Group of 20 finance ministers agreed on Saturday to draft common rules to close loopholes used by technology companies such as Facebook to reduce their corporate taxes, Reuters reported.
Facebook, Google, Amazon, and other large technology firms face criticism for cutting their tax bills by booking profits in low-tax countries regardless of the location of the end customer.
Social media network company Facebook paid £15.8 million in tax in the UK last year despite generating £1.3 billion in British sales. The social media giant’s accounts show that while Facebook increased its UK income by more than 50 percent in 2017, its pre-tax profits increased by only 6 percent to £62.7 million, the Guardian reported.
Retail giant Amazon has nearly doubled its profits from $5.6 billion to $11.2 billion in 2018. But Amazon reported a $129 million federal income tax rebate for the year – a tax rate of –1 percent.
The new rules – prescribed by Group of 20 – will result into more tax for large foreign firms. Countries like Ireland will not be able to attract foreign direct investment with the promise of ultra-low corporate tax rates.
“We welcome the recent progress on addressing the tax challenges arising from digitization and endorse the ambitious program that consists of a two-pillar approach,” the draft communique said. “We will redouble our efforts for a consensus-based solution with a final report by 2020.”
Britain and France have been among the most vocal proponents of proposals to tax big tech companies that focus on making it more difficult to shift profits to low-tax jurisdictions, and to introduce a minimum corporate tax.
The United States has expressed concern that U.S. Internet companies are being unfairly targeted in a broad push to update the global corporate tax code.
“The United States has significant concerns with the two corporate taxes proposed by France and the UK,” U.S. Treasury Secretary Steven Mnuchin said on Saturday at a two-day meeting of G20 finance ministers in the Japanese city of Fukuoka.
Mnuchin spoke at a panel on global taxation at the G20 after the French and British finance ministers voiced sympathy with his concerns that new tax rules do not discriminate against particular firms.
Big Internet companies say they follow tax rules but have paid little tax in Europe, typically by channeling sales via countries such as Ireland and Luxembourg, which have light-touch tax regimes.
The G20’s debate on changes to the tax code focuses on two pillars that could be a double whammy for some companies.
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 havens, countries could then apply a global minimum tax rate to be agreed under the second pillar.
The final agreement will face difficulty because of disagreement on a common definition of a digital business and on how to distribute tax authority among different countries.
“There are differences between the United States and United Kingdom over pillar one. As for pillar two, there are also differences in views within the Group of 7,” said a senior Japanese finance ministry official present at the G20.
The G7 likely will not issue any communique at a meeting of the world’s leading economic powers next month, according to the official. Still, several finance ministers at the G20 said on Saturday they needed to act quickly to correct unfair corporate tax codes or risk being punished by voters.
“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 panel discussion.
The U.S. government has voiced concern in the past that the European campaign for a digital tax unfairly targets U.S. tech giants.