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Recent, rapid and expansive digital transformation has had deep economic and societal impacts resulting in significant changes. This has sparked global debates in many legal and regulatory realms and international tax is no different. The tax implications are wide-ranging affecting both direct and indirect taxation, broader tax policy issues, and tax administration.
At the centre of the debate is whether international income tax rules, developed in a "brick-and-mortar" economic environment 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), have served their purpose well. Namely, they have enshrined tax certainty and helped to eliminate double taxation stimulating global trade.
Today, however, three important phenomena facilitated by digitalisation – scale without mass, reliance on intangible assets, and the centrality of data – pose serious challenges to elements of the foundations of the global tax system.
On one hand, the emergence of new and often intangible value drivers have revolutionized entire sectors creating new business models while continuously eroding the need for physical proximity to target markets. This continuously challenges the effectiveness of existing profit allocation and nexus rules to distribute taxing rights on income generated from cross-border activities in a way that is acceptable to all countries, small and large, developed and developing (the so-called allocation of taxing right issue).
On the other hand, new technologies have facilitated tax avoidance through the shifting of profits by multi-national enterprises (MNEs) to low or no tax jurisdictions. This is the essence of the base erosion and profit shifting (BEPS) project and remains a top priority of the work of the Inclusive Framework.
The centrality of a predictable, efficient and sustainable international tax system within the ecosystem of economic growth and global welfare cannot be overstated.
Growing discontent among countries has catapulted these issues to paramount importance and the urgency to act has left governments in search of effective responses. The result of nearly a century of multilateral efforts to create a clear, consistent, and coordinated tax system lies in the balance.
Given the nature of these challenges and the difficulty to put borders around the digitalised economy, the approach at this critical juncture is clear: a comprehensive consensus-based solution that deals with both the allocation of taxing rights and the remaining BEPS issues. This would secure and sustain the international income tax system and increase tax equity amongst traditional and digital businesses.
Failure to deliver, however, will ultimately lead to a patchwork of unilateral actions, which in a fragile global economy, would harm investment and economic growth hampering the ability of governments to collect revenues and invest in programmes.
The recent success of the elimination of double non-taxation through the BEPS Project illustrates the strength of a coordinated multilateral approach.
Members of the OECD/G20 Inclusive Framework on BEPS (Inclusive Framework) have been dedicated to finding a comprehensive, consensus based solution to the two challenges arising from digitalisation, and committed to deliver this solution before the end of 2020.
Specifically, the Inclusive Framework has convened public consultations engaging key stakeholders including governments, businesses, civil society, academia, and the wider public welcoming a broad array of opinions on the matter to help us chart a path forward.
To reinforce sustainability, the Inclusive Framework is also conducting economic analyses and impact assessments to ensure that any solution complements existing conventions securing the integrity of the global tax system.
All members of the Inclusive Framework have dedicated significant resources and attached substantial political imperative to finding a timely resolution of the issues at stake.
Considering the importance of the challenge and understanding that global consensus is the target, we have made substantial gradual progress. Key milestones accomplished so far in this work include:
Concrete proposals for the two challenges facing the international income tax can be found in the Programme of Work (PoW):
Pillar One – the Re-allocation of taxing rights
- Addresses the question of business presence and activities without physical presence;
- Will determine where tax should be paid and on what basis;
- Will determine what portion of profits could or should be taxed in the jurisdictions where customers and/or users are located;
Pillar Two – Global anti-base erosion mechanism
- Will help to stop the shifting of profits to low or no tax jurisdiction facilitated by new technologies;
- Will ensure a minimum level of tax is paid by multinational enterprises (MNEs);
- Levels the playing field between traditional and digital companies;
The PoW explores technical design implementation issues that must be refined to develop a comprehensive and consensus-based solution. The PoW is also the foundation for the "Unified Approach" on Pillar One proposed by the Secretariat, which suggests a path forward for reallocating some profits and corresponding taxing rights.
The OECD is also providing support to developing countries on this work, through a set of regional events on digitalisation, carried out in partnership with regional organisations and development banks.