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The multilateral proposed changes require significant infrastructural changes to the existing tax framework. How should such changes be implemented? Some changes are required at both the domestic law level and in the public international law arena of double taxation treaties. Other changes can be made in one or other of these fields of law (domestic or international). What other matters need to be addressed? There are many questions in the area of implementation, such as dispute resolution and dispute prevention, calculation and collection of tax, use of multilateral instruments, and the prevention of double taxation.
This chapter examines the development of digital business. It commences with a reflection on the huge benefits arising from digitalisation, including greater productivity, more competition, greater choice and convenience, innovation and profitability. It also notes that it is extremely difficult to separate the digital economy from the rest of the economy. The key features of digital businesses include direct and indirect network effects, economies of scale, anti-competitive lock-in effects, the importance of data and complementarity. The four most significant new types of business models are explained: multi-sided platforms, resellers, vertically integrated firms and input suppliers. Lastly, there are observations made about the key characteristics of highly digitalised business models which have significance and importance in the context of looking at the challenges to the international tax system.
This chapter examines the reasons for, and policy behind, the programme of work that has developed a new international tax framework. In developing two "pillars", the OECD Secretariat and, more latterly, the Inclusive Framework, with the proposals in Pillar One, have broken new ground in proposing new taxing rights without the requirement of physical presence in the source or market jurisdiction. These profit allocation rules radically depart from the existing international tax framework. In addition there are other proposals that use formulaic calculations, residual profit split methodology and elements of formulary apportionment, allocating profits to the marketplace jurisdiction, ignoring the single entity concept, and departing from the arm's-length principle. In respect of Pillar Two, the proposal to prevent profit shifting is equally controversial. The proposals under Pillar Two contemplate a minimum level of tax paid on all internationally operating businesses. These proposals confront the international tax framework norm in the areas of transfer pricing, the use of intellectual property, residence taxation and, in particular, tax competition.
This chapter analyses the two pillars of the Unified Approach and the Global Anti-Base Erosion Proposals in the light of alternative policy choices which were available to the OECD. These major alternative policy choices include destination-based cash-flow taxation, residual profit allocation by income, formulary apportionment and expanding the concept of permanent establishment. In each case these policies are explained and the advantages and disadvantages of the major policy discussed. Each policy is then analysed to see what it has contributed to the 2020s compromise and what further contribution it might make to international tax reform in the future.What emerges from this analysis is that key elements of the reform owe much to the destination basis of taxation present in the various alternative reform options and selectively adopted in particular by the Unified Approach in Pillar One.
This chapter describes the key characteristics of cross-border taxation. Most countries around the world operate hybrid systems involving the taxation of their residents (usually on worldwide income) and non-residents on income which has a source in their jurisdiction. In order to lay some foundational groundwork for the later examination of the taxation of digitalised business, the history of the original 1920s compromise is discussed in order to establish the arbitrary nature of the framework and, in part, to try and understand why it has been so outstandingly successful for such a long period of time.The next part of the chapter looks at the fundamental question of how we justify taxation. The particular focus, in the context of cross-border taxation and trade, is on the taxation of non-residents doing business in a country. The benefit theory suggests that a modification to the 1920s compromise can be justified to expand the taxing rights of multinational enterprises in the digital age. This is also supported by the absence of any constraints in domestic source taxation. But in the age of base erosion and profits shifting, can the threats of the digital economy be ignored?
This final chapter looks at the alternatives between unilateral digital services taxes and a multilateral consensus on international tax reform. It analyses the key features of digital services taxes and contrasts the advantages and disadvantages against a multilateral solution. Then it goes on to analyse five key future international tax trends that form part of the 2020s compromise and considers the tax implications in the light of the COVID-19 crisis.
This chapter considers the key characteristics of the digitalised business models discussed in Chapter 2 and outlines seven key challenges to the current international tax system devised by the 1920s compromise. These are the vanishing ability to tax business profits, the use of data (and the corresponding difficulties of assessing contribution and value), the reliance and mobility of intellectual property, the characterisation of income, the failure of transfer pricing in certain multinational transactions, the inadequacy of residence-based taxation and, lastly, competition by states.These issues remain, making the current international tax system fragile to the expansion of highly digitalised business notwithstanding the outstanding and prompt action by the OECD on the BEPS action plan.
This chapter examines the response proposed by the OECD Secretariat to the challenges to the international tax framework posed by the digital economy. The challenges are very different because some, such as the allocation of taxing rights and taxable nexus, are comparatively recent challenges emerging from the enormous success of the digitalisation of the economy. As companies have been able to secure massive business advantages from the network effect, the use of data, the role of users and the ability of business to identify customer needs, so has the need to address taxation on remote sales become more urgent. Pillar One, with its proposal to allocate taxing rights to the market jurisdiction in circumstances where there is no physical presence, is a key part of this response. Other challenges, such as the issues in tax competition and transfer pricing, are more generic and long-standing. These are addressed by Pillar Two using broad-brush remedies against base erosion and profit shifting. They can be seen as a backstop to the more specific actions proposed by the BEPS 15 point Action Plan.
This chapter continues the examination of the international tax landscape and sets out the two broad options for the reform of tax on cross-border transactions. It has a particular focus on legal constraints existing in double tax agreements and trade agreements. In responding to the challenges detailed in Chapter 3, countries are faced with the option of a consensus-driven multilateral solution, or some form of unilateral domestic interim taxation. In designing unilateral taxes, one needs to be informed and aware of the limitations imposed by existing international trade and taxation agreements. This chapter highlights the potential constraints but concludes that certain forms of unilateral taxation remain as options within these existing legal constraints.
The question of how to tax multinational companies that operate highly digitalised business models is one of the most contested areas of international taxation. The tax paid in the jurisdictions in which these companies operate has not kept pace with their immense growth and the OECD has proposed a new international tax compromise that will allocate taxing rights to market jurisdictions and remove the need to have a physical presence in the taxing jurisdictions in order to sustain taxability. In this work, Craig Elliffe explains the problems with the existing international tax system and its inability to respond to challenges posed by digitalised companies. In addition to looking at how the new international tax rules will work, Elliffe assesses their likely effectiveness and highlights features that are likely to endure in the next waves of international tax reform.
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