OECD is guiding the international community in addressing the problem with tech giants and corporate tax

The international community guided by OECD has increasingly committed to finding a solution for the tax challenges connected to the digitalization of the economy. What the OECD proposed would assure that companies, especially big techs such as Google and Amazon, would pay taxes to the countries in which they operate instead of to tax heavens. A final agreement on the matter is expected to be reached in mid-2021.

The Organization for Economic Cooperation and Development (OECD) drafted new principles aimed at ensuring that big corporations, especially big tech multinationals like Google and Amazon which highly have been profiting from the digitalization of the economy, will pay corporate taxes to the countries in which they operate instead of to tax heavens.

The French organisation has already collected support from 137 countries and says that this new reform would increase tax revenues worldwide annually by $100billion without raising tax rates, which can equate to a rise of up to 4% in corporate tax.

The OECD’s blueprint is based on two main pillars. The first one is that multinationals will have a portion of their global profits apportioned to the countries where their customers are located, even if they do not have a physical presence.

The second pillar is based on the idea to have a minimum corporate tax rate. In this case, multinationals would have to pay taxes regardless of where they are incorporated, therefore if a firm is headquartered in a low-tax state, other countries will have the right to collect taxes up to the minimum global rate, eliminating incentives to move profits to tax heavens.

The principles contained in this tax reform address those issues related to how governments should tax companies that have little if not any physical presence in the country, over the online sale of goods and services to their citizens. In recent years many European countries have expressed the intention to introduce digital service taxes to overcome this problem.

This new reform still currently lacks strong political consensus, which is the reason why a potential agreement is not expected to be reached before mid-2021. Whether a political solution can be found will depend also on the outcome of the 2020 US Presidential Election. However, the OECD warns that if a political agreement on this policy will not be reached, consequent trade wars would generate economic losses that are expected to be equal to 1% of global GDP per year, significantly affecting also the economic recovery from Covid19-crisis.

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