File photo of woman walking past a logo of Google at the Global Mobile Internet Conference (GMIC) 2015 in Beijing...A woman walks past a logo of Google at the Global Mobile Internet Conference (GMIC) 2015 in Beijing, China, in this April 28, 2015 file photo. Google is shuttering Google Compare, its U.S. comparison-shopping site for auto insurance, credit cards and mortgages after one year, the Wall Street Journal reported on February 22, 2016, citing people familiar with the matter. REUTERS/Kim Kyung-Hoon/Files
After pulling its China search service in 2010 over a censorship row, Google has been making efforts to mend relations © Reuters

Tax “optimisation”, as the offshoring of assets by multinational companies is euphemistically known, has long been one of the sore points of globalisation. Capital can move more easily across borders than either people or goods, which means that large companies that can shift profits to more favourable tax locales benefit disproportionately from the neoliberal system.

The fact that multinational corporations can float above the concerns of nation states in this way is, of course, one of the big reasons for the current political populism. So, it is no surprise that countries such as the UK are now suggesting fundamental shifts in the nature of corporate taxation in an effort to level the playing field. The core idea behind taxing revenues at the point of sale rather than profits is that it would reduce the sort of financial engineering that allows intellectual property and data rich companies like Google to benefit from revenues generated from, for example, audiences in Britain, and yet book the profit from that revenue into tax havens with lower rates. It is a problem that was first raised at the global level by the Organisation for Economic Co-operation and Development in 2012, via its Base Erosion and Profit Shifting Initiative or “Beps”, which aims to come up with a method of taxation that limits offshoring of profits and allow individual nation states to avoid a race to the bottom around tax rates. It was also the topic of a three-day conference in February, involving the UN, World Bank, International Monetary Fund and the OECD.

The issue has been turbo-charged by an increasing awareness that the companies that hold the majority of wealth today have no need of a major physical presence in their various markets, or even a fixed national headquarters.

While nearly any big company can use financial engineering to offshore cash, companies based on intangibles such as internet protocol, rather than old fashioned tangible goods, can do it most easily. Among these are the US-based technology platform companies (Apple, Google, Facebook and the like). Their growing wealth and ability to offshore assets means that half of all US corporate profits from overseas are now located in tax havens such as Ireland, Luxembourg, the Netherlands, Switzerland and Jersey.

Of course, the labour market disruption caused by such groups will require states to revamp educational systems, improve vocational training, and do a lot more to create a 21st century workforce. That requires tax revenue — which in turn requires finding something to tax that cannot be moved around so easily — like consumption and the revenue that comes from it.

The UK is not alone in its suggestion that corporate taxation should be fundamentally changed. A number of EU finance ministers support a tax on revenue versus profits. Other countries, such as India, have already implemented “equalisation” levies on payments in excess of $1,500 to foreign enterprises without permanent establishment in the country. When, say, Amazon makes a sale there, a certain amount of tax is withheld on the payment. All this represents a big shift in the old order.

The Silicon Valley giants are, of course, complaining bitterly. At an OECD conference last year at the University of California Berkeley, Robert Johnson, a representative for the Silicon Valley Tax Directors Group, insisted that “raw user data isn’t like oil . . . Value is created by the development and production of goods and services, not consumption”.

Yet consumption of online goods and services is what generates the user data that companies can then monetise. Crafting a smart and fair system of digital taxation will not be easy, as the outcry over the UK plans suggests. It is also clear that at a time when corporations hold more economic power relative to states than ever before, it will also be essential.

rana.foroohar@ft.com

Letter in response to this column:

A fair approach to global corporate taxation / From Chris Preston, Cowes, Isle of Wight, UK

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