This study provides a panoramic view of the evolution of the debate on taxation of the digital economy. It aims to inform policy makers and negotiators from developing and least-developed countries on the latest developments and status of multilateral level negotiations, the types of unilateral measures so far explored by individual countries, and their impacts so far.
The economy as we know it today is on the verge of transformation. Digital technology is penetrating every economic sector and every business, market and workplace. In the context of globalised economic activities and value chains, this accelerating digitalization comes with the challenge of taxing rapidly expanding online marketplaces and businesses without checks at physical borders. The existing tax legislations and policies are found more and more incapable of ensuring fair and effective taxation of companies and Multinational Enterprises (MNEs) who no longer need to establish “brick and mortar” companies and branches across borders to access markets and perform transactions. The key founding principles of the global taxation system and deriving regulatory frameworks are in question as they allow grey areas that larger MNEs, running digital businesses are able to exploit to shift profits and avoid taxes. Realising the large amounts of tax revenue losses resulting from these tax avoidance schemes and the even more significant losses that are expected if this situation persists, governments recently started taking actions towards ensuring fair and effective taxation of the digital economy at the multilateral level as well as at the national level.
At the multilateral level, the international tax system and regulatory frameworks have been so far developed through recommendations and soft laws advanced by the Organisation of Economic Cooperation and Development (OECD) and backed with recommendations from the United Nations Committee of Experts on International Cooperation in Tax Matters to ensure developing countries and LDCs special contexts and needs are taken into consideration. In 2013, the G20 and OECD jointly created the Base Erosion and Profit Shifting (BEPS) Programme to address the global taxation system shortfalls. In 2015, BEPS identified 15 Action-points – at the top being Action 1 “Address the Tax Challenges of the Digital Economy “- now subject to global discussions and negotiations. In 2016, it was decided to establish the BEPS Inclusive Framework and open the process and negotiations to non-OECD countries, thus, allowing developing countries to participate in the discussions originally set between a group of mostly developed countries.
With the BEPS Inclusive Framework, OECD is now leading a multilateral negotiation process aiming for a global solution for Action 1 by the end of 2020. Despite the OECD BEPS Inclusive Framework ongoing process of negotiations and OECD’s advice against unilateral measures, many governments of both developed and developing countries found it difficult to wait years for a consensual solution to be reached and proceeded with exploring and adopting new tax measures and regulations addressing the digital sector and online businesses.
This study will give a panoramic view of the evolution of the debate on taxation of the digital economy. It aims to inform policy makers and negotiators of the developing and least-developed countries on the latest developments and status of multilateral level negotiations, as well as on types of the unilateral measures so far explored at the individual countries’ level and their early impacts.