Implications of digitalisation for international corporate tax reform

This paper examines the challenges, and the opportunities, created by digitalisation for the taxation of multinational profit. Starting from the same approach as the European Commission Expert Group and the OECD, the paper argues that it is not sensible to attempt to “ring-fence” the digital economy as if it were distinct and separate from the rest of the economy. But it diverges from the OECD BEPS project in addressing the question of what is the appropriate conceptual basis for the location of taxation.

The paper considers a number of ways in which greater digitalisation has helped to increase the internationalisation of business – for example, shareholders and customers may be located in different countries, and the company itself can organise itself in complex supply chains also covering many countries. These factors pose significant problems for the current national taxation of such international businesses, which is based on arbitrary distinctions between countries (residence v source) and between types of income (active v passive). Fundamental reform is required to address the problems arising from these distinctions.

Some problems might in principle be helped by digitalisation. To the extent that tax records are digitised, and possibly combined with other data, for example, from banks, then the problems of information for these systems may eventually be overcome. 

There are also issues that arise particularly in digital companies. One involves the case where cash sales are made to advertisers in one country and where the advertisements appear on screens of users in another country. This may be combined with the use of information provided freely by those users. At the moment, there is little attempt to levy a tax in the country of the users. There is a case in principle for tax to be levied in the country of the user, but there remain significant practical and conceptual difficulties in doing so.

Michael Devereux and John Vella, CBT Working Paper 17/07