In today’s digital world, the foundational infrastructure of businesses has changed. It relies heavily on online communication networks that allow the generation and the exchange of a huge amount of data instantly, which is being processed through data technology tools and used by businesses remotely. The mobility of the Digital Economy (DE) and its strong reliance on intangibles makes it difficult to ensure that the taxation is aligned with the location where economic activities take place and where value is effectively created.
Digitalization exacerbated Base Erosion & Profit Shifting (BEPS) issues at the level of both, the market jurisdiction (the country from which income is originated) and the residence jurisdiction (the home country) of the digitalized enterprise and was at the origin of the phenomenon so-called "stateless income".
To date, it is obvious that the international tax rules that have been in place for more than one century do no longer fit to the new modern global economy and that new rules need to be designed to allow for this changing and fast-moving environment, while securing transparency, fairness, and long-term sustainable economic growth. The change is deep, notable, and very fast, raising a number of tax challenges, both policy and technical.
The work on tackling tax issues of digitalization has been the main area of concern and focus of the international tax community particularly since 2013. Action 1 of BEPS Action Plan, entitled "Addressing the tax challenges of the Digital Economy", released by OECD in 2015, was specifically dedicated to address the so-called “Broader tax challenges” related to nexus rules (connecting links to the market jurisdiction to assert the right to tax) and profit attribution rules (rules which enable attributing a fair share of profits to the jurisdiction where nexus is established, based mainly on the analysis of functions performed, assets used and risks assumed), but failed to address them.
Some proposals were identified but none of them were ultimately recommended. Further works have been carried out by the OECD/G20 Inclusive Framework (IF) under the lead of OECD to agree on a two-pillar solution, i.e. so-called BEPS 2.0, to tax the DE and solve any remaining BEPS issues. Other works have also been undertaken more recently by UN aiming at attributing more taxing rights to source jurisdictions over specific “Automated Digital Services” defined as services with little human involvement from the service provider, including mainly advertising services, online search engines, social media platforms and cloud computing services.
In this context, this study is conducted with the aim to outline the specific features, i.e. policy rationale and design rules, of both proposals, i.e. the OECD and UN proposals, and analyze the effectiveness of each proposal in better tackling and addressing the specific tax challenges of the DE, thus ensuring that multinationals pay a fair share of taxes wherever they operate.
This study consists of two main parts. The first part focuses on outlining the specific DE features and explaining how they challenged the traditional international tax rules. The second part outlines the two proposals and analyzes their potential effectiveness in addressing the issue.
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Manel Bondi is the Digital Taxation Director for the Digital Cooperation Organization.
An expert in international taxation, Manel is also a Tunisian Tax Advisor for the International Tax Affiliate of the Chartered Institute of Taxation of UK (CIOT – UK), runs her own tax firm in Tunisia, and is the Tunisian Country Chair of G100 - Tax & Incentives.
She is a holder of the Advanced Diploma in International Taxation (ADIT), supervised by the CIOT UK, as well as the Executive Program in Transfer Pricing (EPTP) Certificate, delivered by the Tax Policy Center of the University of Lausanne, and the Executive Certificate on Comparative Tax Policy and Administration (ComTax) delivered by Harvard Kennedy School USA.
Manel is also a lecturer. She gives courses on International Taxation to Post-graduate students.