The Future of International Taxation in a Digitalized World, Part 1: The OECD’s View

How should international taxation evolve to reflect an increasingly digital global economy? It’s a crucial question and one that a growing number of stakeholders are striving to address. The OECD and the European Commission (EC) have separate, but related, efforts under way to do so, for example, and tax leaders will want to monitor these initiatives. Both organizations issued important publications in March; a subsequently published PwC Tax Policy Bulletin contains useful overviews of each effort.

The report summarizes and analyzes two documents:

1. The OECD paper, Tax Challenges Arising from Digitalisation – Interim Report 2018, published by the OECD Inclusive Framework on BEPS; and
2. The EC publication, Fair Taxation of the Digital Economy (available here.)

The bulletin’s analysis of these reports’ content is quite helpful; even more valuable, to my mind, is PwC’s commentary on the implications for businesses. I’ll pick up a couple of salient points for the OECD recommendations here and will cover the EC material in an upcoming post.

• Businesses are concerned about the potential for double, or even multiple, taxation. The interim report does not recommend the introduction of specific interim measures; it simply explores the challenges, identifies different positions among some member countries, and proposes a commitment to spend the next two years bringing those countries together on a compromise. However, some countries have already introduced unilateral measures, and others may do so. To minimize overall negative impacts, such countries should consider measures to minimize the risk of over-taxation, the OECD group suggests.
• The scope of “digitalization” remains unclear. The OECD report’s explanation of digital marketplaces is broad and deep, the bulletin notes. At the heart of the OECD’s discussion are divergent views around how and where digital businesses create value and should, therefore, be subject to tax.  It is clear that challenges remain around defining the notion of “digitalization” in relation to tax: “The digital economy increasingly is the economy, and it cannot be ring-fenced. Any changes will therefore impact all businesses, however narrowly policy makers try to draw them.”

Stay tuned for the next blog in this series, which will examine the future of digital taxation regulation from the EU’s view.