Taxation of the Digital Economy

Addressing the challenges of the taxation of the digitalised global economy continues to be an area of rapid development.

In October 2021, the G20/OECD Inclusive Framework on Base Erosion and Profit Shifting agreed on a two-pillar solution to meet those challenges. Pillar One proposes rules that would re-write some of the fundamental building blocks of international taxation by creating a new taxing right and result in the allocation of a larger share of taxable profits to the market jurisdiction (i.e., the jurisdiction where a business has customers but no local taxable presence). Pillar One also proposes “simplifications” to existing transfer pricing rules for routine sales and marketing activities, although the road to achieving simplicity is proving problematic. Pillar Two proposes model rules for domestic laws designed to impose a minimum effective rate of tax of 15% and place a floor on international corporate tax competition.

Many obstacles, both technical and political, have impeded the ability to reach final consensus on both pillars. Adoption across the 138 member jurisdictions of the G20/OECD Inclusive Framework has inevitably been slow. Pending the implementation of the multilateral solution, there have been a number of developments in various countries regarding unilateral direct and indirect tax measures in the form of proposals, announcements and even implementation. These reflect those countries’ different conceptions of how the digital economy operates and how new sources of revenue might be generated. Unilateral measures inevitably increase compliance complexity and reporting obligations for businesses trying to apply the rules. In addition, they can result in double taxation and lead to protracted international tax disputes.

To navigate this volatile landscape, BDO developed a tool —Taxation of the Digital Economy (TOTDE)— that helps visualise the proliferation of rules, both implemented and proposed, across the world.  The tool has undergone a major refresh and expansion to cover more jurisdictions, present the data in a more user-friendly manner and expanded to include information on where covered jurisdictions are in their approach to, and adoption of, Pillars One and Two. In an upcoming edition of the tool, we will be expanding the data by providing downloadable summary overviews of each jurisdiction’s measures and policies.

If you have any specific queries or just want to find out how BDO can help you in more detail, please do get in touch.