The Strategist

OECD proposes "a tax revolution" for international companies

10/13/2020 - 03:14

The Organization for Economic Co-operation and Development (OECD) has presented a draft of a new approach to taxation of international companies, on which a group of 137 countries and jurisdictions has worked. This was reported on the OECD website.

The proposal has two components. The first involves “a fundamentally new way of dividing taxation rights between countries.” The goal is for multinational companies to pay taxes where they do “sustainable and significant business,” even if they are not physically present in those countries, as required by current legislation.

The second component involves the introduction of a global minimum tax, which should help the countries of the world to deal with the problem of the transfer of profits by international companies.

The idea is for companies to pay income tax where they work and not be able to use tax havens, the Financial Times explains. The newspaper notes that because of the first proposal, the taxation process will undergo “revolutionary changes”: large organizations will transfer part of the profits to the countries in which their clients live, even if they sell goods remotely. American companies like Apple, Amazon and Facebook will pay more taxes in Europe and developing countries, while French holding company LVMH or German automaker Mercedes-Benz will pay more taxes in the United States.

The second sentence means that even if a company is based in a tax haven with a low corporate tax rate, then other countries still have the ability to tax it at the level of the established international minimum. It is estimated that this will bring countries up to 4% additional corporate taxes, or $ 100 billion.

The lack of an agreed solution increases the risk associated with uncoordinated tax measures, warned OECD Secretary General Angel Gurria. In the most negative scenario, such measures will trigger a “world trade war” and global GDP will decline by more than 1% per year, the organization emphasizes.