Issues around taxation in the global economy have been considered problematic for a number of years. This is exacerbated by the expansion in the digital economy.
There are a number of challenges in the area of digital tax. First, firms that operate online may operate across borders. They can generate huge revenues from users in a country without ever setting up a local office. This makes it a challenge for countries to be able to assess and collect taxes in these cases.
Moreover, existing global rules are limited. They allocate taxing rights to the country where a company is legally headquartered or books its profits, not where its economic activity is located. This has allowed multinational firms, especially in the digital sector, to legally shift profits into low-tax jurisdictions and minimise their overall tax bills.
In both the above cases, smaller and developing countries may be strongly impacted, with limited ability to push back and collect taxes in the face of large firms.
Local regulations
In the area of digital taxation, there is a complex interplay between local and global rules.
During the COVID-19 crisis, in response to the above limitations, countries began to impose interim rules or introduce rules on tax, including “digital service taxes” on firms, as well as requirements for firms to have local representatives in countries in some cases.
Countries that have done this include many countries in Europe, Southeast Asia and Latin America. With these rules increasingly under scrutiny, particularly in the US, countries face the threat of trade reprisals for these taxation rules, which may be seen as unilateral and outside global norms.
Interaction with global rules
Global tax agreements have been agreed in this area, particularly OECD regulations that would seek to establish equal rules on digital tax and reduce the motivation for digital service taxes. However, this is not in implementation as yet implemented, and some developing countries argue that it waters down the ability to collect digital tax.
Digital tax also has a complex relationship to other rules. For example, debates on MFN/National treatment in previous WTO agreements and the Moratorium on Customs Duties for Electronic Transmissions may or may not overlap with Digital Tax and local regulations according to different interpretations.