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