Developing Countries’ Tax Challenges from the Digitalization of the Economy
There is a global consensus that the existing international tax rules and standards are not adequate to fairly allocate taxing rights and income among countries, prevent tax base-eroding transactions carried by multinationals, and fight harmful tax competition among countries. The digitalization of the economy has escalated these problems, and even developed countries are not able to collect taxes on the profits of multinationals anymore. Haskel and Westlake (in Capitalism without Capital, 2017) outlined that institutions and laws needed a “reboot” to adequate to the “inherent contestedness of intangible” that “tested to destruction” the current tax rules. The effects of the pervasiveness and contestedness of the digital economy on the existing international tax system were noticed, and countries are seeking to reform the international legal tax system focusing on changing the corporate and income taxation standards to face the tax challenges arising from the digitalization of the economy.
The ongoing international taxation legal system reform process was triggered by the G-20 with the announcement of the OECD mandate to lead the Base Erosion and Profit Shifting Project (BEPS). The BEPS Project sought to identify and propose tax policies to strengthen the international taxation system and fight against aggressive tax planning. The BEPS Project was a set of 15 Action Plans intended to issue reports on different tax issues such as harmful tax Competition, transfer pricing, and hybrid mismatches.
Due to the strong digitalization of the economy, the report on BEPS 1 Action “Addressing the Tax Challenges of the Digital Economy has become the starting point for a major corporate tax reform debate and negotiations, including the discussion of new rules for allocating taxing rights and income, and global anti-erosion measures. The BEPS Action 1 Report concluded that the establishment of a ring-fenced set of rules designed for the digital economy would not be desirable and proposed a more holistic and broader reform of the corporate tax system. Thus, the Members of the Inclusive Framework on BEPS agreed to negotiate new rules under the BEPS 1 Action work.
Additionally, the BEPS project introduced not only a new set of international taxation standards but also the new international taxation global governance architecture with the creation of two new international collaborative mechanisms: the Inclusive Framework on BEPS and the Platform for Collaboration on Taxation.
My Policy Brief, "Addressing the Developing Countries’ Tax Challenges of the Digitalization of the Economy" sheds some light on the implications for developing countries concerning the new international taxation global governance structure and the ongoing corporate tax reform process under the OECD and the Inclusive Framework on BEPS umbrella. The objective is to inform developing countries tax authorities on the issues that may require further South-South cooperation and action to protect taxing rights that are of vital importance for the achievement of the Sustainable Development Goals 2030. The first part describes the new international collaborative mechanisms created after the BEPS Project: the Platform for Collaboration on Tax and the Inclusive Framework on BEPS. The second part outlines the international tax reform proposals under negotiations in the Inclusive Framework on BEPS. The conclusion addresses the challenges for developing countries to participate in the ongoing international tax reform effectively.
Monica Victor, University of Florida