Seeking global tax justice: Global tax policy for the digital economy – part two

Posted in: Business and the labour market, Economics, European politics, Global politics, IPR internship, UK politics, US politics

Valeria Ortega Berzunza and Nadine Shannon are Research Interns at the University of Bath Institute for Policy Research (IPR), working with Dr Charles Larkin, Director of Research at the IPR.


In the second entry of this two-part series, we continue the discussion on global tax policy for the digital economy with a focus on the allocation of tax rights across jurisdictions. Part one gave an overview of the ongoing international effort to address the tax policy challenges raised by the intangible economy and aggressive tax practices by multinational companies, with extremely low levels of tax paid by globally by major multinational corporations. The focus was on the development of a global minimum corporate tax rate.

Even though the Reports on the Pillar One and Pillar Two Blueprints (2020) hold valuable features towards developing a solution to the tax challenges, there is a call for simplification— to reduce complexity, compliance costs and disputes risks for both taxpayers and tax administrations — especially in the current context where countries are facing different challenges in a pandemic crisis, that has increased the reliance on and dynamism of a digitalised economy.

The one key criticism which emerged from governments and stakeholders regarding the Pillars was that they were overcomplicated. A cry for simplicity, certainty, practicality, and sustainability echoed from governments and multinational enterprises (MNEs). In response to this, governments have been proposing alternate or parallel plans to the preliminary solution that the OECD gave last year.

Recent developments

Recently the G7 announced their position to commit to a 15% global minimum tax rate on a country-by-country basis, as well as to reallocate, to the market jurisdictions where the MNEs operate, at least 20% of the profit.

On a parallel roadmap, the European Commission issued a Communication to the European Parliament and the Council, a policy document entitled Business Taxation for the 21st Century. The document outlines a Business in Europe: Framework for Income Taxation (BEFIT).

BEFIT aims to go beyond the OECD model, being one of the main goals to “provide a simpler and fairer way to allocate taxing rights between Member States”. One of the features of BEFIT is the ability to consolidate the profits of MNEs and then allocate them to Member States using a formula, to be taxed at national corporate income tax rates. Action 5 from the document, tabling a proposal for BEFIT, providing new rules for allocation of taxing rights between Member States, is planned for 2023.

It is yet to be seen how Pillar One and Pillar Two will be assembled in an EU framework that wants to be consistent whilst competitive. However, considerations around these measures are running parallel to BEFIT as it is anticipated both frameworks will provide rules to allocate taxing rights. One can only wonder if this overlap may foster a new way to carry out international tax planning.

Only Pillar One will be considered here, under the assumption that the EU document mentions that BEFIT will work once the multilateral convention is agreed and given there is not enough to analyse BEFIT. Also, Pillar One provides a starting point since it is already in course.

The debate on Pillar One and the allocation of profits

Pillar One overlooks non-digital business, and concerns were raised on whether new taxing rights were introduced by Pillar One or just acknowledged if the reallocation was on residual profit, and if there was a direct intersection between Amounts A and B. From what seemed an absence of consideration for different sectors, the technical and practical challenges were placed on the very basics of tax policy: nexus, source allocation, and double taxation.

On the profit allocation, stakeholders insisted on a clarification to be incorporated on the need to consider altogether double taxation and allocation. The double taxation effect must be considered in both the residence and sourcing country. Also, when considering the profit that is being reallocated, it should be well outlined (e.g., the routine profit, a residual profit, and excess return on intangibles) considering country specifics — source or residence — and industry specifics.

Pillar One is, on the one hand, based on a broad definition of the digital economy, and on the other aims to achieve segmentation either on Automated Digital Serves (ADS) or Consumer-facing businesses (CFB), turning one of the main features of Pillar One to not just a very complex matter, but also into a subjective practice. Uncertainty and the risk of disputes over the application of segmentation criteria were shared. Stakeholders' joint stand was to preserve business self-segmentation, as well as to rely on financial metrics. Remarkably, the segmentation issue was raised by digital content streaming platforms that, pursuant to the Pillar One Blueprint, could fall under ADS classification, as opposed to the online sale of goods and services.

The development of revenue sourcing rules

The idea of developing a set of hierarchical rules to pinpoint the source seems to appeal to all parties involved. The highlighted benefit of the revenue sourcing rules (RSR) goes back to any public policy and legal framework basics, that is certainty by exploiting perhaps OECD's most fundamental feature: 'standardisation'. Consequently, the RSR are expected to allow the taxpayers to comply uniformly across jurisdictions.

