The breadth and speed of the digital transformation introduces challenges in many policy areas, including the existing international income tax rules which were developed in a "brick-and-mortar" economic environment more than a century ago. The Organisation for Economic Co-operation and Development (OECD)/G20 Inclusive Framework has been working to address tax issues arising from the challenges of an increasingly digitised economy since the initial recommendations of the OECD’s Base Erosion and Profit Shifting (BEPS) work which started nearly ten years ago.
The current scope of the OECD’s two-pillar proposal, however, includes a wide-scope overhaul of the international tax system which is likely to have an impact on virtually every multinational enterprise, regardless of how “digital” they are. Pillar 1 looks at a re-attribution of profits to market jurisdictions, and Pillar 2 deals with the imposition of a global minimum tax. The current scope of Pillar 1 is intended to cover both highly digitalised businesses, as well as consumer-facing companies with cross-border activity. The Pillar Two goal is expressed as addressing remaining BEPS challenges by ensuring large companies pay a minimum level of tax on income regardless of where it arises.
The latest development in the context of the above has been the release of “Blueprints” on Pillar 1 and Pillar 2 on Monday, 12 October 2020. Although no agreement has been reached on the Blueprints, the 137 countries forming part of the Inclusive Framework agreed to “swiftly address the remaining issues with a view to bringing the process to a successful conclusion by mid-2021.”
These reforms are cast as leading to a much more favourable environment than scenarios which assume the proliferation of unilateral digital service taxes and increased trade tensions if there were no consensus. In the meantime, the European Commission has made it clear that it would give space during the first six months for the OECD process to play out, but warned that it would not accept further delay and will pursue both pillars (on a European level) if there is no OECD agreement.
According to the coalition agreement of the new Belgian government, Belgium wants to play a “leading role” in the introduction of a form of digital taxation and a minimum tax - preferably within the framework of an international agreement - but it will introduce its own digital services tax in 2023 in the absence of any such international agreement. Whilst the OECD’s “best effort” economic impact analysis predicts revenue gains from both Pillar 1 and Pillar 2 for low-, middle- and high-income economies, various other analyses fear that small, open economies’ attractiveness would be undermined compared to large economies.