The digitalization of the economy has resulted in significant innovations, especially in terms of convenience for the general population. Now, you can buy your groceries, your clothes, and your food digitally and have those same orders brought to you within the same day or, at most, a week. However, digitalization comes with a dark side as well. The digitalization of the economy has allowed multinational corporations to take advantage of tax systems around the world by transferring their income to tax havens (or places where their income would not be subject to tax).
As of 2023, the Fortune 500 has pegged the revenues of Amazon at $469.8 billion, Alphabet (or, more commonly known as Google) at $257.6 billion, Apple at $365.8 billion, Microsoft at $204.1 billion, Meta (or Facebook) at $118.1 billion, and Netflix at $31.6 billion. Yet these tech giants have been among those criticized as avoiding taxes by shifting their income to tax havens, such as Ireland or Bermuda.
According to Fair Tax Mark, a non-profit organization, these tech companies paid significantly below threshold. From 2010 to 2017, at a time when the baseline rate for tax around the world was 35%, they paid only 15.9% of their declared profits on taxes. And while they generate millions of dollars from the Philippines, they have paid zero in taxes to the Bureau of Internal Revenue (BIR).
Technically speaking, of course, this is all legal. Unlike tax evasion, tax avoidance is a legal way of decreasing the amount of taxes that a taxpayer has to pay. Nevertheless, excessive tax avoidance can cause problems for the government, especially for developing countries like the Philippines, which would need those tax revenues the most.
One of the basic principles behind taxation is that it is the lifeblood of the nation. Without taxes, governments would not be able to function. While tax avoidance should be allowed to a certain extent, it must not result in the detriment of the government.
In 2021, the Organization for Economic Co-operation and Development (OECD) recognized the problem of tax avoidance around the world. Called “base erosion and profit shifting” (BEPS), the OECD noted that multinational enterprises were exploiting tax systems by shifting their profits to countries where their income would not be subject to tax. By the OECD estimate, countries lost $100 billion to $240 billion in tax revenues due to BEPS practices.
To combat this, the OECD, together with the G20, came up with a Two-Pillar Solution to address the tax challenges arising from the digitalization of the economy.
The first pillar addressed the issue of determining the nexus of taxation (which essentially means which government can collect the tax concerned) and the determination of the tax base. Naturally, this also requires the elimination of double taxation so that companies would not be taxed twice by different tax authorities. The first pillar also creates the concept of Amount A (which refers to a portion of the residual profit of large and highly profitable enterprises) and Amount B (which refers to the application of the arm’s length principle to in-country baseline marketing and distribution activities) and setting down the guidelines for their respective collection.
The second pillar, on the other hand, focuses on the establishment of the Global Anti-Base Erosion (GloBE) rules. Under these rules, a global minimum corporate tax rate will be set at 15% and this tax would be applicable to multinational enterprises earning €750 million annually. This minimum tax is intended to ensure that multinational corporations would be liable to pay a minimum amount of tax on their income arising from each of the jurisdictions in which they operate.
So, what does this have to do with the Philippines? The Philippines is one of the countries which is not a member of the OECD/G20 Inclusive Framework on BEPS. Meaning, it has not had much involvement in the fight against tax avoidance. Fortunately, the OECD has noted that the Philippines does not have any harmful tax regimes.
Still, it is important that the Philippines participate in this global initiative in order to curb tax avoidance. As noted before, tax avoidance hurts developing countries the most and fighting this tax avoidance issue would only serve to strengthen the country more.
The Two-Pillar Solution creates rules which allow the “redistribution of taxing rights to market jurisdictions.” Simply put, this means that the countries which would have the right to tax are the ones where the sales happen and where the users are located. In essence, this means that developing countries would gain additional revenue. The OECD estimates that, at a rate of 15% global minimum tax, countries can generate around $150 billion. Moreover, developing countries would also gain further revenues under the Subject to Tax Rule (STTR) which would allow countries to deny the application of tax treaty reliefs in certain cases.
Already, there are concrete policies that can be taken from the OECD proposal, especially on Pillar Two. As of January 2023, the Pillar One model rules are still undergoing finalization, but the Pillar Two model rules (i.e., model rules on Global Anti-Base Erosion) have already been released in 2021. One of the main policies enshrined in those model rules is the imposition of the minimum global corporate tax of 15%, as well as the rules for determining which taxpayers would that tax be applicable to. The model rules also already contain the basis for the global minimum tax, and other pertinent rules.
Instead of implementing tax measures without any significant impact and which would only harm the consumers (such as the recently proposed VAT on digital services), these OECD policies are worth the consideration of the Philippine Congress. As noted above, these measures could result in up to $150 billion in annual revenues. Revenue collections from these tech giants could then be used by the government to address inflation and support the economic recovery of the country.
This article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines or MAP.
Raymond “Mon” A. Abrea is an MPA/Mason Fellow at the Harvard Kennedy School. He is a member of the MAP Tax Committee and the MAP Ease of Doing Business Committee, co-chair of the Paying Taxes on Ease of Doing Business Task Force, and the chief tax advisor of the Asian Consulting Group.