Written by Marcin Szczepański.
On 8 October 2021, the OECD announced that, following years of intense negotiations, 136 countries had finally reached an agreement on how to tackle the tax policy challenges arising from the digitalisation of the economy. A growing realisation that these challenges cannot be addressed by the existing tax system – over a century old – helped achieve the breakthrough. With this, one of the main questions pertinent to the digital economy – how to fairly tax businesses that rely on intangible assets and have no or only an insignificant physical presence in the tax jurisdictions where they operate – seems to have been answered.
The EU and other international bodies have been discussing these issues for some time. In March 2018, the EU introduced a legislative package on the fair taxation of the digital economy. It contained proposals for an interim and a long-term digital tax. However, there was no immediate political agreement in the Council. As finding a global solution at the OECD level or a coordinated EU approach was not yet feasible at the time, some Member States started designing or implementing their own digital taxes, which gave rise to trade tensions.
The two-pillar solution agreed under the auspices of the OECD will put an end to this fragmentation. Pillar One would reallocate taxation rights concerning the largest and most profitable multinationals, and Pillar Two would introduce a global minimal corporate tax rate. While the consensus has been broadly welcomed, the new rules have also sparked controversy, particularly regarding their impact on developing countries, their complexity and their resilience to possible circumvention. The agreement will be presented for endorsement during the G20 Leaders’ Summit scheduled for 30-31 October 2021 in Rome.
This Briefing updates a previous one from March 2020.
Read the complete briefing on ‘Taxing the digital economy: New developments and the way forward‘ in the Think Tank pages of the European Parliament.
Listen to policy podcast ‘Taxing the digital economy: New developments and the way forward’ on YouTube.