Fifteen Eighty Four

Academic perspectives from Cambridge University Press


International Tax: The Dawn of a New Era?

Craig Elliffe

The world established an international tax regime in the 1920s which most countries follow with respect to cross-border transactions. It has had a remarkably successful tenure. There has been, however, a prevailing view that the international tax rules are not currently fit for purpose. Initially, this was driven by various aggressive tax planning techniques by multinational corporations and by countries tax-competing between themselves. The resultant Action Plan on Base Erosion and Profit Shifting (BEPS) led to a package of reforms involving 15 action points agreed to by all OECD and G20 countries. Approval of the BEPS package occurred in late 2015.

Amongst the 15 Actions was the most vexing question in contemporary International tax policy: how to appropriately and fairly tax the digital economy? The digital economy has generally led to a higher standard of living for people through increased efficiency, productivity and economic changes. These changes are not all positive (think of some social changes such as live streaming of terror attacks, alleged interference in electoral processes and selective exposure to self-justifying news sources).

In the area of taxation there are also significant changes. Nearly all highly digitalised businesses do not require a physical presence in a jurisdiction, yet they can supply a superior way to sell goods and services. Any changes to the taxation of highly digitalised businesses would necessitate a seismic shift from the existing international tax framework. This is because under the current rules, a foreign entity requires a nexus to a country to be taxed on profits derived in that country of source (a non-resident enterprise is usually necessary to have a physical presence in a jurisdiction). Furthermore, what income should be allocated to the source jurisdiction (what portion, if any, of the profits are attributable to the activities carried on in the market jurisdiction)?

There is no quick fix to resolve the issue that highly digitalised businesses currently pay very little source-based corporation tax. Add to this the Covid-19 pandemic, the resultant need of governments for revenue, and the dominance of the highly digitalised businesses in a time of self, or small-group isolation imposed by “lockdowns”, and the urgency of tax reform becomes clear.

The Inclusive Framework is a group of 138 countries who are working under an unbelievably tight deadline to deliver a multilateral, consensus-based solution to the tax challenges of the digital economy. This multilateral solution involves two pillars as follows:

• Pillar One, which allocates new taxing rights in respect of a percentage of residual profits of multinational companies to the market or source country.

• Pillar Two, which provides for a global minimum tax no matter what multinational tax planning occurs.

The G20 leaders have authorised the Inclusive Framework to deliver this new international tax framework by mid-2021. In the absence of a 2020s compromise (the multilateral solution or a variant thereof), over 40 countries are considering, or will operationalise, their own individual Digital Services Taxes.

Angel Gurria, the Secretary-General of the OECD has noted the importance of delivering this solution by mid-2021. In his words, “we cannot wait forever”. A US negotiator is to be appointed by the Biden administration. The new US Secretary of the Treasury, Janet Yellen, said in her confirmation hearings that the US is “committed to the cooperative multilateral effort to address base erosion and profit shifting through the OECD/G20 process, and to working to resolve the digital taxation disputes in that context”. This is positive news to assist in a timely resolution and possibly herald the dawn of a new era.

The original 1920s compromise was forged in the context of the significant worldwide deficits which it had arisen because of the First World War and the influenza just at the end of the war. The 2020s compromise might be forged on the anvil of the Great Lockdown, and the burgeoning digital economy, as countries struggle to deal with the enormous economic consequences of one of the most significant health crises of the last hundred years.

Taxing the Digital Economy by Craig Elliffe

About The Author

Craig Elliffe

Craig Elliffe is a Professor of Taxation Law at the University of Auckland. Prior to becoming an academic, he spent twenty-three years as a tax partner for major international lega...

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