TOKYO — The Group of 20 major economies are set to agree on a basic corporate tax policy that would allocate revenue to countries that provide large user bases for the world’s digital corporate giants, sources said on Wednesday, just ahead of a round of meetings in Japan.
The rise of the data economy has sparked controversy, as companies are often able to avoid paying taxes in markets where they have millions of users but no offices or other physical presence. The G-20 — which brings together the U.S., Japan and European countries along with China and emerging nations — is reviewing international tax rules formed about a century ago to update them for the digital age.
The new approach would allocate revenue based on the scope of a company’s business in a particular market, as opposed to the location of the corporate headquarters. G-20 finance ministers and central bank governors will meet on June 8-9 in the Japanese city of Fukuoka, where they are expected to agree on a basic policy for the transfers. They will seek to reach a final agreement in 2020, the sources said.
Since last summer, the U.S., U.K. and emerging economies have put forward proposals for discussion among the 20 member states. These all call for the same basic method of taxation, and for tax revenue to be distributed to countries where users of digital services reside.
As part of this push, the G-20 is considering imposing levies on the big four U.S. tech giants — Google, Amazon.com, Facebook and Apple — and other companies that operate globally. The U.S. itself is moving to collect taxes by repatriating more than $2 trillion in revenues American companies have piled up overseas.
The new international rules could work in a couple of ways. The G-20 is thinking about calculating a company’s global tax burden with a formula that factors in revenue generated by personal data and contributions to brand power.
The G-20 will also weigh a scheme in which taxes are shared between member states based on indicators such as sales by country and user count.
Consider Facebook, which boasts more than 1.4 billion users around the globe. Of that number, 490 million reside in the Asia-Pacific region, 270 million live in Europe and 180 are in North America. But Facebook has centralized its profit and tax payments in Ireland to take advantage of the country’s low tax rates.
A barrage of criticism has prompted Facebook to review its own tax strategy and move toward calculating income in each country where it operates.
Once the new G-20 rules are introduced, tax payments by the American company would shift to the places where its users live.
Meanwhile, the Organization for Economic Cooperation and Development, at the G-20’s direction, will estimate how the new rules would affect tax revenue in each country and work out a specific method for calculating payments and determining which companies should be subject to the system.
One proposal is to limit the rules to highly profitable businesses.
Also on the agenda is the issue of tax havens. The G-20 intends to set a minimum tax rate governments should respect, in order to halt tax-cutting competition to lure businesses. The group hopes this would lead to fairer distribution of tax revenue hitherto concentrated in countries with low rates.
To make the new international rules work, however, countries will need to revise their own tax legislation and conventions. As a result, it is expected to take time for the changes to take hold. The idea of a minimum tax has provoked opposition from low-tax countries, suggesting it may be difficult to agree on the actual rate.