The OECD announced that its member countries have reached a new agreement on taxing internet companies operating across borders and paying little to no corporate income tax due to a lack of physical presence in a country. They aim to present a first proposal to G20 finance ministers at their meeting in June and agree the new international tax rules in 2020.
The agreement is part of the larger Base Erosion and Profit Shifting (BEPS) project of the OECD and G20, which have been working for several years on updating international standards in order to reduce tax evasion and avoidance. A recent meeting of the participating countries approved a policy note on how they envisage tackling the problem of taxing internet companies.
The main issue is how to update the so-called 'nexus' rules, namely how to determine the connection a business has with a given tax jurisdiction. Companies operating only online often lack a significant physical presence in a country, which is one of the main determinants in subjecting them to corporate income tax. The OECD members will look at defining new concepts such as a 'significant economic presence' or 'significant digital presence', to give countries a new base for levying corporate income tax on online businesses.
In addition to new rules on determining tax jurisdictions for online businesses, the proposal will explore rules designed to give countries a remedy in cases where income is subject to no or only very low taxation. This addresses a common practice of online businesses of shifting revenues or profits to related companies in low-tax jurisdictions through royalty or associate agreements, rather than paying taxes in the country where their customers are based and revenue is generated.
In the coming weeks, the OECD will issue a consultation document outlining the proposals, and a public consultation will be held in Paris in March as part of the meeting of the Task Force on the Digital Economy.
The OECD agreement comes as several European countries are already proposing their own digital taxes, such as Spain and France. The European Commission proposed in 2018 a sales tax on certain large digital businesses as an interim measure until an international agreement can be reached, but the EU member states have yet to agree on implementing the plan.
