Taxing the digitalised economy

Despite having only recently undergone ‘the most significant re-write of the international tax rules in a century’ during the BEPS process, members of the OECD Inclusive Forum turned their attention in 2018 to broader issues of the allocation of tax rights, as the OECD acknowledged that ‘BEPS measures do not necessarily resolve the question of how rights to tax are shared between jurisdictions, which is part of the long term issue’. The presenting issue has been around the taxation of ‘highly digitalised businesses’ (HDBs) for which the existing system is particularly unsuitable.  Although one group of countries took the view that the BEPS process had ended the need for further reform, the key debate was between countries that believed there was a need for a special regime for HDBs and those that argued that a reform that applied to all businesses was more appropriate. In March 2018 the EU Commission put forward two proposals targeted at certain HDBs, which were thus aligned with the views of the first group. Individual countries have done likewise, including the UK. Yet since then the OECD has moved further towards fundamental reform for all businesses.

This research project addressed the central issue of special taxation for HDBs from an academic and policy perspective. Digitalisation exacerbates and exposes clearly the problems plaguing the  existing system, for example, in dealing with ‘hard to value intangibles’. Nevertheless, the problems that are faced in taxing HDBs are also present for other businesses. This research project set out four high level critiques of proposals to tax HDBs separately: (a) they are based on a guiding principle that is conceptually flawed and unable to provide guidance in practice; (b) they seek to ring-fence a set of companies in a way that is conceptually unjustified and practically difficult; (c) they are likely to involve considerable complexity; and (d) they fail to deal with the broader challenges faced by the international tax system. It therefore favoured more fundamental reform which does not differentiate between sectors. 

Michael Devereux, and John Vella ‘Taxing the Digitalised Economy: Targeted or System-Wide Reform?’, British Tax Review 2018, Issue 4, Pages 301-320, and Oxford University Centre for Business Taxation Working Paper 18/23.