Global Tax Reform To Forestall Digital Tax

Establishing a global tax regime may rob digital tax initiatives of their momentum.

Decades overdue, the two-pillar proposal from the Organisation for Economic Co-operation and Development (OECD) for international tax reform received the backing of 132 countries, representing more than 90% of global GDP. The first pillar would reallocate tax jurisdiction from where multinationals are headquartered to where they make profits, while the second pillar would establish a global minimum corporate tax rate of 15%.

The long delay in agreeing a global framework has, however, seen many European countries to either announce, propose, or implement their own unilateral digital services tax (DST).

“The UK government has always maintained that it would look to repeal the DST when OECD measures are implemented,” says Ross Robertson, international tax partner at BDO. “I continue to view that as likely, and probably even more so given the concession of the exclusion of financial services from pillar one, which I would see as placing further pressure on the UK to follow through on that commitment.”

Robertson also expects the EU to stick to its commitment to shelve its own digital tax levy plans and refocus its efforts on the carbon border adjustment mechanism. “The future of DSTs more broadly lies in the debate around whether developing nations can, or should, be precluded from implementing DSTs in the period when the scope is restricted to a relatively small number of very large multinationals,” Robertson says. “It is possible we may see the OECD needing to drive a multilateral approach, to design a DST to at least prevent the risk of multiple different versions of DSTs appearing globally, which would be difficult for business to manage from a compliance standpoint.”

While the first pillar has the potential to address many of the concerns generated by the current tax framework, Robertson predicts pressure for the revenue threshold to ease over time, as all businesses are increasingly digital now, not just the largest multinationals.