2020 "promisses" big changes on digital economy taxation
The year 2020 is showing substantial changes in the world order and it will be remembered as the year of COVID-19, but it might also bring substantial changes in the world tax order or maybe a tax war. For more than 20 years, the world discussed the tax challenges of the digital economy without any real resolution of the challenges. Despite the rich academic research on the topic, including my intensive research, that developed deep understanding of the challenges and potential solutions, the political conflict of interests prevented any resolution. The ambitious OECD/G20 inclusive framework on BEPS, which groups more than 134 countries and jurisdictions on an equal footing, for multilateral negotiation of international tax rules for the 21st century, aims to reach an international consensus on taxing the digital economy by the end of 2020.
On January, the participants agreed to pursue the negotiation of new rules on where tax should be paid ("nexus" rules) and on what portion of profits they should be taxed ("profit allocation" rules), on the basis of a "Unified Approach" on Pillar One, to ensure that MNEs conducting sustained and significant business in places where they may not have a physical presence can be taxed in such jurisdictions. The main idea is to grant a new taxing right over a portion of residual profits allocable to market jurisdictions. This idea was brought to the table many years ago by Professor Avi Yonah in his article International Taxation of Electronic Commerce and in my article E-commerce Taxation and Cyberspace Law: The Integrative Adaptation Model. It is a promising idea that was adopted recently by the U.S. Supreme Court in South Dakota v. Wayfair in the context of inter-state sales taxation, but, I am not sure that the U.S. Administration would follow this path in the international tax context. Several responses from the U.S. direction, including responses of president Trump, and the U.S. international business community, indicate serious obstacles.
The OECD Pillar II is progressing as well, and it seeks to develop rules on global minimum tax rate. Obviously, I support this direction of thoughts, as I already proposed myself in the article Minimum Global Effective Corporate Tax Rate as General Anti-Avoidance Rule. The U.S.A. adopted this concept of minimum tax in its recent Trump Tax Reform, in the base erosion anti-abuse tax (BEAT) provisions. but that does not mean that it will agree for similar concepts at the international tax arena.
In the absence of international consensus, the unilateral option would prevail. European countries, such as France, are leading in this option with the Digital Services Tax, which imposes a turn over tax on digital services to local customers. As long as France or any other country, manages to handle the US opposition and threats, it will mark the way and open the door for other countries, but, I am sure that France is really able to doing so.
In sum, the international tax world is in a conjunction in 2020, to face the most compelling issues of digital economy taxation, with further complications due to COVID-19. An international consensus would be a revolution in the regime while an international tax war would destroy the regime. The status quo could continue for few more years but not forever and this is not the appropriate approach for taxing the digital economy in the 21st century.