International Tax Rules Research Articles

Tax Challenges Arising from Digitalization: Evaluating the Taxation Models Proposed by the European Commission and the OECD

The world has entered a period of deep transition with rapid and phenomenal development of innovations. The rise of the digital economy has dramatically changed the global business environment, creating new challenges for the tax system. Newspapers and magazines are being replaced by the Internet, and trade in material goods – by digital services. The digital economy eliminates the barriers of time, space and distance. The server where the transaction is processed, the location from which the goods or services are supplied and the place of supply of such goods or services are in different jurisdictions, therefore, the question “Where should the transaction be taxed?” is raised. Meanwhile, the digital economy opens up unprecedented opportunities to avoid taxes with the international tax rules which are still “stuck” in 20th-century business concepts, because the companies operating in the digital space do not need factories, stores or other permanent residences to develop their activities. This article aims to evaluate the efforts of the European Union and international standard-setting entities to find a solution for fair taxation of the digital economy. The first part of the article delves into the concept of the digital economy and its essential features with a special emphasis on the role of the digital service user which is unique and more complex than the role usually played by the customer. This part also analyses the differences between digital and traditional business. The second part of the study emphasizes the reasons that will lead to the necessity of taxation of the digital economy, discusses the digital services tax applied in certain countries of the European Union and highlights the weakness of the concept of digital establishment in double taxation agreements concluded by the countries. The final part explores the proposals submitted by the European Commission regarding the introduction of a common consolidated corporate tax base and the inclusion of the concept of virtual permanent establishment in the tax system in the context of the digital economy taxation model proposed by international organizations.

Preventing Tax Base Erosion from Tax Treaty Abuse For SDGS in Vietnam

Objective: Tax treaties represent an important aspect of the international tax rules of many countries, especially in globalizing era. The taxing rights of the states is one of the biggest issues in cross border transactions because it decides the budget revenue deriving from tax. Tax base, tax base erosion and tax base erosion prevention are topics that have received a lot of attention recently in Vietnam in order to protect government’s revenue for sustainable development goals (SDGs). Method: By analyzing the current status of Vietnam's double taxation agreements (DTAs), the authors assessed the current situation and identifying risks of tax base erosion from abusing Vietnam's DTAs. The study focuses on analyzing the indicators to assess the content of DTAs such as the Source Index (SI), Permanent Establishment Index (PEI) and Withholding Tax Index (WHT) of Vietnam’s DTAs with the ones of groups of countries. Results: The authors found that there are loopholes in DTAs creating conditions for abuses of the terms of the agreements and causing tax base erosion in Vietnam. Comparing to the average level of developing countries, the DTA system of Vietnam is higher, however, the biggest limitation and the biggest risk from the system of DTAs are these agreements are agreements signed by Vietnam with the countries/territories that have the lowest scores and are in the group of countries/territories with the largest amount of investment capital in Vietnam. Contribution: The study makes some recommendations for Vietnam to prevent tax base erosion from tax treaty abuse by reviewing and considering negotiating to update the content of the bilateral tax agreements, promoting participation in multilateral tax agreement and improving efficiency of tax audit.

The Impact of the Global Minimum Tax Reform on China and Its Countermeasures

Abstract Significant corporate tax reform was agreed upon by more than 140 nations in 2021, with implementation set for 2023 and beyond. Many people throughout the globe are discussing the possible effects of the Organization for Economic Cooperation and Development (OECD) planned adjustment to the global minimum tax (GMT) on their respective economies. The OECD has formulated a “two-pillar” scheme for international tax rules for 137 countries and regions within the overall framework. Pillar 2 is to set the tax rate at 15%, the world’s lowest corporate tax. The GMT is a reclassification of the taxing authority mechanism for the profits of multinational corporations, which has made significant adjustments to the global tax coordination and governance mechanism. People living in China and earning money from China must pay university fees, which are all of a nationality. Progressive rates ranging from 3 to 45% apply to the complete income. Therefore, taking the initiative in policy is crucial to address this challenge actively. This article makes an in-depth assessment and prediction of the impact of the GMT reform on China’s tax system and enterprises and proposes countermeasures. However, approximately 20% of the earnings can be exposed to the 15% tax rate that governments can apply. If the entire process is mixed in tandem, the tax rate equals 0.2%. Hence, an important amount of tax revenue can proceed down the drain. From the numerical outcomes, the minimum tax with jurisdictional blending was set at 12.5% under Pillar 2; the disparity between the sample’s top and lowest EATRs would decrease by 2.8% points.

