Group of 20 finance ministers recently agreed to create common rules to close loopholes used by tech heavyweights such as Facebook, Google, Amazon, and others to reduce the amount of taxes they need to pay, according to a report by Reuters.
Those tech giants are often slammed for cutting their tax bills by booking profits in low-tax countries such as Ireland and Luxembourg no matter where their end-customers are located.
The new rules are likely to require MNCs to pay taxes according to their business footprint—the size of their user base—instead of their headquarters locations.
The G20’s draft communique is quoted in the Reuters report as saying that it welcomes the recent progress on addressing the tax challenges arising from digitization and endorses the ambitious program that consists of a two-pillar approach.
“We will redouble our efforts for a consensus-based solution with a final report by 2020,” the draft communique adds.
The first pillar is dividing up the rights to tax a company where its goods or services are sold even if it doesn’t have a physical presence in that country.
If a company is still able to find a way to book profits in low tax or offshore havens, countries could apply a global minimum tax rate to be agreed under the second pillar.
France and the UK have been among the most proactive proponents of taxing huge digital and technology firms.
Earlier this year, France introduced a 5% digital tax on companies with a global digital revenue of at least €750 million (US$848 million), and a French revenue of more than €25m (US$28 million).
France’s finance minister Bruno Le Maire has owed to scrap country’s equivalent digital services tax as soon as an international approach is agreed.
Despite the 2020 deadline in the draft communique, final agreement isn’t easy to reach as there are still differences between countries on the definition of a digital business and in their views on how to distribute tax authority among different countries.