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.