Taxation of the Global Digital Economy

On January 29, 2019 the OECD announced that the OECD/G20 Inclusive Framework on BEPS has made important steps towards addressing tax challenges associated with the digitalisation of the global economy, committing to deliver a progress report to the G20 Finance Ministers in June 2019 and to release a long-term solution in 2020.


The OECD/G20 Base Erosion and Profit Shifting (BEPS) Project consists of 15 discrete action areas, which target gaps in the international tax system that enable the shifting of profits away from the jurisdiction of the underlying economic activity. Action 1 of the BEPS Project is focused on tax challenges associated with digitalisation.

The Task Force on the Digital Economy (TFDE), with participation from more than 45 countries including all OECD and G20 members, was established to carry out the work of Action 1.

The TFDE developed the 2015 BEPS Action 1 Report, Addressing the Tax Challenges of the Digital Economy (the “Action 1 Report”),[1] which was released in October 2015 as part of the full BEPS Package and was endorsed by the G20 Leaders in November 2015.

Following the release of the BEPS Package in October 2015, the OECD/G20 Inclusive Framework on BEPS (“Inclusive Framework”) was established in June 2016. The Inclusive Framework includes 125 countries and jurisdictions brought together to collaborate on the implementation of the BEPS Package. Upon the establishment of the Inclusive Framework, the mandate of the TFDE was extended to include the delivery of an interim report by 2018 and a final report in 2020.

In March 2018, the Inclusive Framework delivered its Interim Report, which provided analysis but no conclusions regarding the tax challenges of the digital economy. 

Tax Challenges of the Digitalised Economy

The tax challenges recognized in Action 1 Report and the Interim Report include the questions:

  • where tax should be paid and in what amount in a world where businesses can be heavily involved in the economy of different jurisdictions without any material physical presence;
  • how enterprises in the digital economy add value and make their profits;
  • how transfer pricing rules should account for intangible value drivers such as branding and innovation;
  • how the digital economy relates to the concepts of source and residence; and
  • how to address BEPS risks exacerbated by the digitalising economy.

The Policy Note

In January 2019, the Inclusive Framework produced a Policy Note, which sets out that renewed international discussions on the digitalisation of the economy will focus on two central pillars: (i) problems raised directly by digitalisation; and (ii) general BEPS problems exacerbated by digitalisation.

The first pillar will focus on how the existing rules dividing up the right to tax the income of multinational enterprises among jurisdictions could be modified to address the challenges of digitalisation.

Under the first pillar, the Policy Note identifies that proposed approaches require reconsidering current transfer pricing rules, going beyond the arm’s length principle, and abandoning the idea that taxing rights must be determined by reference to a physical presence.  In addition, the Policy Note indicates that new ideas about profit attribution and nexus may need to be developed, and that doing so could require changes to tax treaties and changes to the permanent establishment threshold.

The second pillar will focus on how to resolve remaining BEPS issues not directly associated with digitalisation, recognizing that features of the digitalised economy exacerbate more general BEPS issues.


The following are concerns and questions which any solution to the digitalisation of the global economy will be required to face.

How far?

There is no doubt that digitalisation has created substantial changes to the global economy and that traditional taxation rules need to be reconsidered. However, how far this reconsideration should go remains a question.

Transfer Pricing without the arm’s length principle?

It is unclear how to develop rules that don’t rely on the arm’s length principle or how this shift away from a core element of traditional transfer pricing could be justified.

Transfer Pricing without the concept of permanent establishment?

Additionally, how could taxing rights be determined without reference to physical presence, and under what authority could such rights be exercised? Once physical presence is removed as a threshold, what would prevent a jurisdiction from taxing everyone everywhere?

Is Consensus Possible?

An important element of the OECD’s pending solution is that it is to be “consensus-based”, which is a tall order especially given the diverse interests at stake. It is difficult to imagine how the required consensus could be formed where the participating jurisdictions have such divergent interests.

Relation to Unilateral Efforts

How will a solution to the challenges of the digital economy operate with the various unilateral efforts that are emerging?

The Traditional Approach is Still Required

There will not be a purely digital economy so any new rules will have to be appropriate to both a digital and a traditional economy. 

With respect to the tax challenges of digitalisation, members of the Inclusive Framework renewed their commitment to reaching a long-term solution by 2020, and have agreed to deliver an update to the G20 Finance Ministers in June 2019.  With so many questions and such a complicated mandate, it will be impressive if the Inclusive Framework is able to report on meaningful progress before the deadline.

Up Next

In March 2019, the OECD held a public consultation and invited submissions from stakeholders on potential solutions to the tax challenges arising from the digital economy. Despite the limited timeframe, approximately 200 comments were received, some referring to the proposed solutions as “draconian” and other suggesting solutions should go further and make the tax base as “broad as possible”. Stay tuned for more details on the consultation process and results.

[1]       OECD (2015), Addressing the Tax Challenges of the Digital Economy, Action 1 – 2015 Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris.