taxation of digital economy research paper

Taxation of Digital Economy

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• Parthasarathi Shome 3 , 4  

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The digital sector has little physical presence in taxing jurisdictions, rendering its taxation challenging. The OECD’s October 2015 BEPS Action 1 Final Report observed that digitalisation exacerbated BEPS and identified ‘nexus, data and characterisation’ issues. The G20 asked that OECD’s Inclusive Framework (IF) of more than 100 members deliver a solution by 2020. A 2018 interim report analysed nexus and profit allocation rules but repeated the challenges of ring-fencing it for taxation. Nevertheless, the IF released a Policy Note in January 2019 grouping proposals into two pillars—one on nexus and profit allocation (Pillar One) and one on ensuring a minimum level of taxation (Pillar Two). Pillar One could not generate consensus though a ‘Unified Approach’ (UA) document was released in October 2019. Consultation occurred on Pillar Two in December 2019. In January 2020, a note, ‘Outline of the Architecture of a Unified Approach on Pillar One’ was released. The United Nations proposed a framework for digital economy taxation in August 2020 with little traction. In October 2020, the OECD admitted that Pillar One discussions were deferred. This chapter relates the nature of the digital economy, revealing why multilateral taxation has been impossible, with countries taking unilateral steps to tax it.

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See OECD( 2015 ).

See Chap. 30 , Sect. 30.2.4 , and Chap. 30 , Footnote 13, for a description of IF.

See OECD ( 2018 ), op. cit.

See OECD ( 2019a ).

See OECD ( 2019b ).

See OECD ( 2019d ). Note that the Inclusive Framework Secretariat Proposal for a ‘Unified Approach’ under Pillar One focuses on ‘consumer-facing businesses’, which would cover highly digitalised and profitable business models that interact with consumers. It proposes a new nexus, distinct and separate from the existing concept of the PE, which would ensure a company is taxable in a jurisdiction where its sales exceed a certain threshold even if it is not physically present in that market.

See OECD ( 2020 ).

See Butani and Jain( 2020 ). They have pointed out that taking the UN Model route may provide a solution in the final analysis.

Indeed, with some cohesion, it is not impossible to tax the digital economy. For example, the OECD’s 2017 International VAT/GST Guidelines included principles and mechanisms for collecting VAT on cross-border sales of digital products. Implementing such standards, EU members raised EUR 14.8 billion during the first 4 years of implementation (2015–2019).

See Sekar ( 2018 ).

Some early figures of Cisco, an American technology conglomerate showed between 10 and 15 billion devices connected to the Internet, a figure that represented less than 1% of potential connection (Evan 2012 ). In the OECD area alone, the figure was estimated to rise from 5.8 billion by 2017 and to 14 billion by 2022 (OECD 2013 ).

See OECD ( 2011 ).

See OECD ( 2001 ).

See OECD ( 2015 ) op. cit., p. 17.

See Kumar andAgarwal ( 2020 ).

See Gupta et al. ( 2020 ).

See Choudhury and Dey ( 2020 ).

See Chap. 28 , Sect. 28.2.1 , for an explanation of various approaches.

See Avi-Yonah ( 2020 ).

See Butani and Jain ( 2020 ), op. cit.

See Martin ( 2020 ).

Activities covered would include online advertising services, online intermediation platform services; social media services, digital content services; cloud computing services, and standardised online teaching services.

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Shome, P. (2021). Taxation of Digital Economy. In: Taxation History, Theory, Law and Administration. Springer Texts in Business and Economics. Springer, Cham. https://doi.org/10.1007/978-3-030-68214-9_31

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Taxation of the digital economy and direct digital service taxes: opportunities, challenges, and implications for african countries, 1. introduction, 2. literature review, 2.1. digital taxation defined, 2.2. digital taxation and the international context, 2.3. digital taxation in developing countries, 2.4. digital taxation in african countries, 2.5. opportunities, challenges, and implications administering direct dsts.

“While those turnovers based on specific taxes are heavily criticized as ‘bad policy’ from an economic perspective (regarding e.g., double burdens, impact on investment, innovation, welfare and growth, distortion of consumer choices and business decisions, benefits the older over digital technology, etc.), recent scholarship has found some potential sympathy for DSTs as a potentially appropriate taxation of location-specific rents”.

3. Review Methodology

4. discussions of findings, 4.1. opportunities from applying direct dsts taxes in african countries, 4.1.1. the increase in tax revenue, 4.1.2. improved public confidence and trust in the fairness and transparency in the tax system, 4.1.3. improved economic growth and fulfilment of government’s key objectives, 4.1.4. reduction in other taxes, 4.2. challenges of taxing the digital economy and administering dsts, 4.2.1. reduction of the growth of the digital sector and economic growth in african countries, 4.2.2. administrative challenges and the infant nature of dst legislation, 4.2.3. increased administration and enforcement costs, 4.2.4. increase in compliance costs, 4.2.5. possible challenges in abolishing the interim digital taxes (dsts), 4.2.6. lack of co-operation and information asymmetry, 4.2.7. probability of over-taxation, 4.2.8. possible welfare loss, 4.2.9. negative effect on investment, growth, and innovation, 4.2.10. possibility of economic incidence of taxes being passed to consumers, 4.3. implications and lessons drawn on digital taxation in african countries, 4.3.1. revenue mobilization, increased tax morale, and tax compliance, 4.3.2. reduced usage, reduction investment in digital services, and declining revenue, 4.3.3. race bottom tax competition, 4.3.4. infringement of tax agreements, 4.3.5. conflict and unfairness perceptions, 4.3.6. possibility of trade wars, 5. conclusions, 6. recommendations.

