In the global tax arena, tax challenges arising from digitisation are the most talked about topic, and the ongoing work by the OECD/G20 Inclusive Framework needs no introduction. After rounds of releasing policy documents and holding public consultations, the OECD on October 12, 2020, held a press conference to provide an update on the ongoing work under Pillar One and Pillar Two proposals to address the tax challenges arising from digitalisation. The OECD has released the Blueprints on Pillar One and Pillar Two.
The Blueprints provide an outline for a future agreement that would adhere to the concept of net taxation of income, avoid double taxation, and be as simple and administrable as possible. The Pillar One Blueprint proposes solutions for attribution of revenues and taxing rights to market jurisdictions, and the Pillar Two Blueprint deals with imposition of a minimum tax rate. The Blueprints provide significant insight to the final solutions that are expected to be adopted; however, there is no consensus on the manner in which profits are to be allocated under Pillar One and there is no agreement or plan on the minimum rate of tax to be proposed under Pillar Two.
While the work of the OECD towards a global consensus is ongoing, the pressure on governments for revenues is leading to many countries implementing or announcing unilateral measures for taxing digitised businesses. Further, on one hand, while countries like France, Australia, the UK, India and Italy have or are in advance stages of implementation of unilateral measures, the US, on the other hand, has initiated investigations against France, India and other countries for unilateral measures. The US has even proposed retaliatory tariffs against French goods if France does not withdraw its proposal to tax US digital giants. While such measures may meet the objective of governments to collect taxes, these can also lead to trade wars and multinationals would end up paying taxes in multiple jurisdictions.
India has been actively involved and has implemented unilateral measures to tax the digitised economy. The newest being the introduction of Equalisation Levy on non-resident e-commerce operators selling goods or services or facilitating sale of good or services if they do not have a taxable presence in India.
The Inclusive Framework team members note the technical challenges to develop a workable solution as well as some areas where critical policy differences remain, which will have to be resolved to reach an agreement. The biggest challenge for them now is not a technical architecture or a solution, but the political acceptance of the same across nations.
The US withdrawing from talks has been a setback, but a possible change of guard in the US administration after the upcoming elections could change some of it. Unilateral actions may not solve the problem and could create newer ones. However, at this point, one cannot rule out unilateral actions by countries running out of patience.
The Blueprints released by the OECD also highlight that a probable solution to taxing the digitised economy could be through multilateral instruments, the implementation of which will be complex, owing to political factors involved and the need for international cooperation. Most countries will have to amend their domestic tax laws to enable implementation.
Having said that, one would not deny that commendable efforts are being made by the OECD and the status of the same will be presented to the G20 finance ministers soon for further discussions. Inputs from stakeholders are invited through public consultation, to further fine-tune and simplify the proposed solution and the process for arriving at a consensus is proposed to be completed by mid-2021. Public consultation would follow the receipt of inputs from stakeholders (the last date for which is December 14, 2020). Meanwhile, countries would continue unilateral measures and one can only hope global consensus is arrived at soon.
The author is partner, Dhruva Advisors LLP