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Taxation of Digital Economy

November 11, 2020 - by Priyan Sharma

No doubt, there is a widespread view that the international tax system needs reform to address the digitalization of the global economy, but it is not universal yet. On the particular subject, both OECD and the EU publish papers, and have released proposals subsequently with regards to allocating profits to various countries under which the international company makes sales or derives value. OECD/G20 Inclusive Framework on BEPS (IF) supports the OECD’s two-pillar ‘Unified Approach.’ OECD released draft blueprints of the technical aspects of the proposals under both pillars on 12th October 2020.

Furthermore, it is said that recent blueprints represent a considerable volume of technical work and discussion. The extension of the OECD timeline for reaching an agreement on the proposals from the end of 2020 to mid-2021 at the earliest is indicative of the challenges. 

 

The two pillars are:

  • The Taxation of the digital economy – a unified approach is the first pillar. Under this approach, the countries are most likely to get the right to tax profits of international businesses irrespective of whether they have a base in the state or not. It is most likely based on calculating a new pot of profit infusion with improved dispute prevention and resolution mechanisms. It is far away from the long-established principle of “profit where the business has a physical presence.” The proposal mainly represents the reattribution of value to market jurisdictions where users of a digital service mixed with an intended simplification of some specific aspects of transfer pricing rules.
  • Global Anti-Base Erosion (GloBE) Proposals are the second pillar. Under this approach, proposals are mostly made to counter profit-shifting by multinationals subject to low or zero Taxation. Additionally, the request is perceived as seeking to prevent a ‘race to the bottom’ on corporation tax rates by imposing an effective minimum rate of tax on corporate activities.

 

Leading insights:

On the Taxation of the Digital Economy debate, the BDO has been one of the top commenters. 

  • November 2020- The OECD had claimed that‘ Rethinking the world tax system is a must and the delay in it is most likely increases the likelihood of the proliferation of unilateral measures and of possible shifts in tax authority behaviors.
  • October 2020- As per  Laurie Dicker, BDO US Transfer Pricing, Technical Tax Leader, he discussed what has been accomplished in the past, what businesses should be doing now that these reports have been released, and what can we expect over the next months and into 2021. All of it was all told under  ‘OECD releases blueprints of the digital tax plan.’
  • Rethink transfer pricing- As per  BDO’s series of Transfer Pricing Insights into the current transfer pricing issue, it can be said that Perspectives from around the world that cover developments from tax authorities, other government agencies, judicial bodies, and the OECD are taken into consideration, and lastly the bodies are also seeing how both current economic and political conditions might have a significant impact transfer pricing structures and policies.
  • February 2020- A statement was issued back at the end of January 2020 by the OECD/G20 Inclusive Framework on BEPS (IF). It was said that there was a common international desire to find an international solution to this global challenge. Above all, people need to understand that it is challenging to find a solution to such a huge issue. But there are some attempts to simplify the administration of a new Unified Approach. In the same month, a survey of senior tax executives at companies with revenues ranging from $100m to $3bn was conducted, and it was found that the impact of the ongoing OECD work on Taxation of the digital economy is the #1 international tax concern.

Lastly,  Robert Aziz, BDO Global Head of Tax,  had shared his perspective on what a fair and workable global tax system looks like in the modern global economy.