A Critique from a Developing Country Perspective of the Proposals to Tax the Digital Economy

Abstract

The digital economy has revolutionized the way of doing business, but it poses challenges to the effectiveness of current international tax system. The OECD has called on the international community to consider new international tax rules for taxing the digital economy, with a plan to reach consensus by 2020. This article highlights that the feasibility of the new rules should be based on a principled approach. However, before international consensus could be reached, some countries started adopting unilateral measures that threaten the integrity of the international tax system, and they impact on foreign direct investment in developing countries. The article highlights the pros and cons of the proposals from a principled and developing country perspective. With country interests to protect, there is no guarantee that consensus will be reached soon. While uncertainty prevails, the article recommends measures that have historically been used to protect source tax bases and are in line with international tax principles that will be useful for developing countries.