Solution to the tax challenges arising from the digitalisation of the economy

Feb 03, 2020

The international community reaffirmed its commitment to reach a consensus-based long-term solution to the tax challenges arising from the digitalisation of the economy, and will continue working toward an agreement by the end of 2020.  This is according to the Statement by the Inclusive Framework on Base Erosion and Profit Shifting (BEPS) released by the OECD last week.

The Inclusive Framework (IF) on BEPS decided to move ahead with the two-pillar plan to address the tax challenges of digitalisation. The IF has agreed an outline of the architecture of a Unified Approach on Pillar One and welcomed the progress made on Pillar Two which are contained in Annexes 1 and 2 of the Statement.

The IF endorsed the Unified Approach on Pillar One as the basis for the negotiations of a consensus-based solution to be agreed in 2020. The proposed reallocation of taxing rights under Pillar One would require improved tax certainty, including effective and binding dispute prevention and resolution mechanisms. In the design and implementation of the solution, the IF also acknowledges the need to minimise complexity. IF Members noted the technical challenges to develop a workable solution as well as some areas where critical policy differences remain which will have to be resolved to reach an agreement.

IF Members also recognise there are a number of other issues where significant divergences will have to be resolved. These include;

  1. the binding nature of dispute prevention and resolution mechanisms as well as the scope of the dispute resolution mechanisms under Amount C;
  2. the suggestion by some members to weight the quantum of Amount A to account for different degrees of digitalisation between in scope business activities (so-called “digital differentiation”); and
  3. the suggestion by some countries to account for regional factors in computing and allocating Amount A (through regional segmentation). Members note that concerns have been expressed by some jurisdictions and businesses about the continued application of Digital Service Taxes.

With respect to Pillar Two, the Statement outlines that more work needs to be done.

For more information read the OECD update.