OECD declares progress on global tax reform, but hurdles remain

US tech giants such as Google, Amazon, Apple and Facebook are collecting billions in profits each year, but their tax bills are surprisingly light. The firms take advantage of their global footprint to book their profits in countries with low tax rates. But governments around the world are working to close that loophole, and last weekend they made a breakthrough.

The Organization for Economic Cooperation and Development announced that more than 130 governments have agreed to change the global corporate tax code. Under current rules, companies are taxed only if they have a permanent establishment in that country, which means fixed places of business such as offices and factories.

Now, governments have agreed to tax big firms regardless of where they are established, as long as they are recording sales and profits across borders via the internet.

Negotiators were able to hammer out the framework in a matter of months after the G20 meeting in Japan last June, which ended with a communique urging member states to proceed quickly with tax reform.

The next step is to set a revenue threshold for the new rules. And though the tech titans are the impetus for the changes, other firms are likely to be affected too, such as luxury goods, cosmetics, and home appliance makers.

But there are hurdles ahead, most notably in the form of a US proposal called “safe harbor”. Treasury Secretary Steven Mnuchin has suggested companies should be allowed to choose between the old rules and the new. So even if an agreement is reached, it could be rendered toothless.

Meanwhile, other countries are trying to introduce their own taxes on digital services. France and the UK are leading the pack on this. But the OECD is hoping it can institute the global reforms before unilateral taxes complicate the picture.

The OECD members are aiming to reach a final agreement by the end of the year. If they manage it, it could be the biggest shakeup of the international tax code since the rules were formulated almost a century ago.