Big internet companies would be forced to pay more tax to countries where they sell products and services under proposals for a global shakeup of taxation rules to limit firms shifting profits to low-tax locations around the world.
In an attempt to tackle challenges for countries from the rise of firms such as Facebook, Amazon and Google, the Organisation for Economic Cooperation and Development (OECD) launched plans to upgrade the international tax system for the 21st century.
It said the changes would force large and highly profitable multinational firms, including digital companies, to pay tax wherever they have a significant consumer-facing activity and generate profits.
The Paris-based membership organisation, which represents the wealthiest countries, said existing tax rules dated back to the 1920s and were no longer sufficient to ensure fair allocation of taxing rights in an increasingly globalised world.
Ángel Gurría, the secretary general of the OECD, said: “This plan brings together common elements of existing competing proposals, involving over 130 countries, with input from governments, business, civil society, academia and the general public. It brings us closer to our ultimate goal: ensuring all multinational enterprises pay their fair share.
“Failure to reach agreement by 2020 would greatly increase the risk that countries will act unilaterally, with negative consequences on an already fragile global economy. We must not allow that to happen.”
The changes come as part of the OECD’s Base Erosion and Profit Shifting (Beps) work, which attempts to counter large companies’ tax planning strategies that are used to exploit gaps in tax rules to avoid paying. The OECD estimates as much as $240bn (£200bn) in revenue is lost for exchequers around the world, which could be used to fund key government projects, welfare benefits and public services.
Under the new plans, which the OECD launched for consultation on Wednesday, some profits and tax rights would be reallocated to countries where companies have their markets.
The rules, designed to ensure firms undertaking significant business in places where they do not have a physical presence are taxed in them, apportion where tax should be paid, and what amount of profit they should be taxed on.
Several European politicians welcomed the proposals. Markus Ferber, a German conservative MEP on the EU parliament’s economic and monetary affairs committee, said: “It is high time to adapt the corporate tax rules for the digital age. The OECD standards finally move away from the antiquated idea of physical presence.”
However, the plans were branded as weak and overly complex by anti-poverty campaigners who said they would fail to “deliver meaningful progress against corporate tax abuse”.
The Tax Justice Network said the plans would do “little or nothing” for developing countries. Alex Cobham, the charity’s chief executive said the OECD had rejected clear definitions of businesses that will be affected and the taxable profits caught by the new rules.
Cobham said: “To add uncertainty, while at the same time leaving the widely derided arm’s length principle largely in place, is a feat of complex engineering that would only serve to further undermine the credibility of international tax rules.”
Susana Ruiz, tax campaign lead at Oxfam, said: “Unfortunately, particularly for developing governments and their citizens, what the OECD has come up with today is very disappointing.
“Under this new proposal, companies’ profits and their ability to shift them offshore will barely be affected and consequently developing countries will only see a very small increase in their corporate tax revenues.”
Tax Justice Network has previously said the OECD proposals could end up shrinking the tax paid in poorer countries, worsening levels of global inequality.
While many poorer countries lose out most through tax abuses, the changes could cause their tax bases to shrink by 3%, researchers said. They said about 80% of taxes clawed back are likely to be redistributed in high-income countries.