By The Japan News/Asia News Network
A proposed system for taxing large multinationals, including global tech giants, unveiled by the Organization for Economic Cooperation and Development (OECD) last month has drawn mixed views on how it will impact Japanese companies.
While one viewpoint is that only a limited number of companies will be subject to the new tax, the Japanese economic community expects nearly 100 domestic companies to be affected.
The OECD plan is being considered because multinational enterprises, such as major digital companies that provide services across borders via the internet, are seeing rapid profit growth.
The new rule will allow governments to impose taxes on companies which do not have a physical presence within their borders, such as a branch office or factory. The OECD aims to reach a broad agreement in January 2020.
Reallocation of profits
Under the proposal, mainly companies that focus on “consumer-oriented” businesses will be covered. According to sources familiar with the matter, companies with global sales of more than €750 million (about ¥90 billion) and an operating profit margin of more than 10 percent will likely be targeted.
Profits exceeding 10 percent will be treated as excess profits generated from intangible assets such as intellectual property rights and brands, and a portion of the profits will be reallocated for taxation by each country.
To avoid possible criticism from the United States and others of unfairly targeting the tech giants, the new rule would cover multinational enterprises in a wide range of industries. As such, about 100 Japanese companies would fulfill the criteria, sources said.
From simple calculations based on fiscal 2018 financial statements, companies in the service or pharmaceutical industries — notably SoftBank Group Corp., Astellas Pharma Inc., Nintendo Co., Rakuten Inc., and Fast Retailing Co., which operates the fast fashion brand Uniqlo — are expected to be subject to the new tax.
Conversely, large manufacturers with low operating profit margins such as Toyota Motor Corp. and Hitachi Ltd. would be excluded.
Among the tech giants originally considered as the main targets of the new rule, Facebook Inc. and Apple Inc. — with operating profit margins of about 44 percent and 26 percent, respectively — are highly likely to be covered, while Amazon.com Inc. may be exempted because its profit margin is about 5 percent.
Vagueness of ‘consumer-oriented’ label
Within the OECD, some have suggested calculating profit margins by focusing only on consumer-oriented business.
However, it remains a fluid issue subject to future debate as to which companies will eventually be taxed. Although the proposal identifies some fields, such as the financial and mining industries, as being exempt, it does not clearly set criteria for “consumer-oriented business.”
The proposal does state that “online advertising” is included in such business. That could be because emphasis is placed on the fact that advertisements in the end are seen by consumers, even though tech giants gain advertising revenue from businesses.
Meanwhile, in the manufacturing sector, the viewpoint has been raised that it is necessary to determine whether auto parts makers are consumer-oriented businesses or not. Then there is the possibility of conflicts of interest as each country has its own specialty industries.
“It will be difficult to distinguish whether or not a business is consumer-oriented,” said Ernst & Young member firm EY Japan Tax Chairman Nobuhiro Tsunoda.
On Oct. 31, the Japan Business Federation (Keidanren) invited OECD officials for a conference with tax accountants and others from about 200 domestic companies for a briefing of the proposal.
At the meeting, Keidanren emphasized that the range of the new rules should be properly narrowed down, showing concern that the number of companies affected could be expanded.
From now, the OECD can be expected to be locked in intensifying tugs-of-war with each government, business groups and other concerned parties.