Digital Economy Taxation: Progress So Far
By Chirag V, VCMV & Associates LLP
To put things in perspective, digital economy will be USD 23 trillion globally, or 24.3% of global GDP by 2025! Hence, political leaders, media outlets, and civil society around the world have expressed growing concern about tax planning by Multinational Enterprises (MNE) that makes use of gaps in the interaction of different tax systems to artificially reduce taxable income.
1. The Digital Economy and Actions that Followed
Therefore, in response to this concern and following issuance of BEPS Action Plan in 2013, the chart below captures the milestones:
Final Report issued by the OECD – Addressing the Tax Challenges of the Digital Economy
Call for input, comments and public consultation
Release of interim report – Tax Challenges Arising from Digitalisation Policy note on tax and digitalisation
Release of the policy note on tax and digitalisation Public consultation Programme of work to develop consensus-based solution “Unified approach” under Pillar One was proposed Global Anti-Base Erosion Proposal under Pillar Two was proposed
Statement by the OECD/G20 to work on inclusive framework on BEPS on a two-pillar approach Delivery of blueprints of Pillar One and Pillar Two Public consultations on the above blueprints
Public consultation on the blueprints
2. Challenges Recognised
The OECD recognised the following tax challenges posed by the digital economy:
a. Existing profit allocation and nexus rules to distribute taxing rights on income generated from cross-border activities is otiose within the digital economy.
b. Shifting of profits by MNEs to low or no tax jurisdictions.
In the BEPS Action Plan 1, the OECD prescribed some far-reaching multilateral reforms, such as the conception of a single firm, modification of source and residence, and deemed PE, while providing several possibilities, including the concept of Significant Economic Presence, withholding tax on digital transactions, and equalisation levy. However, consensus could not be reached due to geopolitical issues. Hence, this led to adoption of unilateral measures by few of the affected leading economies, namely the UK, India, France, Spain, Hungary, etc.
3. Actions Proposed
In late 2019, the OECD/G20 inclusive framework was formed comprising 137 member countries.
This inclusive framework has prescribed a unified approach, with a two-pillared approach to address direct tax challenges:
a. Pillar One focuses on nexus and profit allocation, i.e. under Pillar One, the OECD divides the profits earned by MNE into two different categories, Amount A & B.
b. Pillar Two is focused on global minimum tax intended to address remaining base erosion and profit shifting issues caused by large MNEs.
4. UN Proposal
The UN came up with a proposal that is radically different from the unified approach proposed by the OECD, i.e. rights to tax the income earned by digital MNEs would be shared between the country of residence and the country of source.
This article has been written with the assistance of Aditya Sriram and Bharathi V.
Chirag VGGI member firm
VCMV & Associates LLP
Advisory, Auditing & Accounting, Corporate Finance, Fiduciary & Estate Planning, Tax
T: +91 44 2828 2930
Founded in 2017, VCMV & Associates LLP is a young and dynamic firm specialising in taxation (direct tax, international tax, transfer pricing, GST) and regulatory, litigation, advisory and assurance services. The organisation is based in Chennai and employs a total of 26 staff and professionals.
Chirag V is a Chartered Accountant and an ex-Big Four. He holds more than a decade’s worth of experience in advising Indian as well as Multinational Companies in the areas of corporate law, corporate tax, inbound/ outbound structuring, expatriation tax and exchange control regulations from an Indian perspective.
Published: International Taxation Newsletter, No. 14, Spring 2021 l Photo: jamesteohart - stock.adobe.com