On 13 February 2019, the OECD released
the document ‘Addressing the
Tax Challenges of the Digitalisation of the Economy Public Consultation
Document’ and
requested general and specific comments ranging from technical to policy
aspects. Under the first pillar, the document revisited the profit allocation
and nexus rules with primarily three different actions: the user participation
proposal, the marketing intangibles proposal, and a proposal to update the
standard of ‘physical presence’
with a ‘substantial
economic presence’ concept.
The second pillar, which is focused on the remaining base erosion and
profit-shifting (BEPS) issues sets forth an income inclusion rule and rules for
the taxation of tax eroding payments.
This article analyses these proposals
from the perspective of developing countries including low income economies
(LIEs), lower-middle income economies (LMIEs) and upper-middles income
economies (UMIEs) as classified by the World Bank. Emphasis is given to the administrative
capability issues that are present in all of them rather than fairness or
efficiency parameters. The analysis suggests that both the value creation and
the marketing intangibles proposals could not be easily administered in these
developing countries nor are the proposals compatible with their legal systems.
The analysis developed in this article
suggests that the preferable reform to tackle the remaining BEPS issues for
developing countries is a tax on base eroding payments such as the global
anti-base erosion proposal described in Pillar 2 of the consultation document
that is similar to the base erosion anti-abuse tax (BEAT) recently enacted in
the United States. However, this alternative minimum tax (AMT) should be paired
with a significant economic presence (SEP) to tackle the challenges of the
digitalization of the economy under Pillar 1.
Finally, a much simpler BEAT-like or AMT for developing countries is delineated further in the article if this option is to be administrable in jurisdictions with limited resources to enforce it.
Intertax