How will the tax system be modified to respond to a change in business models brought about by the emergence of giant information technology firms? It is advisable to aim to work out an international agreement based on a proposed reform plan.
The Organization for Economic Cooperation and Development has unveiled a draft proposal for a new taxation system under which corporate tax would be imposed appropriately on multinational companies that are active beyond national borders.
The proposal would make it possible even for countries where multinational enterprises have no physical business bases, such as factories or branch offices, to impose tax according to the amount of the companies' sales if there are people who use online shopping and other digital services.
Individual countries should conduct constructive discussions with a view to realizing a tax system that fits the economy in which IT applications have been progressing.
The model for the current taxation rules was made by the League of Nations in the 1920s after the end of World War I. As the system was established with the manufacturing industry in mind, taxes were designed to be levied on profits generated at production centers.
But the IT giants collectively known as GAFA, including Google LLC and Amazon.com Inc., have emerged to undertake business globally with a small number of business bases.
Even if such multinationals earn a huge amount of profits by providing goods and services for Japanese consumers, they are in principle not subject to taxation in Japan. The tax system cannot be said to be fair if it remains unchanged.
The OECD proposal will be discussed in forums such as a meeting of finance ministers and central bank governors from G-20 major economies, which will be held in the United States. A final agreement is targeted to be reached within next year.
The problem is how the envisioned tax system will take shape.
The proposal, first of all, calls for dividing profits of multinationals into two parts. Tax will be imposed as before on "routine profits" earned by ordinary firms in countries where they physically operate and elsewhere.
The part not included in "routine profits" will be defined as "residual profits" and part of that will be subject to the planned taxation. "Residual profits" will thus be regarded as profits that can be derived from intangible assets such as brands instead of the location of business bases. The amount of tax will be determined according to the amount of sales in countries where the multinationals are active.
How will profits be divided into routine and residual parts? It is hard to set standards on this. Concern cannot be dispelled about the possibility of a confrontation emerging between the United States, where the four IT giants of GAFA are based, and emerging countries that want to increase their tax revenue.
The OECD proposal limits the type of industry subject to the planned taxation system to consumer-facing businesses. In addition to IT businesses, such industries as electric machinery, commodities, music and image distribution services are expected to be subject to the envisaged tax system. But it is not an easy task to draw a line as to types of industries and business operations. Interests of countries will clash with each other.
It is also uncertain whether it is possible to precisely grasp the amount of sales in each country, which is necessary to determine the amount of tax to be paid.
Fair taxation rules are conducive to the growth of the global economy. The Japanese government should work toward coordinating opinions to form a consensus on a new global tax system.
(From The Yomiuri Shimbun, Oct. 18, 2019)
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