World tax challenges in digital economy

The OECD has recently released that the International community has renewed commitment to address tax challenges from digitalisation of the economy.

The OECD / G20 Inclusive Framework on BEPS, which groups 137 countries and jurisdictions, agreed during its 8-9 October meeting that the two-pillar approach they have been developing since 2019 provides a solid foundation for a future agreement.

 
This is an important step as, the absence of a consensus-based solution, could lead to a proliferation of unilateral digital services taxes.

✔ The OECD considers that the centre of the debate is whether international income tax rules, developed more than a century ago, remain fit for purpose in the modern global economy.

✔ The fundamental elements of the global tax system which determined where taxes should be paid (“nexus” rules based on physical presence) and what portion of profits should be taxed (“profit allocation” rules based on the arm’s length principle), are challenged by the current digitalisation context which permits scale without mass, reliance on intangible assets and the centrality of data. 

✔ As a reminder, the OECD summarises that: 

1. Pillar 1 (“nexus rules”) aims at establishing new rules on where tax should be paid and a new way of sharing taxing rights between countries. Its purposes consists of ensuring that digitally-intensive or consumer-facing Multinational Enterprises (MNEs) pay taxes where they conduct sustained and significant business, even when they do not have a physical presence, as is currently required under existing tax rules. Consequently, the re-allocation of taxing rights will determine where tax should be paid and on what basis as well as what portion of profits could or should be taxed in the jurisdictions where customers and / or end users are located.
2. Pillar 2 would introduce a global minimum tax that would help countries around the world address remaining issues linked to base erosion and profit shifting by MNEs. The Global anti – base erosion mechanism will help to stop the shifting of profits to low or no tax jurisdictions and to ensure a minimum level of tax is paid by MNEs.

 
✔ As an example of unilateral digital services taxes and effective as from Jan. 16, 2021, Spain has approved new regulations relating to the application of a so – called “Google tax” that levies by 3% the rendering of digital services, as it was informed in a previous post.

✔ Last but not least, it must be mentioned how important is it to avoid the risk of further uncoordinated unilateral measures that, based on the OECD predictions, could reduce global GDP by more than 1% annually.