Photo/IllutrationParticipants finish their family photo session of the G20 finance ministers and central bank governors meeting on June 9 in Fukuoka. (AP Photo)

What sort of corporate taxation system is appropriate in this digital era of corporate profits arising from online data exchanges?

The Group of 20 Finance Ministers and Central Bank Governors Meeting, held earlier this week in Fukuoka, confirmed the need to devise common rules to create a global corporate taxation system.

But as to the specifics of the restructuring, each nation has its own agenda. Forging an agreement will not be easy since taxation is "the ultimate embodiment of national sovereignty" in the words of Finance Minister Taro Aso.

However, tax reform befitting this digital era is imperative, and we hope the G-20 finance chiefs will strive to find common ground.

The premise of the current rules is that corporations manufacture and sell goods, and they are taxed on the profits generated at points of manufacture or sale, such as factories and branch offices.

Absent from the current rules is any business model based on global IT giants such as Google, Apple, Facebook and Amazon--collectively referred to as GAFA. No matter how much money they make from music downloads and online advertising, they are not taxed in countries where they have no physical base of operation.

To tax GAFA and the like, new rules are needed to enable taxation in countries where there are users of digital services provided by them.

The Organization for Economic Co-operation and Development (OECD) has issued three proposals as a basis of discussion. They represent different approaches according to the physical presence or absence of IT giants in the countries concerned.

Britain proposes taxation based on the number of social media and search engine users, the underlying argument being that the providers of such services can mine users' personal data for their own financial gains.

India is calling for a simple tax formula based on sales in each country.

On the other hand, the United States, which is home to GAFA, is reluctant to apply a simple tax formula based on the number of users and other factors. The reason is that much of the mined personal data is of no practical marketing value until it has been analyzed.

The United States proposes considering the brand strength of GAFA as a taxable "intangible asset" in countries where the companies have users. And by the same argument, the United States asserts that the same taxation system should also apply to non-IT businesses.

Each of these three proposals appears to represent the interests of the countries concerned. But even so, the current rules do not enable any country to adequately tax the profits made by digital service operators. However, there is consensus on the inevitability of a system restructure. This means there must be room for compromise.

The G-20 finance chiefs also agreed to set a minimum level for an effective corporate tax rate so that the earnings of affiliate companies operating in countries with a tax rate below the minimum level can be incorporated into the parent companies' aggregate profit and taxed accordingly by the governments of the countries where the parent companies are based.

The purpose is to prevent tax evasion by eliminating countries with excessively low tax rates.

The G-20 finance ministers and central bank chiefs are aiming to reach a broad agreement next January. We hope the entire world will work together to expedite the process.

--The Asahi Shimbun, June 11