Global Tax-Avoidance Rules to Be Aimed at 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 Organization for Economic Cooperation and Development, supported by 34 member countries including the U.S., U.K., 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 organization’s tax policy and administration center, said during a webcast today.

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 organization, a group of technology companies said officials shouldn’t propose separate rules for their industry.

‘All Sectors’

“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 organization describes itself as a coalition of “leading U.S. and non-U.S. 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 U.S. and U.K.

Companies allocate corporate income for tax purposes based on transactions between units under “arm’s length” prices -- the amounts that would be paid between unrelated parties. That has let subsidiaries in tax havens pay low prices for patent rights, moving future profits offshore.

The economic-development group doesn’t intend to replace the arm’s length rule although it may need to be revised, Marlies de Ruiter, an official working on the issue, said on the webcast.

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