Group of 20 finance ministers meeting in Fukuoka, Japan reached a tentative agreement on Saturday to “compile common rules to close loopholes used by global tech giants” such as Amazon, Apple, Facebook, and Google, Reuters reported—with a particular focus on reducing the practice by some companies of routing profits through countries that offer rock-bottom corporate tax rates, like Ireland and Luxembourg.
According to Reuters, draft documents prepared during the meeting showed the finance ministers are looking to enact a “two pillar” approach: The first being agreements to tax multinationals where their goods and services are sold, and the second being a “global minimum tax rate” that could apply if a corporation managed to avoid taxes under the first pillar. Reuters wrote:
The first pillar is dividing up the rights to tax a company where its goods or services are sold even if it does not have a physical presence in that country.
If companies are still able to find a way to book profits in low tax or offshore havens, countries could then apply a global minimum tax rate to be agreed under the second pillar.
The path to a final agreement is still fraught with difficulty because of disagreement on a common definition of a digital business and on how to distribute tax authority among different countries.
However, several thorny issues will need to be sorted out, according to the Financial Times:
The G20 is looking at various ways to tax digital companies. One idea is to calculate the “non-routine” profits made by a digital company. Another approach is to use existing calculations of profits and then reallocate part of them to different countries. A third possibility is to specify a “baseline profit” for marketing and distribution in any given country.
Another set of rules will also be required to determine for tax purposes whether a given company actually has a presence in a country beyond simply selling a product, the Times added.
Tech companies have earned a reputation as prolific tax avoidance participants—and so far a solution to the issue has remained elusive, with efforts in the European Union stalling out earlier this year and no small amount of disagreement on the right approach. French lawmakers recently approved a new three percent tax on digital advertising, sale of personal data, and other revenue for any tech company that earns more than $840 million worldwide each year, while the UK is also likely to enact a similar policy.
According to the Times, U.S. Treasury Secretary Steven Mnuchin warned that “the United States has significant concerns” with the tax proposals in France and the UK, which has been characterized as a direct attack on U.S. companies and could create a risk of double taxation.
However, Mnuchin also said that the G20 had reached a “strong consensus” on goals and that “We need to just take the consensus across here and deal with technicalities of how we turn this into an agreement,” Reuters reported. The Times noted that ministers from France and the UK agreed that they would shelve their approaches if G20-wide rules are implemented.
“We cannot explain to a population that they should pay their taxes when certain companies do not because they shift their profits to low-tax jurisdictions,” French Finance Minister Bruno Le Maire said during the meeting, Reuters wrote.
The draft document mentioned a target date of 2020 for a “consensus-based solution with a final report.”