This post explains the background to my letter in Today’s Guardian, reproduced here: “The furore over corporate tax avoidance has inevitably created a clamour for “international agreements to squeeze the multinationals” (Firms must pay their fair share of tax – this is war, 3 December). The government has said it will pursue this goal through its forthcoming presidency of the G8, yet, at the annual session of the UN tax committee in October, the UK argued that the power to tax a company must remain linked solely to the existence of a physical business establishment within a country’s territory, regardless of the value of sales to its residents. The government thus opposes changes to the UN’s model tax treaty that are supported by countries outside the G8, notably India and China. Ironically, these changes are designed to address the difficulty of taxing companies such as Google and Amazon.”
The most lively debate in the first two days of the UN tax committee meeting ended with the decision to start work on a new article for the UN’s model tax treaty that would allow developing countries to levy a tax on payments made to overseas providers of ‘technical services’. The advocates of this position support the view set out in the input paper [pdf] produced by Canadian tax professor Brian Arnold, which explains the problem as follows:
The payments for technical services erode the source country’s tax base, but such payments are often not taxable by the source country under the provisions of the United Nations Model Convention treaty. As a result, multinational enterprises sometimes use fees for technical, management and consulting services to strip the profits of their subsidiaries.
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Martin Hearson 