Taxation of the Digital Economy

Taxation of the Digital Economy is a very topical and controversial topic, as digital economy is becoming the economy itself and as a result of COVID-19 more and more businesses operate online. Following BEPS Action 1, the OECD through the Inclusive Framework is working on creating a system of taxing digital businesses.

The work on Pillar I focusses on the reallocation of taxing rights to the jurisdiction of users and/or consumers (market jurisdiction). The work proposed under Pillar I is grouped into three main blocks:

  • new profit allocation rules, examining approaches to determine the amount of profits subject to the new taxing right and their allocation among the jurisdictions;
  • new nexus rule, developing the concept of taxable business presence in a ‘market’ jurisdiction, not constrained by physical presence requirements; and
  • implementation and efficient administration, covering different instruments to implement any new taxing right, including the effective elimination of double taxation and resolution of tax disputes.

Taxand can assist you in understanding how the new rules might impact your business operations by providing the following services in the taxation of the digital economy:

  • Preparing an analysis, highlighting the key areas of the business that could affected by the new rules and proposing solutions to deal and limit the risk.
  • Preparing a presentation, analysing the proposals and what their implications for your business operations over the globe.
  • Carrying out an impact assessment to assess the new tax consequences resulting from the proposals.
  • Advising for alternative solutions to mitigate the risk and tax consequences.

The work on Pillar II is a global anti-base erosion proposal, enabling countries to tax profits shifted to jurisdictions with low effective rates of tax, building on BEPS principles. Pillar two will introduce a global effective minimum rate of tax which will operate through two inter-related rules:

  • an ‘income inclusion rule’, to tax the income of a foreign branch or a controlled entity if that income was taxed below a minimum effective rate, supplementing existing controlled foreign company rules; and
  • a ‘tax on base eroding payments’, involving an ‘undertaxed payments rule’ to deny a deduction for payments made to related parties unless taxed at a minimum effective rate, together with a ‘subject to tax rule’ incorporated into double tax treaties to deny treaty reliefs otherwise available to undertaxed payments, and possibly a withholding tax.

STI Taxand can advise on the operations and likely consequences of these proposals on your business through the preparation of a comprehensive impact assessment.