‘Deeming’ rate needed for global giants

Donald Trump wants to protect the profits of digital multinationals, as his trade representative, Robert Lighthizer (left), launches an investigation into France’s tax. Picture: Getty Images

Instead of stealing from pensioners with unfair deeming rates, the government should support the French and German effort to apply a sort of “deeming rate” to the taxation of multinationals.

The French and German finance ministers have proposed a global effort to deal with multinational tax avoidance by setting a minimum global corporate tax rate. If a multinational was shifting profits to a subsidiary in a tax haven, the home country would bring its local tax rate up to the minimum global rate.

It would operate a bit like a pensioners’ deeming rate: the minimum global corporate tax rate would be deemed to be, say, 20 per cent, and if a digital company was doing a double Irish Dutch sandwich and paying 10 per cent, the countries in which they actually operate would tax them another 10 per cent.

Needless to say, France and Germany are spinning their wheels, getting nowhere with this, because the key to making it work is Trump’s America, and it’s not interested.

In fact, so uninterested is the US President in seeing that digital companies pay their fair share of tax around the world that his trade representative, Robert Lighthizer, launched a section 301 investigation of France last week over France’s decision to go it alone with a 3 per cent turnover tax on digital multinationals with annual revenue of more than €750 million, of which at least €25m is generated in France.

Section 301 of the Trade Act gives the US trade representative the power to impose tariffs and other penalties on countries deemed to be using unfair trade practices. It’s this section that’s being used as the basis for the tariffs against China.

But the pressure is growing. The UK – also frustrated with the lack of progress on getting global co-operation on this issue - last week announced its own plans for a 2 per cent digital sales tax, and India and Hungary have already done it (on digital advertising only).

US Treasury Secretary Steve Mnuchin says that America supports OECD efforts to address “broader tax challenges arising from the modern economy”, but that it “firmly opposes proposals by any country to single out digital companies”.

And in his announcement of the section 301 action against France last week because it “unfairly targets American companies”, USTR Robert Lighthizer added: “The United States will continue its efforts with other countries at the OECD to reach a multilateral agreement to address the challenges to the international tax system posed by an increasingly digitised global economy.”

Yeah right. The fact is that the challenges to the tax system posed by the digitised economy are all being posed by American companies (we don’t need to name them here – we all know who they are) and the Trump administration is interested only in protecting their profits, for the simple reason that the US stockmarket depends on them.

In fact it is not going too far, in my view, to say that a large part of the reason the S&P 500 is at a record high above 3000 is that the largest listed companies in the US all boost their profits by underpaying tax all over the world.

With Trump tweeting about how great it is that the S&P 500 is breaking records, he’s not going to allow anything to jeopardise that.

So unsurprisingly, with the US running dead, countries are starting to take their own actions, and really the only big picture thing they can do is tax sales rather than profits.

The problem with that as a general rule is that it’s unfair on companies with low profit margins, like supermarkets, and really great for those with high margins.

That’s why France, India, Hungary and the UK (so far) are singling out digital companies – because it wouldn’t work as a more general shift of corporate taxation from profits to sales, and the digital companies are almost all American.

And the United States is neither interested in effective multilateral agreements, on trade or anything else, nor inclined to allow American companies to be singled out for special treatment, even if they deserve it.

The Australian government has been saying for a few years that it is leading the global fight against multinational tax avoidance, and in this year’s budget speech, Treasurer Josh Frydenberg said “tough new laws (have) helped raise more than $12 billion” as part of the crackdown on multinational tax avoidance, although he didn’t say over what period, so it might not be very much.

The Australian approach of not troubling the digital multinationals for too much cash at least has the benefit of keeping us under Mr Lighthizer’s s.301 radar.

Also the approach is at least effective, up to a point - attacking the details of what the multinationals are doing, with things like the diverted profits tax, which imposes a penalty rate of 40 per cent on clear cases of using tax havens, closing loopholes and tightening transfer pricing rules, rather than just whacking all digital multinationals with a high-profile 3 per cent turnover tax, which then leads to tariffs from the US.

But it’s clear that some kind of new global tax system is needed, and the idea from France and Germany to “deem” global company tax to be a certain percentage looks pretty good.

Increasingly, Australia is going to come under pressure to do more than take its own actions, and nibbling at Google’s heels: as this fight develops the government will have to choose whose side it’s on – America’s or Europe’s – and whether we are really “leading the fight against multinational tax avoidance, as successive treasurers have claimed.

That’s after we decide which side we’re on in the fight over technology supremacy between America and China.

That’s the trouble with having an ally that’s picking fights all over the place.

* Alan Kohler is Editor in Chief of InvestSMART