Tax rules to target digital economy

An international economic group seeking to ensure that multinational companies pay their taxes says it will publish a proposal focused on the digital economy in the next two months.

The Organisation for Economic Co-operation and Development, supported by 34 member countries including the US, UK, Germany and Japan, aims to address issues raised by digital businesses in a world that taxes activities based on their physical locations.

“We’d better have strong and robust rules which do not give ground” and allow companies to avoid paying taxes anywhere, Pascal Saint-Amans, director of the Paris-based organisation’s tax policy and administration centre, said during a webcast yesterday.

In July, the group proposed developing rules over the next two years to prevent companies from avoiding taxes. Such rules would be offered for adoption by its member countries. The idea was endorsed by the Group of 20 major economies.

The rules would try to keep companies from putting patent rights into mailbox companies or taking interest deductions in one country without reporting taxable profits in another. Another would require companies to disclose to regulators their income in subsidiaries around the world.

In a letter to the Paris-based organisation, a group of technology companies said officials shouldn’t propose separate rules for their industry.

“Enterprises that employ digital communications models operate in all sectors of the global economy,” said the letter, written by lawyers at Baker & McKenzie LLP on behalf of the Digital Economy Group. The organisation describes itself as a coalition of “leading US and non-US companies.”

“These enterprises constitute the digital economy,” the letter said. “Accordingly, any options for addressing the digital economy should apply fairly and equally across all business lines.”

The economic development group’s proposals are also being fought by some of its own member countries. Several members, such as Ireland, the Netherlands and Luxembourg, have laws that provide companies with an incentive to shift income out of other countries and into tax havens.

Under current laws, company subsidiaries in low-tax offshore locations can take credit for profits arising from patents developed in countries like the US and UK.