Tax and the Digital economy – Will Pillar one be the solution?

The articles discusses the developments with respect to the digital economy and what it will mean for the international tax practice. The main focus is on the 2019 reports since in those reports the OECD tries to find its way within solutions which have amongst others the characteristics of formulary apportionment. Whether the countries of the world will choose a formulary apportionment system as mentioned in the March 2019 report, the system from the October 2019 report, or all go their own way by applying an equalisation levy, still it is clear that none of them will be perfect from the perspective of companies. It can be foreseen that companies will suffer (to say the least) from a new era of uncertainty.


The author highlights that a better Unified Approach in his opinion is based on a multilateral solution. Only a multilateral solution in combination with a multilateral dispute resolution can protect against double taxation caused by two states with a different view to allocation mechanisms or states which go on their own and tax whatever they can, for example based on scoping.


Secondly, the author says that the combination of a sales based system would in his opinion best served with an alternative which relates to existing obligations like the obligations related to global VAT reporting. Based on this system, states will only be able to tax the multinational in its country provided that it makes sales according to the criteria of this alternative Unified Approach. If a company would execute only marketing in one country without making any sales in that country, no profit will be allocated to it.


The author has also discussed various dispute resolution techniques such as Advance Pricing Agreements, Arbitration and ICAP’s. The author supports more of ICAP  solution with a modification that adds to the programme a ‘Dispute Resolution Commission’ which comes up with a binding solution for all states.  It further highlights that a second solution could be arbitration as suggested under the MLI, irrespective whether baseball arbitration or the independent opinion model, provided that the solution is fully binding.


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