A Step Toward Smarter Taxes on Multinationals’ Profits

(Bloomberg Opinion) -- For years governments have been discussing how to bring century-old international tax rules into line with modern business practices. A new proposal developed at the Organization for Economic Cooperation and Development, a think tank backed by industrial-country governments, is a big step forward.

Under existing rules, multinationals have great leeway to shift profits to low-tax jurisdictions, with little regard to where their products are actually produced or consumed. This so-called base-erosion problem is only going to get worse. The long-term move from manufacturing to services, and from physical to intangible assets, keeps widening the opportunities for avoidance. Governments are already losing about $500 billion a year as a result — a revenue shortfall that has to be made good by taxing workers, and companies without international operations, more heavily.

Taxing multinationals in part according to the location of their customers would make such avoidance harder, because customers aren’t as mobile as a titular corporate headquarters. Essentially, that’s what the OECD is advocating. The details, including exactly how to divide the revenue, need to be hammered out — but merely accepting the basic principle would be valuable progress.

One notable advantage of this approach: It doesn’t target a single industry, as countries such as France have done. Technology giants such as Google parent Alphabet Inc. and Apple Inc. would be affected, but no more than other multinationals of similar size. The idea would encompass any company with at least $800 million in annual revenue and a significant customer base in foreign markets. It would apply only to a share of profits above an agreed threshold. This also makes sense, because it would make the system easier to operate, and soften political resistance to the change.

Critics say the proposal doesn’t go far enough, leaving profits undertaxed and benefiting rich countries more than poor. They have a point: Possible alternatives are more ambitious. Nonetheless, giving weight to customers’ location is a big improvement when it comes to narrowing the opportunities for avoidance. And a failure to adopt some such cooperative principles would lead more governments to follow France’s example and impose new taxes on foreign multinationals — unilaterally, inequitably and inefficiently. Austria, Italy and the U.K. are considering similar plans.

France and others have said they’ll stand down if discussions at the OECD come up with a solution. Now they have — in outline, at least. Officials have been tasked to produce a final plan next year. Finance ministers are arriving in Washington for meetings of the International Monetary Fund and World Bank. They should take the opportunity to endorse this tax-rule proposal and press to complete the plan. They’ll be showing, into the bargain, that global economic cooperation is not quite yet a lost cause.

Editorials are written by the Bloomberg Opinion editorial board.

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