Globalization and digitalization have transformed corporate tax management, giving technology businesses the opportunity to artificially shift tax responsibilities to the low or zero tax jurisdictions of offshore tax havens like Bermuda, the Netherlands, Luxembourg, Switzerland, or Ireland. Thus far, technology corporations such as Google, Apple, Amazon, or Facebook have been able to reduce their tax bills because of such tax havens, yet this situation may change by the end of 2020. The Organisation for Economic Co-operation and Development (OECD) has been working on global tax transparency standards and combating offshore tax evasion. In the OECD’s latest initiative to reform digital tax management, the organization brought forth the Inclusive Framework on Base Erosion and Profit Shifting (BEPS) at the G20 meeting in Japan in June 2019. Finance ministers at the G20 reached the consensus that they must develop a long-term solution to close international tax loopholes by 2020.
G20 member states and the OECD drafted a two-pillar framework to address the issue of international taxation. Currently, companies pay taxes in countries where they are based, permitting offshore tax avoidance. The first pillar attempts to change this by taxing companies based on where their products and services are sold instead, even if companies have no physical presence in these countries. Such goods and services include targeted digital advertising and online marketplaces. The second pillar will introduce a global minimum tax rate in order to prevent tech firms from seeking tax havens.
The OECD estimated in 2015 that between 100 billion and 240 billion USD in revenues were lost due to BEPS tax evasion, accounting for 10% of all corporate tax revenues worldwide. Particularly big technology companies such as Google or Apple benefited from lacking international tax standards. In 2016, Google reportedly saved between 2.4 billion and 3.7 billion USD in taxes by moving profits between the Netherlands, Ireland, and Bermuda. Apple employed a similar offshore tax strategy, profiting from tax loopholes in Ireland. When Ireland changed tax regulations after being pressured by the European Union (EU), Apple moved its subsidiaries to Jersey, a self-governing island under the responsibility of the United Kingdom that is also considered a tax haven.
While there appears to be consensus among G20 members that international tax regulations must be developed, states disagree on various details such as a common definition of digital business or the exact re-allocation and distribution of tax authority among states. Disagreement between the United States and France has caused considerable diplomatic friction ever since France’s government introduced a new domestic minimum tax law in March 2019. The new law charges digital companies operating in France a 3% tax rate on revenues. The US government objected to France’s new regulation, arguing that it specifically targets US tech companies. France initiated this move after the EU failed to implement comprehensive digital tax legislation. Sharing this sentiment, the UK also warned that it will individually implement a domestic digital tax law if the international community does not adopt a global regulation by 2020. Hence, apparent differences between G20 members like France, the UK, and the US over the contents of the global tax reform must be bridged through mutual engagement if they want to succeed in reforming the current system and establishing more equal taxation.
While financial policymakers disagree over the new regulation, multinational tech corporations and tax havens must brace for potential future challenges if global tax reform is implemented. Technology businesses must anticipate higher tax burdens, while tax havens like the Netherlands may struggle with losing foreign direct investment because they can no longer offer low to zero corporate tax rates. Reduced investment and business activity would in turn reflect negatively on the growth of the financial sector of tax havens. At the same time, global tax reform would create more equality among states while also stinting international competitiveness, which would stop tax havens from using their attractive tax regulations to their advantage. These two aspects can be considered a benefit as well as a risk. Therefore, it remains to be seen to what extent the final draft of the global digital tax reform impacts businesses and tax havens.
