Lower-income countries are often disadvantaged when global corporate taxes are in force. The residence of the company is the factor determining its corporate tax liability. If a company has no physical presence in a country, it generally does not need to pay taxes there. In today’s shifting information economy, many companies doing business in a country do not need to have a physical presence to have a significant impact on local matters. Harold Adrion, an international tax expert, examines the issues surrounding global corporate tax reform and how it impacts large and small economies around the world.
In tax reform circles, there is a great deal of animus toward countries that unfairly concentrate tax revenues for themselves. The Organization for Economic Cooperation and Development, (OEDC) a global body, is a coalition of 34 democracies which works with 70 non-member countries to work on economic issues of shared importance. Working together, these countries attempt to make the global economy fairer for all its participants. This organization has a daunting mission, but it has made a difference in the earning prospects of its member countries.
Corporate Tax Reform Proposals
The OECD has proposed four different tax reform proposals which are intended to redistribute the tax revenue from today’s Internet-based economy. The first concept, created by the United Kingdom, is called the user participation proposal. This would allocate tax revenues based on the number of users a given company has in the country. This concept particularly targets multinational tech firms like Facebook, Apple, Google, and Amazon.
The United States advanced a marketing intangibles proposal. This proposal has more extensive provisions, allowing countries where a company maintains a “functional link” to marketing intangibles such as user data, brands, and research. This proposal would be in effect no matter which part of the company holds the assets. This proposal catches not only large tech companies but also global consumer brands with significant marketing ventures around the world.
Developing countries are interested in a “significant economic presence” proposal. Countries like India, Israel, and the Slovak Republic have already adopted this framework in their domestic corporate tax provisions. This plan depends on a tangible interaction with the country in question, based on digital technology.
There are many factors which determine whether a company would be taxed based on this proposal. The company would need to generate revenue in the country. It would also need to localize its services by providing a website in the local language as well as taking payments in the local currency. This proposal would catch not only internet sales and marketing companies but also investment funds that depend on the revenue from clients in the country.
It is difficult to judge which proposal has the most economic benefit for lower-income countries since there is very little data on the international earnings of the largest corporations. The International Monetary Fund (IMF) has assembled some macroeconomic data in this area, but it is not enough to correctly judge the potential revenues.
Creating a Fairer System
Global companies which have previously given all of their revenues to the country where they are headquartered may find themselves in greater tax liability in the future. This will help smaller economies around the world make up some of the difference in revenues.
In most member countries of the OECD, it is legal to shift profits out of the country, but tax reform may limit the amount of money that these corporations can move. Harold Adrion encourages revenue agencies from all countries to explore the benefits of these proposals and to help put them in place.