Internet firms and taxes: Patch-up job

THE international framework for taxing multinationals has been tweaked and refined over several decades under the aegis of the OECD, a club of mostly rich countries. But it remains “a patchwork of national laws and international treaties, frayed by internal and cross-jurisdictional inconsistencies,” laments Ajay Gupta, editor of Tax Notes International.Internet businesses find it especially easy to exploit the holes in the fabric to shift profits to places with lower taxes. Data on an internet user in one place can be analysed in another, then used to sell advertising, aimed at that user, to an advertiser in a third place. Taxmen generally cannot get their teeth into a web firm’s profits unless it has a “permanent establishment”—an ill-defined term—on their turf.All this lets internet giants engage in breathtaking tax gymnastics. In 2011 Google cut its tax bill by $2 billion by routing some sales royalties through units in Ireland, the Netherlands and Bermuda. The OECD aims to produce firm proposals for reform by 2015, and was due to give an update on its progress on January 23rd, after The Economist went to press. Pascal Saint-Amans, the head of its tax division, says it is proving “complex and contentious”.The OECD’s big worry is that those European and developing countries that most dislike the present set-up may lose…

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