Implications of Digitalisation for International Corporate Tax Reform


Digitalization exacerbates the problems faced by the existing system for taxing corporate profit in an international context. It does so by making it much easier for all aspects of a company to be spread around the world: its shareholders and creditors, its operations and its consumers. As many of these problems ultimately stem from the fact that the existing system taxes companies in the location of their mobile factors, this article argues that a more direct and satisfactory response to these problems would be to move to a system in which companies are taxed where their immobile factors are located. The article considers two such possibilities: the location of shareholders and that of consumers. It also considers two specific issues which arise particularly in the context of digital companies, namely two sided markets and free usage.

Research Highlights


Proposals to tax profits in the digitalised economy

Digitalisation of the economy has brought the international corporate tax debate to a critical point, with different reform options being considered by the 122 countries participating in the OCED’s Inclusive Framework. One group of countries favours reform targeted at certain highly digitalised businesses, a second group favours system-wide reform and a third argues that there is no immediate need for further reform. This issue will dominate the international corporate tax policy debate for the next few years and its outcome could have a lasting effect on the international corporate tax system. The situation has been addressed in two CBT papers.

The first argues that digitalisation exacerbates a number of problems that have long troubled the existing system, including: real economic distortions, profit shifting, complexity and instability due to competition among states. As these problems ultimately stem from the fact that under the existing system companies are taxed where their mobile factors are located, the paper explores reform options that address the problem directly by taxing companies where their immobile factors are located – namely shareholders and consumers.

The second addresses proposals targeting highly digitalised business favoured by a group of countries including the UK. The paper critically discusses both the short-term measures (such as Digital Services Taxes) and long-term measures (digital PEs) with a particular focus on the latter. It sets out four high-level criticisms of proposals for digital PEs: (i) they are based on a guiding principle (the value creation principle) which is conceptually flawed and problematic in practice; (ii) they seek to ring-fence a set of companies in a way that is conceptually unjustified and practically difficult; (iii) they are likely to involve considerable complexity; and (iv) they fail to deal with the broader challenges faced by the international tax system

Michael Devereux and John Vella, “Implications of digitalisation for international corporate tax reform” in S Gupta, M Keen, A Shah and G Verdier (eds) Digital Revolutions in Public Finance, 2017, IMF. Reprinted in Intertax, 46, 6&7, June/July 2018, 550-559.

Michael Devereux and John Vella (2018) “Taxing the digitalised economy: targeted or system-wide reform”, British Tax Review 4, 387-406. 

Michael Devereux, The Digital Services “Sutton” Tax, CBT Blog. 

John Vella, Taxing Digital Business: a Plea for Holistic Thinking, CBT Blog. 


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.

Working paper 17/07