A Toss Up? Comparing Tax Revenues from the Amount A and Digital Service Tax Regimes for Developing Countries
By Vladimir Starkov and Alexis Jin
In this paper, we attempt to estimate the tax revenues to be gained by the Member States of ATAF, WATAF, AU and the South Centre under the Amount A and an alternative stylized DST taxation regime. Our research demonstrates that the comparative revenue effects of the Amount A and DST taxation regimes largely depend on (a) the mix of relevant domestic economic activities at market jurisdictions (i.e., revenues sourced to the country as a market jurisdiction under Amount A and the level of revenues from automated digital services generated in the country), (b) design details of the DST regime such as the DST tax rate and the nature of activities to be taxed and (c) the relief from double taxation, if any, countries will grant to domestic and foreign taxpayers under DST. This paper contains analysis relying on sources of information available to private sector researchers and it does not involve review of any information that individual taxpayers provided to tax authorities.
COMMENTS ON PILLAR ONE – AMOUNT A: DRAFT MULTILATERAL CONVENTION PROVISIONS ON DIGITAL SERVICES TAXES AND OTHER RELEVANT SIMILAR MEASURES
The BEPS Monitoring Group, 25 January 2023
The BEPS Monitoring Group submitted comments to the public consultation on the draft provisions on withdrawal of Digital Services Taxes and ‘relevant similar measures’. Abdul Muheet Chowdhary, Senior Programme Officer of the South Centre Tax Initiative, was a contributor.
These draft provisions are amongst the most controversial aspects of the Pillar One rules, as countries which decide to implement the OECD solution will be expected to give up the use of DSTs and similar measures on all companies, not just those in-scope of Amount A.
The proposed OECD Pillar One and Two reforms mark a significant shift in the way large multinational enterprises are taxed on their global incomes. However, while considering the reform at the proposed scale tax administrators must be able to compare the revenue gains with alternatives. This paper uses open-source data to provide tentative estimates of the impact of Pillars One and Two. The methodology has been detailed so that administrators can replicate it for comparison. Further, the paper provides an assessment from the perspective of developing countries of some of the key design elements of the proposals so as to understand whether they are administrable and to foresee possible challenges.
Two Pillar Solution for Taxing the Digitalized Economy: Policy Implications and Guidance for the Global South
by Irene Ovonji-Odida, Veronica Grondona, Abdul Muheet Chowdhary
The taxation of the digitalized economy is the single most important topic in international tax negotiations today. The OECD has devised a “Two Pillar solution” to the problem. Pillar One is focusing on a reallocation of taxing rights to market jurisdictions, which are largely expected to be developing countries, and Pillar Two is instituting a global minimum tax. The Pillar One solution, known as Amount A, will be codified into a Multilateral Convention (MLC) and is expected to be placed before countries for signature in early 2023. The solution ushers in a new paradigm in the taxation of multinational enterprises but has immense complexity and likely minimal revenue gains for most developing countries. It will also require them to give up the right of unilateral tax measures on all out-of-scope companies, meaning they will only be able to tax the fewer than 100 companies likely to be in-scope, if at all. The decision to sign or not is thus a historic one, as it will lock developing countries into a constricted new framework, at a time when revenue needs are especially critical to recover the economies from COVID-19 in the context of a turbulent state of the global economy.
However, the United Nations too has a solution, known as Article 12B. This operates in a different manner and is a minor modification to the existing decentralized international tax system which is based on bilateral tax treaties, and which developing countries are more familiar with. It is also likely to generate far higher revenues than Amount A, and does not restrict any of their sovereign taxing rights. This Research Paper assesses the various implications for developing countries from adopting the OECD’s or the United Nations’s respective solutions and concludes with a possible global South response to the Two Pillar solution.
Artículo 12B: una solución del tratado tributario del Comité sobre Cooperación Internacional en Cuestiones de Tributación de la ONU para la tributación de ingresos digitales
Por Rajat Bansal
La tributación sobre los ingresos de las empresas multinacionales dedicadas a actividades digitales por las jurisdicciones de origen y las de mercado es actualmente el desafío más importante para la comunidad tributaria internacional. El actual conjunto de miembros del Comité en cuestiones de tributación de las Naciones Unidas finalizó, en abril de 2021, una medida de tratados tributarios para abordar este desafío. Este informe explica la justificación para la solución particular de agregar un nuevo artículo a la Convención Modelo de las Naciones Unidas, sus méritos y cómo esto puede ser beneficioso para todos los países, especialmente los en desarrollo.
Article 12B – Une solution de convention fiscale par le Comité fiscal des NU pour taxer les revenus numériques
Par Rajat Bansal
L’imposition sur les revenus des entreprises multinationales dans des activités numériques par les juridictions de la source ou de marché est actuellement le défi le plus important pour la communauté fiscale internationale. La composition actuelle du Comité fiscal des Nations Unies a finalisé, en avril 2021, un accord de convention fiscale pour relever ce défi. Ce rapport explique la raison d’être d’une solution particulière consistant à insérer un nouvel article dans le Modèle de convention des Nations Unies, ses mérites et comment il peut être bénéfique pour tous les pays, en particulier les pays en développement.
