Digital MNEs and Taxation: Challenges for the OECD?

Tiffany Wang is an IPilogue Writer, Intellectual Property Journal Editor, and a 2L JD Candidate at Osgoode Hall Law School. 

How do you tax new business models that sell goods and services, often digital in nature, in another country, without a physical presence in those countries, under existing tax laws?

Through accelerating digitalisation, the pandemic has vaulted taxation to the forefront of the global political and economic system. The Organisation for Economic Co-operation and Development (“OECD”) commenced public consultations in January to address the tax challenges of digitalisation. The growth of multinational enterprises (“MNEs”), particularly digital corporations, enervates the current global corporate tax system, and the OECD opines that a multilateral solution will effectively bolster the global gross domestic product (“GDP”). Two proposals, Pillar One and Pillar Two, seek to address this quagmire.

jurisdiction. Pillar Two supervises multinational corporate groups to pay a minimum global corporate tax (currently agreed at an effective tax rate of at least 15 percent). On October 13, 2021, the G20 Finance Ministers and Central Bank Governors endorsed the global tax deal, indicating that the package will pave the way for more stability and fairness in the international tax system. The endorsed package has support from over 90 percent of the global GDP.

Digitalisation pares back the integrity of tax structures. Tax avoidance runs rampant, and the two proposals attempt to outduel digital corporations’ approach of poaching taxes.

Presdent Biden’s leadership on pushing the two pillars through Congress and the G20 demonstrates a recycling of traditional taxation in dealing with Big Tech MNEs. Google, Amazon, Facebook, and Apple (“GAFA”) awaits trial as Washington envisions increased taxation on digital firms.

The lore of the minimum tax plan is “nothing less than a tax revolution.” The global taxation reset presses for a pro rata basis of digital taxation to avoid base erosion. If Congress favors this plan, digital MNEs may fall prey to a minimum corporate tax rate in 2023.

Ambitious and focused, the OECD will ensure that all major players have some skin in the game of international taxation and digitalisation.