Taxation on digital economy



There is no doubt about the huge advantages that arise from the e-commerce; however, it is clear now how difficult it has become to apply a proper tax regime on it too.

E-commerce increases cross border transactions, opens new markets and improves relationships among customers1.

Just let´s take a look at some numbers: By 2022 over 60% of global GDP will be digitized and 70% of the new value created in the economy over the next decade will be based on digitally enabled platforms2.

Online platforms match buyers and sellers and enable more and different products to be sold. This means that new business models evolve in order to fulfill customer´s expectations and enhance the services provided.

Clearly, fast technological modifications play a very important roll on the accelerated development of the digital economy but, unwittingly, it has left undercover some important issues: international trade policies, data protection and taxation.

This article intends to review a recent OECD released document3 regarding the tax challenges from digitalization of the economy that will be under discussion during the next months and that must give pace for a final technical paper on December 2020.

First we must underline two fundamental problems that tax working team form the OECD must deal with:

  • How tax rights can be attributed to any tax jurisdiction when digital economy generates profits without physical presence and without setting up a permanent establishment.
  • How to measure the value created on the market jurisdictions through the users of the platforms and the whole digital structures.


On May 2019, OECD released a document known as “Programme of Work to Develop a Consensus Solution to the Tax Challenges Arising from Digitalization of the Economy” (PoW) that endorsed by G20 Finance Ministers is on the public consultation stage aim to reach a general consensus about this topic.

The main proposals emerged from the Programme are grouped in two “Pillars” as described next:


In short, Pillar one is based on three proposals:

  1. New Profit allocation rules
  2. New Nexus Rules
  3. Implementation of the New Taxing Right

Pillar One has to deal with a very complicated task: To find the best way to reallocate profits among market jurisdictions through a simplified, fair and feasible methodology that avoids double taxation and increasing administrative burden and that takes into account available resources, just to mention some of the them.

In this sense, just few days ago, OECD released a Public Consultation regarding a “Unified Approach” (UA) Under Pillar One (The Secretariat´s Proposal).

UA starting point consists on matching the commonalities of the three proposals described on Pillar One:

  • Would reallocate taxing rights in favor of market jurisdictions
  • Envisage a new nexus rule where physical presence is not mandatory
  • Go beyond the arm’s length principle, meaning they do not focus specifically on controlled transactions
  • Search simplicity, stabilization of the tax system and certainty in implementation.

Key elements of the UA are the following:


UA scope should be focused on large consumer-facing businesses that may be defined as those who generate revenue for supplying consumer products or providing digital services that have a consumer-facing element. This kind of business must be defined in-depth in further publications.

Further discussion will be needed in in order to consider size limitations, such as, the 750 millions of euros threshold used on the country-by-country report and certain carved-out industries.

New Nexus Rule

There is a wide consensus on the fact that digital economy is having huge economic impact on many markets without physical presence and that the permanent establishment rule falls short on providing a fair taxation and solution.

The UA intends to increase the tax impact on the market jurisdiction where the entity has a sustained and significant involvement with or without physical presence, this means that such revenue threshold in the market for purposes is the key factor on determining what a “sustained and significant involvement” stands for. Furthermore, other activities will be considered, e.g. online advertising services.

We must underline that the revenue threshold would be applied as a standalone rule above the permanent establishment rule in order to create nexus to not only business models involving remote selling but to groups that sale products on the market through distributors as well.

Profit Allocation Rule

The new profit allocation rule intends to go beyond the arm´s length principle and, as mentioned before, beyond the physical presence requirement. However, this rule will try to retain existing transfer pricing rules as long as they are working well on the specific market jurisdiction.

From the applicable criteria emerged under this new allocation rule, some “quantum of profit” has to be attributed to the market jurisdiction and in doing so, UA proposes three tier mechanism:

1) A taxing right over a portion of the deem residual profit (from our perspective a complex idea)

2) Possibility to use fixed remunerations specially on distribution functions avoiding more tax disputes about fair taxation on distributors and providing certainty to both taxpayers and tax administrations.

3) Providing a binding dispute prevention and resolution process in case taxpayers and administrations may disagree on any element of the proposal.

The PoW is pushing hard to outline the structure of the UA by January 2020 because the goal of reaching a general consensus was established by December 2020.

It is clear that to much work has to be done in further months and not only on clarifying topics included in the UA described above but in the proper analysis of other possibilities that are being discussed nowadays but that were not included on the UA.


This section of the PoW addresses other BEPS rules regarding the risk of profit shifting to countries with no or low taxation but taking care of leaving jurisdictions free to determine their own tax system.

GLoBE Proposal

It is based on two related rules:

a) Income inclusion rule: designed to tax a foreign branch or a controlled entity when their income is subject to an effective tax rate below a minimum rate. In other words, this rule shall be working as a minimum tax so MNG’s would curb their intentions to allocate income on low tax jurisdictions.

The hardest problem with this rule comes from the necessity to set up a minimum rate, and in order to tackle this matter, the PoW would be exploring using a fixed percentage rate. This rate would not include the parent jurisdiction´s corporate rate.

At a first glace this methodology surely is not the most accurate but it is simple on its application.

Other measures mentioned but that are not being explained on detail on the body of the PoW are the chance to use carve outs and blending (mix) rates.

Finally, the inclusion rule is considering the application of the switch-over4 rule that may lead to changes on local tax regulations and the tax treaties.

b) Tax on base eroding payments: would reject deduction or may impose a source-based taxation unless payments were subject to tax at or a minimum rate (undertaxed payment rule and subject to tax rule).

Basically, with this rule some benefits are allowed only when income is subject to a minimum tax rate.

In further months AUREN will be publishing updated material regarding this interesting topic.

Miguel Rodríguez Brizuela, socio Auren México


1 OECD Report: “Unpacking E-Commerce:Business Models, Trends and Policies”

2 World Economic Forum “Shaping the Future of Digital Economy and New Value Creation”.

3 OECD “Programme of Work to Develop a Consensus Solution to the Tax Challenges Arising from Digitalization of the Economy”

4 It states the option of any tax jurisdiction to apply the credit method instead of the exemption method so the income would be properly taxed.