New Pillar to Address Tax Challenges Arising from Digitalization of the Economy

Traditional international tax rules empower a source state to tax non-residents who have a strong physical connection to that state. Digitalized business models reduce, or even eliminate, the need for a physical presence to conduct economic activities in the state where customers are located. This change has created significant challenges for tax administrations, and many jurisdictions have adopted unilateral digital services taxes to increase collection from digitalized businesses. The OECD/G20 Inclusive Framework aims to reform the ‘outdated’ international tax rules by promoting the Pillar One project on the tax challenges of digitalization in order to enable greater taxing rights by market jurisdiction. However, Pillar One seems to foster uncertainty rather than reassurance. This article considers the possibility of coordinating digital services taxes among individual jurisdictions: instead of focusing on the uncertainty and complexity of Pillar One, the OECD could use the Inclusive Framework to provide guidance on the collection of digital services taxes to protect taxing rights of market states and prevent double taxation of multinational enterprises.

THE FISCAL CHALLENGES OF THE DIGITAL ECONOMY IN THE EUROPEAN UNION: A BIBLIOMETRIC ANALYSIS

The digital age offers new opportunities for innovation and growth. From a fiscal point of view, it creates opportunities for tax administrations to reduce tax evasion. On the other hand, as business models change, there is international pressure on the tax system. The current rules were developed at the beginning of the 20th century for traditional companies that relied on the principle of corporate taxation where value was created. In the case of digital activities, physical presence is no longer a condition for the provision of services. There are two major questions: Where do we tax? In the case of a company with a low or even non-existent physical presence and what do we tax? in the context of a digital business plan based on knowledge, data and intangible assets. The digital economy is a challenge for all tax regimes, as its rapid development has led to the conclusion that international tax rules are not properly adapted. One objective currently pursued at EU level is to adapt Member States' tax systems to optimize them to meet the challenges of the digital era. The aim of this paper is to identify the model and the most effective instruments for charging the digital economy at the level of the European community, as well as the way in which the directives issued by the European Union manage to harmonize the fiscal policies of each member state for charging and regulating the digital economy. In order to achieve that, we performed a bibliometric analysis on the database Web of Science Core Collection, regarding our study research. This study was performed according to the Preferred Reporting Items for Systematic Reviews and Meta-analysis (PRISMA) statement.

Implementation of the «Two-Pillar Solution» prospects in the international taxation system

The world economy has undergone a rapid digital transformation, which has caused critical discussions about the effectiveness of existing international tax systems. Traditional norms and rules are proving insufficient to solve the dynamic challenges associated with the development of the digital economy, where new sources of value creation and innovative business models challenge the established norms of profit distribution and relationships. At the same time, intangible sources of value creation contribute to tax avoidance by transnational corporations. Base Erosion and Profit Shifting (BEPS) rules are becoming a key initiative to counter these challenges. The article identifies the difficulties in reforming the modern international tax system, emphasizing the need for constant dialogue, cooperation, and adaptation to changing economic conditions. A two-step solution is an important tool in the fight against aggressive tax planning. Current discussions highlight the complex nature of the impact of the digital economy on international tax rules. Effective monitoring of the implementation and impact of the two-step solution is critical to areas for improvement, with international cooperation through the OECD playing a central role in this reform process. The BEPS rules are seen as a critical solution in the evolution of international tax policy in overcoming the challenges associated with the digital economy. The success of the implementation of the two-step solution initiative depends on effective cooperation between countries, in particular in the context of agreements on the avoidance of double taxation. The internal adaptability of this tool has the potential to improve the efficiency of the international tax system, as it directly addresses the challenges and conditions of the digital economy.

