But developing countries also want any global corporate-tax system to recognize their increasing importance as producers for traditional multinationals. Digital companies may be the largest and most prominent tax avoiders, but a tax reform that focused only on these firms would clearly not be in developing countries’ interests. The US government is also against changing tax rules only for (mostly American) digital companies, because it would mean the US giving taxation authority to other countries and receiving nothing in return.
The geographic allocation of multinationals’ global profits and tax payments therefore needs to reflect supply-and-demand factors. This would take into account both sales (revenues) and employees (as a proxy for production). Such a system would benefit developing and developed countries alike.
The arguments in favor of such an approach are overwhelming. But multinationals of both the digital and traditional sort remain politically powerful. Even – or especially – in the digital economy, old-fashioned lobbying still counts.
Jayati Ghosh is professor of economics at Jawaharlal Nehru University in New Delhi, executive secretary of International Development Economics Associates, and a member of the Independent Commission for the Reform of International Corporate Taxation.