• Thorough Cost and Benefit Analysis
• Participation in Multilateral Discussion Forums on Tax Matters
• Design Sound Policies, Consider Resource Constraints and Capacity Building
• Capacity Building and Increased Awareness Programs
• Regional Collaboration
• Stakeholder Engagement and Public Consultation on Digital Taxes

Institutional Review Board Statement

Informed consent statement, data availability statement, conflicts of interest.

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Mpofu, F.Y. Taxation of the Digital Economy and Direct Digital Service Taxes: Opportunities, Challenges, and Implications for African Countries. Economies 2022 , 10 , 219. https://doi.org/10.3390/economies10090219

Mpofu FY. Taxation of the Digital Economy and Direct Digital Service Taxes: Opportunities, Challenges, and Implications for African Countries. Economies . 2022; 10(9):219. https://doi.org/10.3390/economies10090219

Mpofu, Favourate Y. 2022. "Taxation of the Digital Economy and Direct Digital Service Taxes: Opportunities, Challenges, and Implications for African Countries" Economies 10, no. 9: 219. https://doi.org/10.3390/economies10090219

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Addressing the Tax Challenges of the Digital Economy

• Base erosion and profit shifting (BEPS)

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The spread of the digital economy poses challenges for international taxation. This report sets out an analysis of these tax challenges. It notes that because the digital economy is increasingly becoming the economy itself, it would not be feasible to ring-fence the digital economy from the rest of the economy for tax purposes. The report notes, however, that certain business models and key features of the digital economy may exacerbate BEPS risks. These BEPS risks will be addressed by the work on the other Actions in the BEPS Action Plan, which will take the relevant features of the digital economy into account. The report also analyses a number of broader tax challenges raised by the digital economy, and discusses potential options to address them, noting the need for further work during 2015 to evaluate these broader challenges and potential options.

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Taxation of the Digital Economy: Preliminary Analysis of OECD Pillar 1 Impact Assessment + KPMG Transfer Pricing Study of Amounts B & C (Presentation Slides)

13 Pages Posted: 28 Apr 2020 Last revised: 20 May 2020

Allison Christians

McGill University - Faculty of Law

Date Written: March 8, 2020

A recent KPMG transfer pricing study posits fixed percentages for returns to marketing and distribution activities, a.k.a. Amounts B and C in OECD parlance. The study casts some light on the OECD's design for a new global tax allocation respecting the profits of certain digital economy firms. By extrapolating from Amounts B and C, the KPMG study helps draw a very rough estimate of what Amount A potentially looks like (granularity is impossible because, among other things, how much routine and non routine profit is attributable to factors other than Amounts A, B, and C cannot be determined in the abstract). The attached powerpoint provides a formula I derived from the OECD Unified Approach, applying the fixed routine (10% and 20%) and market share (20%) numbers the OECD provided by way of example in its Impact Analysis, and plugging in the KPMG percentages for Amounts B and C. The study provides a starting point to consider how firms are likely to approach Pillar One and how nations are likely to fare under the OECD Secretariat's approach, now endorsed by the Inclusive Framework.

Keywords: digital economy, taxation, tax policy, OECD, Pillar one

JEL Classification: D21, D78, E62, F02, F21, F23, F42, H25, H87, K34, O16, O23, O38

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Taxation of the Digital Economy

• Krister P. Andersson
• Published in Intertax 1 October 2017
• Economics, Law, Business

10 Citations

Economic growth for sustainable development: the covid-19 pandemic and tax instruments, transformation of the legal mechanism of taxation as a factor of influence on strategic planning of budgetary policy: russia case study, brazil's international tax policy, ring-fencing digital corporations: investor reaction to the european commission’s digital tax proposals, internal digitalization and tax-efficient decision making, international taxation and the frustrations of formulary apportionment estimation, creating value in the data economy: the role of competition, trade, and tax policy, a conceptual model of e-commerce taxation using a circular model for e-commerce sustainability, measurement of the integration level between the digital economy and industry and its impact on energy consumption, macroeconomic implications of changes in corporate tax rates: a review, related papers.

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Taxation and Development: What Have We Learned from Fifty Years of Research?

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Tax Incidence Anomalies

This paper reviews the literature on the incidence of consumption and labor taxes and focuses on the empirical results that show stark departures from the canonical model of tax incidence, which I refer to as anomalies. In particular, there is mounting evidence questioning three fundamental implications of the canonical model: (1) that statutory incidence is irrelevant for economic incidence, (2) that the relative magnitude of the demand and supply elasticities is a sufficient statistic for tax incidence, and (3) that incidence is symmetric for increases and decreases. I review this empirical evidence and draw implications for the canonical model’s relevance.

The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.

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