As the economy digitises, new business models emerge, presenting new tax challenges that need to be addressed due to the distinctive features of digital companies. However, the regulations governing their taxation are still based on those put in place for traditional companies at the turn of the 20th century. These regulations primarily focus on the importance of physical presence, which is no longer necessary for digital businesses given that many services may be offered remotely and without a physical presence of the business in the country where its clients are located.
Within the framework of the OECD, the EU, and at the level of individual countries, new initiatives are emerging and solutions are being implemented with the aim of more equitable taxation of these new types of companies.
At the EU level, two directive proposals were prepared in 2018, which predicted the creation of a new tax regime that would only apply to digital companies. One suggestion for a long-term solution was to include the concept of "significant digital presence" in the existing definition of a permanent establishment. This would be demonstrated by surpassing a specific proportion of total revenues, the number of users in a Member State, or the number of business contracts. Due to a lack of consensus, the proposal was not adopted.
Nevertheless, a few individual EU member states have already passed new tax legislation that regulates the introduction of tax for certain digital services. The majority of countries accepted them as a temporary measure until an international consensus is reached.
The OECD framework is where the most significant advances have been made in achieving a wide international consensus for the resolution of the problem in question. The Statement on a Two-Pillar Solution, which was adopted in 2021 based on several proposals and discussions, establishes a new special-purpose nexus rule with the redistribution of profits of multinational companies with a global turnover above 20 billion euros and profitability above 10 % within the framework of the first pillar. Therefore, part of the profits will also be redistributed to countries where the corporation has no physical presence.
In the event that agreement is reached, the aforementioned measure would represent a departure from significant physical presence. However, it would only be applicable to a very narrow group of multinational corporations. Therefore, it will also be necessary in the future to keep looking for international solutions that will more comprehensively address the challenges of the digital economy. In doing so, decision-makers will need to take precautions to avoid new administrative measures that would burden companies even more, come up with a fair solution for countries of various sizes, adopt measures that will not stifle innovation despite additional tax burdens, and tackle the problem of transferring the costs of increased taxation to consumers.
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