Research on Global Tax Governance under the Background of Digital Economy

<p style="text-align: justify;"><span lang="EN-US" style="font-size: 14pt; font-family: 'times new roman', times, serif;">Under the background of digital economy, global tax governance has become one of the important topics in today's world development and change. In recent years, new challenges, such as tax base erosion and profit transfer, and the imbalance of cross-border tax source division, have become prominent, forcing the reform of international tax rules and the reshaping of international tax order. Based on this, the article first deeply digs into the scale and cross-border characteristics of the spatial-temporal aggregation of the digital economy, and comprehensively evaluates its impact on the global tax governance pattern. After that, the article combs out the realistic picture and challenges of the current digital tax reform from the aspects of theoretical basis, basic principles and governance mechanism. Finally, based on China's basic national conditions, the article puts forward some institutional ideas and policy suggestions, with a view to improving China's participation, voice and influence in global tax governance, and also enabling governments, enterprises and residents of various countries to enjoy the fruits of world economic development fairly and promote the construction of Community of Shared Future for Mankind.</span></p>

CROSS-BORDER TAX CHALLENGES AND SOLUTIONS IN GLOBAL FINANCE

In the dynamic landscape of global finance, cross-border transactions have become increasingly prevalent, facilitating economic growth and international trade. However, accompanying this expansion are complex tax challenges that both multinational corporations and governments encounter. This abstract delves into the multifaceted issues arising from cross-border taxation and explores potential solutions to mitigate these challenges effectively. One of the primary concerns in cross-border taxation is the issue of base erosion and profit shifting (BEPS), where multinational enterprises exploit gaps and mismatches in tax rules to artificially shift profits to low-tax jurisdictions, thereby eroding the tax base of higher-tax jurisdictions. Such practices not only lead to revenue losses for governments but also create an uneven playing field for businesses. Furthermore, navigating the intricate web of international tax treaties and agreements poses significant hurdles for taxpayers and tax authorities alike. The lack of uniformity in tax regulations across jurisdictions often results in ambiguity and disputes regarding the allocation of taxing rights and the determination of taxable income. Addressing these challenges requires a comprehensive approach that incorporates both policy reforms and international cooperation. Implementing measures such as the OECD/G20 BEPS project, which aims to modernize international tax rules and combat tax avoidance strategies, is crucial. Additionally, enhancing transparency through initiatives like country-by-country reporting enables tax authorities to gain insights into the global operations of multinational corporations, thereby facilitating more effective enforcement of tax laws. Moreover, fostering collaboration among nations through information exchange agreements and multilateral frameworks enhances the effectiveness of tax enforcement efforts and reduces opportunities for tax evasion. Embracing digitalization and leveraging technology tools can also streamline tax compliance processes and enhance the efficiency of cross-border tax administration. The complexities of cross-border taxation in global finance necessitate proactive measures to address BEPS, enhance tax transparency, and promote international cooperation. By implementing comprehensive strategies that blend policy reforms with technological innovations, stakeholders can navigate the challenges posed by cross-border taxation while fostering a fair and conducive environment for sustainable economic growth.
 Keywords: Cross-Border, Tax, Environment, Sustainable, Economy, Review.

Analysis of International Disputes over Digital Services Tax and Exploration of China’s Approach

