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 revolutionised 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 multinational 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 141 members of the OECD/G20 Inclusive Framework.
