SouthViews No. 220, 28 June 2021
Improve nexus rule for fair distribution of taxing rights to developing countries
By Radhakishan Rawal
One of the open issues for Pillar One in the discussion on the taxation of the digital economy is the nexus threshold, which would determine which Multinational Enterprises (MNEs) have a taxable presence. Big developed economies or smaller developing economies both may be deprived of taxing rights as a result of nexus thresholds as presently described in the Pillar One proposal. Further, even where smaller thresholds are adopted, some countries may still be denied taxing rights. Financial threshold was never a parameter of distributing taxing rights between the countries. A minor tweaking of the tax certainty process could address the issue.
This article recommends giving the taxing right over Amount A of Pillar One, which covers the main portion of taxable profits from the digital economy to all the market jurisdictions, but to give rights related to affected tax jurisdictions only to those countries meeting the nexus thresholds. This approach will result in a fair distribution of taxing rights and will also ensure that there is no additional burden on the tax certainty process, which will be easier for developing countries.
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This article was tagged: Affected Tax Jurisdictions, Amount A, Automated Digital Services (ADS), Consumer Facing Businesses (CFB), Digital Economy, Digital Taxation, Double Taxation, Group of 7 (G-7), Inclusive Framework, Multinational Enterprises (MNEs), Nexus Rules, Permanent Establishment, Pillar One, Tax, Tax Certainty, Tax Law, Tax Policy, Tax Reform, Taxing Rights, Trustee