In a January 20 article in the Financial Times, Pascal Saint-Amans, head of the OECD Centre for Tax Policy and Administration, said the digital economy could not be defined for the purpose of creating a new, special kind of jurisdiction. He added that there were no pure digital companies, but rather a “digitalization of the economy.” The Financial Times reported that many European governments balked at the concept of a digital permanent establishment and that France, which has been seeking greater tax control over companies like Google and Facebook, might have to stop trying to get the BEPS project to address the issue.
Lee Sheppard wrote that the most important aspect of this news is probably that Europe is not yet ready for a nonphysical PE concept. Nonphysical PE, sometimes called a service PE, might seem unworkable to Europe, but U.S. states have been successful in asserting nexus over these types of firms and winning in court, she says.
Google is the poster child for companies that don’t pay taxes anywhere, according to Sheppard. France hoped to put an end to that by forcing consideration of the digital economy as part of BEPS, but the United States shunted any consideration of this type of PE into a study group, where proposals typically go to die. It appears that Treasury’s efforts have been successful, with Saint-Amans essentially admitting that digital issues are going nowhere.
The fate of a digital PE is important for two reasons. The first is that companies like Google should be subject to tax somewhere. It is appalling that a major, profitable multinational pays an effective tax rate of around 2 percent. If the United States won’t step in and disregard absurd transaction structures like the double Irish and Dutch sandwich, it shouldn’t hinder efforts by France and others to tax these multinationals on their end. Google’s low tax rate is undoubtedly more the product of leaky U.S. transfer pricing rules and the OECD’s obsession with separate company accounting. But the idea of taxing Google based on the residence of its customers isn’t so far-fetched. This kind of tax planning erodes everyone’s tax base, costing taxpayers across the globe and undermining governments’ financial security. It should be stopped.
The second reason this development it important is because it shows that the United States simply isn’t committed to BEPS. That’s been clear from the beginning, as Treasury hemmed and hawed in even considering whether BEPS could address permanent establishment or tweak the arm’s-length method. But now U.S. intransigence is starting to bear fruit. It’s unlikely the BEPS project can be successful without some U.S. cooperation, and it’s hard to imagine that it’s in the nation’s best interest to continue allowing multinationals to strip income out of the U.S. tax base and avoid paying taxes anywhere.