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Editorial: US must not be permitted to water down new tax rules for digital giants

A total of 137 countries and regions including Japan have agreed in principle on an outline of new international taxation regulations for tech giants. They say they are aiming to reach a final agreement by the end of 2020.

U.S. internet giants such as Google LLC and Inc. are earning huge profits from online services overseas while paying relatively small amounts of taxes outside the United States. This is because under current rules, the countries which host factories and offices of these companies can impose corporate tax on their profits.

The draft would allow taxes to be imposed on internet giants and other businesses in any country where they have earnings, even if they have no physical presence there, as long as they have online customers there. This is a measure necessary to ensure that taxes are shared fairly.

However, since different countries' interests tend to conflict with each other over international taxation, they face a challenge in ensuring that the new rules are viable.

Particularly problematic is the United States' proposal to allow individual companies to decide whether to abide by the new rules or operate under the current ones.

If information technology giants choose to operate under current taxation rules, the new rules would be rendered toothless. It is only natural that Japan, Europe and many other countries have voiced concerns about the U.S. proposal.

At the same time, since outright rejection of the proposal could have prompted Washington to walk out of negotiations, leading to the collapse of the talks, countries had no choice but to put the U.S. proposal on the agenda.

Washington has protested the moves to create new digital taxes as targeting the United States. The recently agreed outline would cover not only IT companies but also highly profitable multinational businesses, out of consideration for the U.S.

Under the new rules, the tax burden on U.S. pharmaceutical companies that have huge political influence could increase, and this is apparently why Washington proposed allowing IT and other firms to choose whether to abide by the new tax rules or operate under the current ones.

The administration of U.S. President Donald Trump has previously made light of international cooperation in tackling trade and global warming issues. It cannot be helped if the Trump administration is viewed as prioritizing its own benefits in the new international taxation rules.

The U.S. suggestion could throw the global economy into chaos. European countries have long considered imposing own taxes on IT giants. This would not happen if the new rules come into force. But they are poised to impose such taxes if the rules are watered down. United States, meanwhile, has hinted at the possibility of imposing punitive tariffs in such a scenario, possibly triggering a pointless conflict.

The current international taxation system was established about a century ago on the assumption that it would apply to manufacturers that have factories overseas. The system has not been able to keep pace with the rapid digitization of the world economy.

Reform of the international taxation system into a fair one is essential for the wholesome growth of the digital economy. Japan, which has led discussions on the new taxation rules with Europe should urge the United States to cooperate to that end.

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