With the continuous emergence of emerging information technologies, the digital economy is developing rapidly around the world. The global operations of multinational digital enterprises no longer rely on physical presence. The effectiveness of permanent establishment rules based on the traditional real economy settings has been questioned by market countries, which actively participate in Market countries where digital business value is created do not receive corresponding taxation rights. Multinational digital companies take advantage of loopholes in digital platforms and current tax rules to actively carry out tax planning, resulting in digital companies’ global tax burden being much lower than that of traditional companies. Tax sources cannot be fairly and reasonably distributed in the places where value is created and profits are taxed, which harms the tax interests of market countries. Against the background of slow progress in the OECD global unified solution, as a temporary unilateral measure to address the challenges of the digital economy, some countries have taken the lead in imposing digital service taxes on specific digital businesses of digital enterprises. On the basis of discussing the relevant concepts and theories of digital service tax, this article discusses the relevant concepts and theories of digital service tax, and analyzes the international development of digital service tax and the positions of various countries around the world. Further analyze the impact of digital service tax collection from three aspects: national fiscal revenue, tax trade disputes and international tax order coordination, and analyze the impact of digital service tax on digital enterprises. Then the perspective is focused on my country, sorting out and summarizing my country's relevant digital economy tax policies, and analyzing the impact of digital service tax on my country in the near term and long term based on the development of my country's digital economy. Finally, based on the previous comparative analysis and impact analysis, my country's tax system for promoting the development of the digital economy has gradually improved and actively participated in the reshaping of international tax rules, and my country's response strategies under the digital service tax have been proposed. The different levels of digital economic development between China and countries that have levied digital service taxes will inevitably lead to disharmony in the international tax order. The study found that the fiscal revenue brought by digital service tax is limited and has a certain degree of distortion effect. It is necessary to actively participate in international cooperation and make China's voice heard before reaching a consensus on international tax rules. In the long term, we should focus on the connection between the two-pillar plan and the domestic tax system, strengthen tax information exchange, improve the domestic digital tax rule system, and promote the healthy and sustainable development of my country's digital economy.

Международное налогообложение в начале XXI века: новая реальность

The article analyses the main changes in international taxation at the beginning of the XXI century. The author highlights the changes in the system of tax international information exchange for individuals and the BEPS project for multinational companies. These changes were caused by the consequences of the 2008 crisis. A system of tax information exchange in digital form based on international tax agreements was built for individuals. To combat corporate international tax evasion, the G-20 and OECD presented a BEPS Action Plan consisting of 15 actions. This Plan is designed to prevent the chaos in international taxation as a result of uncoordinated tax actions of individual states. The main elements of the BEPS Action Plan are traditional anti-avoidance measures without fundamentally changing international tax rules based on taxation of individual companies belonging to multinational corporations. The BEPS Plan contains a new form of reporting, which is based on the assessment of a multinational company as a whole. In the future, the tax attitude towards a multinational company as a single business was developed in the BEPS 2.0 project. The author believes that it is necessary to develop the rules of taxation of multinational companies as a single unit to solve current problems with taxation of such companies.

SOUTH AFRICA’S RESPONSE TO THE DIGITAL ECONOMY’S DIRECT TAX CHALLENGES – PART 1

International tax rules were developed more than a century ago. At their core is the principle that profits should be taxed where economic activities physically take place and where value is created. Advances in technology and the progression of the fourth industrial revolution have changed how businesses around the world operate and have given rise to the “digital economy”. Businesses no longer need to be “physically” present in a jurisdiction but can operate digitally or virtually anywhere in the world. New business models such as e-commerce, payment services, app stores, online advertising, cloud computing and participative network platforms have emerged. The digital economy and these new business models pose various challenges to the effectiveness of rules on the current jurisdiction to tax; businesses are able to derive significant economic benefits from a country without a “taxable nexus” to such country – for example, without the creation of a fixed place of business, permanent establishment or establishing a place of effective management. The digital economy is global in nature and, therefore, policy actions dealing with the global economy need a global approach. The Organisation for Economic Co-operation and Development (OECD) has taken a leading role in developing new direct-tax rules that will address the tax challenges posed by the digital economy and has agreed to develop a two-pillar solution that can be consented to internationally and implemented by countries. Pillar one proposes new rules on tax nexus and profit allocation for large multinational enterprises (MNEs) that meet certain revenue and profitability thresholds. The rules do not require MNEs to be physically present in a jurisdiction. Pillar two proposes mechanisms to ensure large MNEs pay a minimum level of tax (currently set at 15 per cent) regardless of where their headquarters are or the jurisdictions in which they operate. Some countries (such as the United Kingdom (UK), United States of America (USA), India, and Nigeria) have opted to take unilateral measures as they wait for a global solution. These unilateral measures are often uncoordinated and give rise to some undesirable consequences, such as double taxation. South Africa has decided to wait for global consensus and is currently not taxing the digital economy through its direct-tax rules. Although the OECD solutions are helpful proposals on taxing the digital economy and are a step in the right direction, it is submitted that they are not completely suited for South Africa as a developing African country; they do not consider some of South Africa’s unique circumstances, such as the prevalence of corruption, semi-skilled tax administration and limited resources. South Africa should not merely adopt the rules blindly but should adapt them to suit its needs as a developing country. South Africa needs to protect its tax base while embracing the digital economy; perhaps, while it waits for a global solution, it could strengthen its source rules as recommended by the Davis Tax Committee. This article is divided into two parts. Part 1 evaluates the suitability of South Africa adopting the OECD global solutions to the direct-tax challenges posed by the digital economy in a developing African country; Part 2 evaluates whether South Africa’s response to these challenges is the best option by considering the approach and consequences of select developed and developing jurisdictions (that is, USA, UK, Nigeria and India) adopting unilateral measures while waiting for an OECD global solution.

