Taxation of the Digital Economy

• Pillar One serves to ensure a fairer distribution of profits and taxing rights among countries where large multinational companies, including technology companies, generate revenue. Pillar One will operate to reallocate some amount of income (so-called “Amount A”) to markets where such companies have business activities and earn profits, regardless of whether firms have a physical presence there.
  1. Pillar One will also:
     • Establish a fixed rate of return for marketing and distribution activities (so-called “Amount B”) – thereby standardizing the rate of return for these services.
     • Remove digital services taxes and existing unilateral measures.
• Pillar One will require local legislation in each participating country to effectuate implementation, which is targeted to be complete by the end of 2023.

• Pillar Two introduces a global minimum corporate tax rate of 15% to large multinational companies. Pillar Two will operate to charge a top-up tax to the ultimate parent company in its home jurisdiction where its subsidiary is not subject to an effective tax rate of at least 15% (the so-called “Global Anti-Base Erosion” or “GLoBE” rules).
  1. The top-up tax would apply to, and be allocated among, group companies if the ultimate parent company is not subject to the income inclusion rule in its home jurisdiction.
  2. Effective tax rate will be calculated based on a definition of “covered taxes” and the tax base which covered taxes will be compared against will be financial accounting income with certain adjustments for timing differences.
  3. Pillar Two also contains a “subject to tax rule” that would apply a 9% tax to “covered payments” between “connected persons”.

Many countries have imposed a unilateral tax on digital advertising on large multinational companies. While Pillar One mitigates the implementation of future digital service taxes, those currently in place are still effective, and indirect taxes (e.g., value added tax, general service tax, etc.) are an entirely distinct matter.

1. Austria: 5% tax
2. France: 3% tax
3. Italy: 3% tax
4. Spain: 3% tax
5. UK: 2% tax
   The countries that joined the OECD’s two pillar program have agreed that current digital service taxes can stay in place until Pillar One is implemented, but companies subject to such digital services taxes may receive a credit against future tax liabilities assessed against Amount A (the so-called “Unilateral Measures Compromise”).

• U.S. will remove putative trade actions taken under Section 301 of Trade Act

Indirect taxes of digital services

• Many countries apply VAT/GST to business-to-consumer sale of digital services
• Sales thresholds are much lower than unilateral income taxes
• VAT rate is higher than income tax