering unilateral steps to protect their tax bases in relation to transnational corporations that those corporations likely face a less predictable tax environment.

That is not good news for investment or the world economy, especially at a time when the economy is already in trouble for a range of other reasons.

The governments of the OECD may soon be regretting that they did not use the opportunity provided by the BEPS process to take some more substantial measures to reduce the scope for profit shifting by transnational companies.

In a hot-off-the-press Working Paper, my ICTD colleague Michael Durst presents an alternative proposal for modifying the ‘Transactional Net Margin’ transfer pricing method – OECD officials may do no worse than delve into it for potential inspiration on where to go next.

Image credit: SEO - Flickr ((CC BY-SA 2.0)

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