Hence, the discussion regarding the RSR was focused elsewhere, mainly on whether the rules are flexible enough and if the criteria to locate the source was adequate. The RSR were discussed from an internal implementation and compliance standpoint, for tax and privacy purposes. During the public consultation meeting it was mentioned that sometimes simplification is won at the expense of accuracy. Although this is a good rule of thumb, applicable to many situations, due to the inaccuracy of certain RSR's criteria (e.g., IP address), the reliance on the information provided by the user may be more practical.

Suggestions have been proposed to adapt the Value Added Tax rules into the income realm. Considering the broad reliance of the RSR on sharing user information throughout the digital chain, it is worthy of mentioning an observation made stating that user data may stay under government or international organisations' watch. Challenges on the governments' ability to manage aggregate data and security concerns were mentioned repeatedly, both in the documentation submitted and in the public consultation meeting.

Also, it was mentioned that if the place of consumption may be more practical to be placed on the first place of purchase, for example, when considering services such as the purchase of advertisement. Moreover, it is noted that due to jurisdictions' privacy regulations, at some point, there might be some actors that will have to claim that the information is 'unavailable' making redundant the RSR.

Moreover, on the RSR, the necessity to share information between digital services providers to comply with tax obligations should be reconsidered from a 'data economy' standpoint. Further considerations await to be debated on the tax field apropos of the type of underlying asset being transferred, how to assign the value and transfer pricing for data sets, among other human rights and privacy concerns. From an earlier impression of the European Digital Strategy, this policy raises the question: are some jurisdictions more prepared or more competitive to collect and transfer data? Would these advantages translate into a more efficient and/or accurate tax system? How damaging would a Digital Services Tax be to EU-US relations?


There is no doubt that someone had to do something to address tax problems arising from digitalisation and to acknowledge a change in society. Nevertheless, the lack of clarity in the Blueprints and previous documentation outlining the pillars, produces uncertainty and practical challenges as the capability to address non-digital sectors is questionable.

Therefore, although significant progress has been achieved by identifying the challenges and proposing solutions in the Blueprints Report, the technical and administrative concerns expressed in the public consultation process should be taken into account.

Nonetheless, it is uplifting to be reassured by the representatives that countries agree that the sustainability and simplification are relevant for the 'reconstruction' of multilateralism and global solutions. The need for simple solutions resonates in the formation of BEFIT where it is assumed that a simpler system will provide a competitive advantage in a single market context. However, it is worth noticing that the allocation rules might not be enough if the frameworks fall short when providing a classification for the digital business, derived from the failure to understand the digital businesses, and for the compliance of rules to track the source of the revenue.

As Pillar One and Pillar Two await to be discussed in the political arena with the G20—after the G7 committed on firm grounds without Ireland on the party—whether the public consultation was a great dialogue exercise or a just a trigger for BEFIT is yet to be seen.

Especially after there is a lot to be discussed around the scope of the term operate as it is the factor that will determine the reallocation of at least 20% of the profit to the market jurisdictions where the MNEs are operating.


Beyond the general call for simplification, the stakeholders' technical contributions and practical solutions will be taken into account by the OECD's members and countries' policymakers. This process is still fraught, despite the US taking on a more active leadership role. The US and the EU remain deeply divided on certain matters, such as the Digital Services Tax. The effectiveness of the much-welcomed return of the US to multilateral negotiations has been placed in doubt by a recalcitrant US Senate and the prospect of hostile Congress following the November 2022 midterm elections.

Even with those caveats, these G7 discussions and the leadership of the OECD BEPS project are an excellent opportunity to prove that, in the process of building an improved international taxation system, change is sourced out of a dialogue practice, following Jürgen Habermas's dialogue work. The OECD's technical teams now have a more comprehensive view and a wider pool of ideas to produce a better model to address the challenges arising from digitalisation. Countries’ representatives recognise all the efforts, as well as  acknowledge that digitalisation is not just a threat to the integrity of tax collection, or the trigger of an unfair perception, but also a great opportunity for everyone.

All articles posted on this blog give the views of the author(s), and not the position of the IPR, nor of the University of Bath.

Posted in: Business and the labour market, Economics, European politics, Global politics, IPR internship, UK politics, US politics


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