October 1, 2017

During summer 2017, 70 countries committed to sign a new pact tackling tax avoidance, which should theoretically resolve some of the current difficulties in the area. The topic gained special attention in the light of the recent discussion around Google case, whereby the French authorities insisted that Google’s activities in the country amounted to “permanent establishment” and therefore claimed more than EUR 1.1 bn in back taxes. French authorities took a more aggressive approach as compared to the largely criticized decision brought last year by the UK, reaching a deal with Google. The judgement was unfortunate for the French authorities and the appeal is upcoming.

Multinational’s agility in shifting profits between jurisdictions constitutes a problem. Following the general rule, the economic activity should be taxed where it takes place. Such companies as Google, Amazon, Facebook do not fit into such system. Such a situation leads to the around USD 100bn-240bn of revenues being lost each year (as OECD estimates) due to the gaps in international rules that allow corporate profits to be artificially shifted to tax havens. Some countries are making attempts to close loopholes through unilateral legislation: the UK has instigated a tax on profits that are believed to have been artificially diverted and India has introduced its own “equalization levy”. A real working solution though is dependent on an international action.

Nevertheless, key countries, such as Ireland and Luxembourg have not yet signed up to all of the provisions of the introduced pact, there are still plenty of outstanding issues. US has neither signed yet. This may not be a big problem, although it gives Washington little reason to help other countries increase their tax take from US companies it believes to be unfairly targeted. A global deal is an ultimate goal, governments are expected to show equal ingenuity and universal approach.