US, Europe diverge on tough taxation for digital firms

A move to bring in tough new international tax rules especially targeting digital companies has failed to find international backing. The French initiative targeting digital companies, such as Google and Amazon, was opposed by the US, forcing the dilution of proposals that would be put up at G20 summit this week.

Senior officials in Washington say they would not support rule changes that narrowly targeted the activities of some of the nation's fastest-growing multinationals, The Guardian reported citing sources with knowledge of the situation.

The Organisation for Economic Co-operation and Development (OECD) is in the process of putting together a much-anticipated action plan for tax reform at the gathering of G20 finance ministers this Friday, but the US and French governments remain sharply divided over the proposals.

While the Americans are not opposed to the updating of rules, they are understood to be in favour of moderate change. They are believed to be looking for tweaking the text of international tax treaties while opposing introduction of wholly new passages directing the taxing in the digital economy.

The US position consequently remains at odds with that of several G20 nations, especially France, which came out with radical proposals for new concepts, in January, in international tax treaties meant to address some of the avoidance measures deployed by internet firms.

Corporate tax avoidance has emerged as a hot political issue following public outrage over revelations in the past year that companies such as Apple and Google had used structures which according to US and European politicians were meant to minimise the amount of taxes paid.

The OECD would present an "action plan" highlighting broad areas where changes would be discussed at a G20 meeting later in July.

Reuters which claims to have seen a preliminary draft of the plan, dated 27 May, said the organisation had already identified several specific profit shifting schemes.

"Domestic and international tax rules should be modified in order to more closely align the allocation of income with the economic activity that generates that income," the draft said, in line with observations of politicians in the US and Europe over the past year.

Business lobby groups have questioned whether companies did engage in activities aimed at shifting profits to units in tax havens and whether such a move was warranted.

However, with governments labouring under massive deficits following the financial crisis, lawmakers had said enough was enough.