• CFRED CUHK Law

International tax regime implications for Asia of MNE digitalisation

Nikolai Milogolov - Laboratory of Tax Policy Research at RANEPA and Tax Policy Centre of Financial Research Institute


The challenges of digitalisation today are certainly among the most discussed topics in international tax, with numerous research papers and policy reports by governments, international organizations (OECD, UN, IMF) and academics. There is a consensus that the current international regime needs globally coordinated reform to address these challenges and the design of such reform is discussed in the course of the continuing OECD/G20 BEPS Project (Pillar 1 and Pillar 2 Proposals). Asian voices are less loud than voices of the EU and US in the discussion of the new global regime. This is the gap which my research[1] is trying to address.


In my recent paper, "International tax regime implications of MNE digitalisation for four leading Asian jurisdictions: comparative analysis and discussion," I explore the emerging approaches in international taxation related with multinational enterprise (MNE) digital transformation in Asia. My comparative analysis contrasts ‘high-tax’, ‘market’ (China, India) and ‘low-tax’, ‘investment hub’ (Hong Kong, Singapore) jurisdictions. Such comparative approach is performed to substantiate my claim that tax competition is speeding up with technological development. The scale of BEPS and race-to-the-bottom could become more significant in future stages of digital transformation because global connectivity between value adding parts of the MNE makes tax control on value creation at each particular jurisdiction more and more problematic. Pillar 1 and Pillar 2, nominally enjoying internationally consensus, do not fit with the policy trends of the examined Asian states. More comprehensive reform is likely needed to also address the issues of automation (industry 4.0), global digital divide and other taxes besides corporate income tax. Some results of my research are summarized below.


India is very active in implementing new concepts aimed at ensuring more taxation of foreign digitalised business activity within its territory. This relates to VAT where India follows the approach recommended by OECD VAT/GST Guidelines (2017) and to CIT where India's activity is pioneering. Some of the concepts used (significant economic presence) deviate from the international tax treaties and therefore will not have any effect in case of treaty application because such treaties limit the signing parties' taxing rights. Other concepts (equalization levy) apply beyond treaties as they do not fall within their scope. India's approach for determining nexus (significant economic presence concept) effectively competes with the OECD Pillar 1 idea.


China is not very active in this area. China intentionally provides incentives for global expansion of its strong e-commerce players worldwide. Pillar 2 will lead to creating a barrier and adding regulatory/compliance costs for such an expansion. Pillar 2 also limits the possibilities for China to use Special Economic Zones as an instrument of its economic policy.


Recently, we can observe a shift in the understanding of the concept of MNE value creation and articulation of the growing importance of the demand-side arguments as justifying the economic value created in the state where the consumers (or users in case of digital products) reside. This shift in argumentation reflects the broader economic interests of the emerging economies with a large and growing population and important economic comparative advantages (low labor costs, developed manufacturing facilities, large and fast-growing markets). Chinese transfer pricing concepts of market premium and location-specific advantages and the Indian approach of profit attribution to PEs are two examples of such kind of demand-side arguments.


The limited scope of taxation in Singapore and Hong Kong in combination with detailed transfer pricing regulations could end up in attributing a significant share of global profits (for example, from alienation of digital services abroad by locally incorporated business) to the locally incorporated company. Such profits often are subject to a very low effective tax rate for legitimate reasons. This will not be possible under Pillar 2. Territorial regimes conceptually contradict Pillar 2 as they intentionally exclude foreign-derived income from taxation. Such regimes will likely be reconsidered in situations when applied together with Pillar 2.


As a result, neither Pillar 1 nor Pillar 2, which nominally enjoy internationally consensus, match up with the current tax policy trends in the leading Asian economies examined. For India, the proposals are ‘too little’ while for China, Singapore and Hong Kong proposals are ‘too big’.

My paper, "International tax regime implications of MNE digitalisation for four leading Asian jurisdictions: comparative analysis and discussion," will be available soon on my SSRN author page.

26 views0 comments

Recent Posts

See All

AI & Global Trade Governance: Towards A Pluralism Agenda

Han-Wei Liu - Monash University; Ching-Fu Lin - National Tsing Hua University -- In 2030, the adjudicators of the World Trade Organization (WTO) are sitting in the Geneva headquarters to hear a trade