Taxation of the digital economy and pushing fiscal boundaries

There is a widespread - but not yet universal - view that the international tax system needs reform in order to address the digitalisation of the global economy. 2018 and 2019 have seen both the OECD and the EU publish papers on this subject, and the OECD has now, in October 2019, released its proposals on allocating profit to different countries in which an international company makes sales or derives value. This so-called “Unified Proposal” (which seeks to find consensus in other proposals put forward by OECD members) would give countries the right to tax profits of international businesses (regardless of whether they have a base in the country or not) based on calculating up to three separate pots of profit. The proposal goes beyond the arms-length principle in certain respects with a greater attribution of profit to market (i.e. customer) jurisdictions. Meanwhile, in the absence of consensus and in recognition of the time that it is likely to take to agree on a workable global framework, many countries have pressed ahead and announced unilateral measures to implement their version of how the digital economy should be taxed. It will come as no surprise that these measures take a range of forms and, even where they align in concept - for example, a digital services tax - the base for taxation can differ significantly. The inconsistency of unilateral measures simply increases the complexity for businesses who seek to comply with the rules and increases the overall tax burden.

There is much work to be done and the OECD sees its role as presenting a clear way forward in 2019 with agreement by countries to a long-term global solution to take effect globally from one agreed date.

Leading Insights – recent highlights

• BDO has been a leading commentator to the debate on the Taxation of the Digital Economy. Read BDO International Tax Partner, Ross Robertson’s initial response to the OECD announcement of 9 October, and a leading article, recently published by Bloomberg Tax which explores the issues further
• Robert Aziz, BDO Global Head of Tax, in an extract from a recent video interview below shares his perspective on What should a fair and workable global tax system look like in our modern global economy:

Read more BDO Insights