Article 12B – A tax treaty solution by the UN Tax Committee for taxing digital incomes
By Rajat Bansal
Taxation of income of multinational enterprises engaged in digitalised businesses by source or market jurisdictions is currently the most important challenge before the international tax community. The current membership of the United Nations Tax Committee in April 2021 finalised a tax treaty solution to address this challenge. This brief explains the rationale for coming up with a particular solution of inserting a new Article in the United Nations Model Tax Convention, its merits and how it can be beneficial for all countries, especially the developing ones.
Statement by the South Centre on the Two Pillar Solution to Address the Tax Challenges Arising From the Digitalisation of the Economy
The South Centre takes note of the statement by 130 members of the OECD/G20 Inclusive Framework (IF) on a two-pillar solution to address the tax challenges arising from the digitalisation of the economy. The agreement by the members is indeed historic and marks progress in the right direction. Unfortunately, the agreed upon solution is limited and disappointing as it falls short of the more ambitious and transformational reforms needed for a balanced agreement that fully responds to the concerns of developing countries, especially in the backdrop of the socioeconomic challenges posed by the COVID pandemic. Nine jurisdictions have not agreed with the statement, with the reasons still not public; however, it is a signal that cannot be ignored.
Assessment of the Two-Pillar Approach to Address the Tax Challenges Arising from the Digitalization of the Economy
An Outline of Positions Favourable to Developing Countries
Report by the South Centre Tax Initiative’s Developing Country Expert Group
Irene Ovonji-Odida, Veronica Grondona, Samuel Victor Makwe
This report is written primarily for developing country negotiators in the Inclusive Framework and accordingly contains a technical assessment of Pillars One and Two. The aim is to discuss the positions and principles which can inform the negotiations in developing countries’ best interests. However, it is also written for a larger audience, particularly diplomats involved in financing for development discussions and international trade rule making, so as to sensitise them to the nuances of the ongoing discussion on the taxation of the digitized economy. In the midst of the COVID-19 pandemic and a devastating economic downturn, it is more important than ever to ensure that developing countries obtain their due taxing rights. This report is an initial contribution in that direction.
Mesures nationales sur l’imposition de l’économie numérique
ParVeronica Grondona, Abdul Muheet Chowdhary, Daniel Uribe
Le Cadre inclusif sur le BEPS de l’Organisation de coopération et de développement économiques (OCDE) envisage une approche fondée sur deux piliers en matière de taxation de l’économie numérique. Les premières estimations concernant l’impact de ses recommandations montrent une modeste augmentation de la collecte de l’impôt sur les sociétés, dont les bénéfices devraient revenir principalement aux pays développés. Dans le même temps, les mesures nationales de taxation de l’économie numérique se multiplient, en conséquence de la pandémie de COVID-19. Le droit international reconnaît pleinement ce droit aux pays, bien que cette approche soit considérée comme une forme d’unilatéralisme. Ce document de recherche met en lumière les mesures de fiscalité directe prises par différents pays et présente les trois approches clés retenues pour taxer l’économie numérique : (1) l’imposition de taxes sur les services numériques ; (2) l’élaboration de règles permettant d’établir un lien fiscal pour les entreprises numériques qui opère par l’intermédiaire d’une présence numérique significative ; (3) des retenues à la source sur les transactions numériques.
Medidas Tributarias Nacionales sobre la Economia Digital
Por Veronica Grondona, Abdul Muheet Chowdhary, Daniel Uribe
El Marco Inclusivo de la Organización de Cooperación y Desarrollo Económicos (OCDE) está considerando un enfoque de dos pilares en relación con el cobro de impuestos sobre la economía digital. Las estimaciones preliminares acerca de la repercusión de sus recomendaciones indican un modesto incremento en la recaudación de impuestos sobre la renta de las sociedades, cuyos beneficios se prevén que se dirijan principalmente a los países desarrollados. Al mismo tiempo, están proliferando las medidas nacionales en materia de cobro de impuestos sobre la economía digital, un cambio estimulado por el comienzo de la pandemia de COVID-19. Los países también tienen plenos derechos a aplicarlas en virtud del derecho internacional, pese a las etiquetas de “unilateralismo”. En este documento de investigación se ponen de relieve las medidas en materia de impuestos directos que están adoptando diversos países y se exponen tres enfoques fundamentales con respecto al cobro de impuestos sobre la economía digital: 1) impuestos sobre los servicios digitales; 2) normas sobre un nexo en base a una presencia digital significativa; y 3) retenciones en origen sobre las transacciones digitales.
