France has failed to secure backing for tough new international tax rules specifically targeting digital companies, such as Google and Amazon, after opposition from the US forced the watering down of proposals that will be presented at this week's G20 summit.
Senior officials in Washington have made it known they will not stand for rule changes that narrowly target the activities of some of the nation's fastest growing multinationals, according to sources with knowledge of the situation.
The Organisation for Economic Co-operation and Development (OECD) has been told to draw up a much-anticipated action plan for tax reform at the gathering of G20 finance ministers this Friday, but the US and French governments have been at loggerheads over how far the proposals should go.
While the Americans concede that the rules need to be updated, they are understood to be pushing for moderate change. They are believed to want tweaks to the existing wording of international tax treaties rather than the creation of wholly new passages dedicated to spelling out how the digital economy should be taxed.
This has put the US at odds with several G20 nations, particularly France, which in January published radical proposals for new concepts in international tax treaties designed to counter some of the avoidance measures deployed by internet firms. Officials at the G20 governments have been working closely with the OECD, a club for the world's industrialised nations, over the proposals.
Despite opposition from the US, the French position – which also includes a proposal to link tax to the collection of personal data – continues to be championed by the French finance minister, Pierre Moscovici.
The OECD plan has been billed as the biggest opportunity to overhaul international tax rules, closing loopholes increasingly exploited by multinational corporations in the decades since a framework for bilateral tax treaties was first established after the first world war.
The OECD is expected to detail up to 15 areas on which it believes action can be taken, setting up a timetable for reform on each of between 12 months and two and a half years.
Among the areas expected to take longest to produce results is in which jurisdiction a multinational group should pay tax on its business activity, under "permanent establishment" rules. Many internet firms' tax structures, such as those of Google and Amazon, exploit loopholes in this area.
While the case for broad reform of the international rules has been made repeatedly by top politicians around the globe, in many areas there is limited common ground on what shape new rules should take.
As a result, because of its consensus-driven nature, the OECD action plan is expected to contain watered-down recommendations in some areas.
Nevertheless, the OECD has already made clear it regards aggressive tax engineering by internet multinationals to be among six "key pressure areas" it will address.
In a report to the G20 in February it said: "Nowadays it is possible to be heavily involved in the economic life of another country, eg by doing business with customers located in that country via the internet, without having a taxable presence therein.
"In an era where non-resident [corporate] taxpayers can derive substantial profits from transactions with customers located in another country, questions are being raised as to whether the current rules ensure a fair allocation of taxing rights on business profits, especially where the profits from such transactions go untaxed anywhere."
However, tensions are thought to have surfaced in the OECD working party looking at how to address the permanent establishment rules in the light of the burgeoning internet economy. This working party is being jointly led by US and French teams – representing the extremes of opinion among G20 nations.
France has been among the most aggressive in responding to online businesses that target French customers but pay little or no French tax. Tax authorities have raided the Paris offices of several firms including Google, Microsoft and LinkedIn, challenging the companies' tax structures.
In the case of Google, in 2011 French tax officials demanded €1.7bn (£1.47bn) in back taxes. In February this year Google settled the case, agreeing to paying €60m to help France with digital innovation and other issues. The French president, François Hollande, said it was "a model for effective partnership and is a pointer to the future in the global digital economy."
In the UK, outcry at internet companies routing British sales through other countries reached a peak in May after a string of investigations by journalists and politicians laid bare the kinds of tax structures used by the likes of Google and Amazon.
Margaret Hodge, the chair of the public accounts committee, called Google's northern Europe boss, Matt Brittin, before parliament after amassing evidence on the group's tax arrangements from several whistleblowers.
After hearing his answers, she told him: "You are a company that says you do no evil. And I think that you do do evil" – a reference to Google's corporate motto, "Don't be evil".
Last month, the Treasury minister David Gauke told backbench MPs who had called a short debate on multinationals and tax avoidance that the government did still hold out hope that shortcomings in international tax guidelines – specifically in what constitutes a business taxable in the UK under permanent establishment rules - would be addressed by the G20.
"We are leading the way in encouraging the OECD to look at what needs to be done to ensure that the tax rules are brought up to date for the internet world," he said.
Writing in the Observer in May, the Google chairman, Eric Schmidt, appeared to drop his previously unapologetic defence of existing international tax rules.
In the face of building public anger, he conceded that rather than taking up tax incentives offered by governments, his firm and others had built tax structures that had not been foreseen by those who drafted the rules decades ago before the advent of the internet.
"Given the intensity of the debate, not just in the UK but also in America and elsewhere, international tax law could almost certainly benefit from reform," he wrote, describing this week's OECD action plan as "hotly awaited".
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