Digital taxation is an example of an area where agreements are taking place outside the trade arena, but this area is very relevant (and interrelated to) discussion of digital trade.
OECD Rules
The OECD has become the major global forum for discussing digital tax issues, with proposals from 2013 onwards cumulating in the Inclusive Framework on Base Erosion and Profit Shifting (BEPS)
The framework includes what is known as the “Two-Pillar Solution.”
- The first pillar would reallocate part of the profits of the largest multinational companies to the countries where their customers are located.
- The second pillar introduces a global minimum corporate tax rate, currently agreed at 15 percent, to reduce the incentive for companies to shift profits to low-tax jurisdictions.
Over 130 countries have signed up to this framework, but turning it into national law and putting it into practice has been slow and uneven.
Initially a lack of progress related to US opposition; buy when President Biden took office, the US shifted course and rejoined the talks, helping to secure a breakthrough political agreement on the Two-Pillar Solution in 2021.
Recently, progress appears to have stalled with a new Trump administration in office. Early signals suggest a retreat from Biden’s commitments and renewed scepticism towards binding international tax rules.
Global Impacts
The potential for agreement on OECD tax rules is an important step forward on tax. But given the forum, and pressure from technology firms, some argue the eventual agreements will have a minimal impact on tax collection in the digital economy for developing countries.
The first pillar of OECD, supports the principle that developing countries could collect tax in cases of international platforms and cross-border e-commerce. Yet it is unclear how useful this agreement will be to e-commerce and developing countries.
Many platforms are also likely to be outside the scope of the legislation due to generous minimum revenue requirements for these rules to apply. The OECD agreement also underplays important tax issues such as information sharing and collecting VAT which is likely to remain a challenge and suggests further discussion or regulation in the future on the issue of tax.
Alternative approaches
There are parallel discussions occurring in the UN. In 2022, the UN General Assembly agreed to work towards a new UN tax convention, which would give all countries — regardless of income level — an equal voice in shaping global tax rules.
Although this initiative is still in its early stages, it signals a potential shift in who sets the agenda for international tax cooperation.