The international tax reform must be the beginning of a better strategy to control the digital economy.

  1. Taxation of the digital economy and proposals for reforms.

The digital economy is giving rise to global debates in many legal and regulatory fields and international taxation is no different.

The tax implications are far-reaching and affect both direct, indirect and social security taxes, broader tax policy issues and Tax Administration.

Regarding direct taxation and specifically in income tax after years of intense and thorough work and negotiations to adapt international tax rules to the 21st century, the members of the OECD and G20 Inclusive Framework on BEPS agreed on October 8, 2021 the Declaration on the two-pillar approach to addressing the tax challenges arising from the digitalization of the economy.

It seeks to make Multinational Companies (MNCs) subject to a minimum tax rate of 15% and will reallocate the profits of the largest and most profitable MNCs to countries around the world.

It is noteworthy that 137 countries and jurisdictions, representing more than 90% of the world’s GDP, have joined the two-pillar approach, which establishes a new international taxation framework, and have agreed on a Detailed Action Plan which is currently in full debate regarding its concrete implementation.

Pillar One seeks to ensure a fairer distribution of profits and tax rights between countries with respect to the largest multinational companies, including the digital ones.

Pillar Two aims to establish a minimum basis for tax competence in corporate income taxes, by implementing a minimum tax at the global level, that countries can use to protect their tax bases.

In the case of Pillar One, it is estimated that tax rights on more than $100 billion of profits will be reallocated to market jurisdictions every year.

It is estimated that, according to Pillar Two, the global minimum tax – with a minimum rate of at least 15% — will bring about $150 billion in additional tax revenues to the global level every year.

According to a recent analysis, these profits will be higher than expected since the proposed global minimum tax would produce annual global revenue gains of around USD 220 billion, or 9% of global corporate income tax revenues.

Pillar One is expected to allocate tax rights on approximately USD 200,000 million in profits to market jurisdictions annually. This is expected to lead to annual global tax revenue gains of between USD 13-36 billion, according to 2021 data.

The new estimates reflect a significant increase compared to the $125 billion profit in previous estimates.

The analysis finds that low- and middle-income countries are expected to get most of the existing corporate income tax revenue.

There are voices very favorable to the historic agreement, but also some opinions such as that of OXFAM he says that it will not be a historic agreement since it affects only the 100 largest companies in the world and only a small part of their global profits.

They argue that the 15% tax rate falls short and it should be raised to 25% and a more equitable distribution should be made with developing countries. Two-thirds of the proceeds would go to the G7 and the European Union, while the poorest countries would keep only 3%.

In short, they say that the funding that developing countries need to save lives and boost recovery after COVID-19 will not be achieved.

In addition, there are other proposals on the subject, such as that of the United Nations Committee of Experts, which also identified the taxation of income obtained from the provision of automated digital services as a priority issue, although this proposal, unlike that of the OECD, specifies elaborating a provision to be incorporated into its Tax Model Agreement that enables taxation at source based on explicit local legislation, even if the existence of a PE is not verified.

They propose to incorporate it in Article 12B of their Model Tax Treaty and allow a jurisdiction to tax the income from certain automatic digital services paid to a resident of the other Contracting State, on the understanding that the proposal could simplify the process for many developing countries, by facilitating the treatment of the problems posed by taxing the digitalized economy without being incompatible with the efforts being made at the global level to find a multilateral solution.

 

  1. Importance of the topic. Special reference to latin america and the caribbean

The issue is particularly relevant, especially in a situation of historical crisis such as the current one, which is producing devastating effects everywhere and especially in the Latin American and Caribbean (LAC) region, where countries need more resources today to finance the growing social expenditures.

The concept of digital economy includes different aspects ranging from electronic commerce, the so-called collaborative economy, electronic money, cryptocurrencies, games and online advertising, among others

Many countries are designing tax reforms, within which I consider it is vital to analyze together with the new business models of the digital economy, the seriousness of the tax evasion phenomenon, to know its causes, the recent diagnoses and existing studies on the subject and fundamentally the relevance of the issue in light of the aforementioned crisis.

The ECLAC’s Fiscal Outlook 2020 analyzes the problem of tax evasion in  LAC and estimates that the region lost USD 325 billions – equivalent to 6.1% of GDP – in 2018 due to tax non-compliance.

The United Nations’ FACTI Panel says the problem is that illicit financial flows, stemming from fiscal abuse, cross-border corruption and transnational financial crime, divert vast resources from sustainable development, worsen inequalities, fuel instability, undermine governance and undermine public trust.

It says that up to 2.7% of global GDP is laundered annually, while companies seeking tax-free jurisdictions cost governments up to $600 billion a year.

The fight against evasion, within which, among other aspects, a better control of the digital economy should be addressed, should be a priority objective of all the countries of the region.

Tax evasion is not only a problem of the availability of public resources, but it is a phenomenon that affects the very foundations on which the legitimacy of the tax system is based, to the detriment of the efficiency and equity that should prevail among taxpayers.

 

  1. Final thoughts.

Although the reform proposals regarding the taxation of the digital economy are very interesting, the issue is much more complex, dynamic and changing, and not limited only to the aspects raised in the aforementioned proposals.

The strategy of controlling the digital economy requires permanent efforts of the countries and their Tax Administrations (TAs).

TAs must identify all the subjects that conduct their activities through the new businesses of the digital economy in order to tax the taxable events established in the regulations of each country.

It should never be lost from sight that many of these operations may have implications not only for taxes but also linked to crimes of money laundering, drug trafficking and corruption.

They must begin to act by promoting the necessary regulatory changes, designing new control strategies and policies, as well as strengthening cooperation and collaboration, both at the national and international level, between the TAs and the different entities involved in the issue.

International tax cooperation should be expanded in a way that is universal in approach and scope and fully takes into account the different needs and capacities of all countries.

I think that despite the growing importance and attention to administrative cooperation and assistance between TAs, there is still a long way to go before we can achieve optimal cooperation at the international level, as well as at the internal level for each country.

This in the sense of not only exchanging information but in the fact of advancing joint work in different areas related to tax management.

TAS should continue to explore the use of new technologies, such as blockchain and artificial intelligence, analytical tools and data analytics, to improve compliance, reduce the administrative burden, generate efficiency and improve taxpayer services.

Obviously, in many cases the control strategies of these operations require regulatory changes, very good information management, intelligent control plans and training of human resources with new digital skills.

Today more than ever it is vital that the TAs manage information about the agents and their economic activities, as well as the regulatory capacity to determine their obligations and the management capacity to efficiently apply the legislation in order to obtain the necessary resources to be able to face the historical crisis.

In short, the proposals for tax reforms of the digital economy that are being discussed today should be the beginning of a better strategy for controlling the digital economy.

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Disclaimer. Readers are informed that the views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author's employer, organization, committee or other group the author might be associated with, nor to the Executive Secretariat of CIAT. The author is also responsible for the precision and accuracy of data and sources.

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