Adroit nations can catch elusive taxes

The new French government’s warm welcome to tech companies does not extend to granting absolution from tax. Bruno Le Maire, France’s finance minister, called last week for Europe to assert itself and “make Google, Amazon and Facebook pay what they owe to European taxpayers”.

Multinationals’ agility in shifting profits between jurisdictions is at the core of the problem. In principle, economic activity should be taxed where it takes place. Technology companies do not fit neatly into such a system; but even if Google’s tax arrangements are legal, the sales it declares in France are clearly not commensurate with the scale of its activities there.

Such discrepancies undermine public faith in the equity of the tax system. Given the rapid growth of the digital economy, they also present a growing challenge to the management of public finances. The Organisation for Economic Co-operation and Development estimates that $100bn-$240bn of revenues are lost each year due to the gaps in international rules that allow corporate profits to be artificially shifted to tax havens.

Some countries are trying to close loopholes through unilateral legislation: the UK has instigated a tax on profits it believes to have been artificially diverted and India has introduced its own “equalisation levy”.

A real solution, though, depends on international action. In June, 70 countries committed to sign a new pact tackling tax avoidance, which should in theory resolve some of the thorniest issues. But the US has not yet signed up and its approach to worldwide income gives Washington little reason to help other countries increase their tax take from US companies it believes to be unfairly targeted. A global deal is the ultimate goal, but much can be done before global efforts bear fruit. Companies will always strive to minimise their tax bill. Governments must show equal ingenuity and perseverance to keep pace. London, July 17.