Legal regulation of IT companies’ functioning in performing tax control (domestic and foreign experience)

The paper examines the peculiarities of taxation of IT technology services in Ukraine. The introduction of digital technologies in the field of taxation today is due to the need to simplify the process of processing tax information, reduce the corruption need to improve the quality of services, improve the quality of planning and forecasting the development of the fiscal system and the national economy as a whole. Digitalization can play a key role in helping tax authorities reduce administrative costs, collect more revenue more efficiently, increase transparency and service for taxpayers, and adapt big data flows. As a result, there is a trend towards global digitalization of the tax space, digitization of tax information, and the introduction of new technologies for tax administration. In our opinion, the tax policy of digitalization will remain at the center of its global debate for a long time as to whether international tax rules will change or remain unchanged in an increasingly changing environment. The purpose of the paper is to study the impact of digitalization on the development of tax control. Researched: the trends of digitization of tax administration, such as the creation of web portals for the provision of electronic services, the introduction of an electronic check, the use of automation and data analysis to improve the efficiency of tax control, and the introduction of the practice of using pre-population of tax return. The main problems associated with these processes are outlined, namely the problems of digital exclusion, as well as the possible occurrence of under or over-tax obligations and, as a result, provoking tax avoidance and evasion. It was established that, regardless of certain problematic issues, it is worth noting the possible positive impact of digitalization on the effectiveness of tax control. In particular, changing the format of interaction between the tax authority and taxpayers, increasing the transparency and accessibility of tax services, changing the focus of tax control from activities aimed at detecting committed violations to measures for their prevention, which in turn contributes to increasing the level of trust and tax awareness of tax subjects.

The debt bias in company financing decisions - problems and possible solutions

Purpose : The purpose of the present article is to compare the relative strengths and weaknesses of thin capitalisation rules and allowances for corporate equity which are the main approaches used in modern tax systems to address the debt bias and have been an integral part of proposals for international coordination of corporate income taxation. Methodology: The theoretical methods applied in the article are review of the existing literature on the topic and comparative analysis of the strengths and weaknesses of the main approaches to the debt bias. Results: Although thin capitalisation rules and allowances for corporate equity contribute to the reduction of the problems associated with the debt bias, both types of methods have their limitations. The two approaches are analysed in the article from the perspective of international reform proposals within the BEPS project and the EU as the effective elimination of the distortions caused by the debt bias can be achieved only in coordinated manner. Originality : The paper adds to the growing body of literature on the topic by summarising the main strengths and weaknesses of the two main methods for resolving the debt bias and analysing them from the perspective of the reforms of international tax rules. Keywords: Corporate income taxation, Debt bias, Thin capitalisation rules, Allowances for corporate equity, International tax coordination https://doi.org/10.58869/EJABM008/SI05

The Evolution of Thinking on Tax and the Digitalization of Business 1996-2018

This article surveys the evolution of the discussion on tax and digitalization between 1996 and 2018, analysing the shifts in thinking over this period and their impact going forward. Particular attention is given to four themes that emerge in this discussion. These are the changes in thinking on: the conceptual basis for the allocation of taxing rights; suitability concerns about the existing international tax rules; concerns about international tax avoidance; and concerns about tax competition between states. The impact of the increasing importance of developing countries on the digitalization debate is also considered. What emerges from the analysis is that there have been significant shifts in how the tax issues raised by digitalization have been framed and addressed by the OECD and the delegate states involved in the process. The chief consequence of the approach adopted is that there has never been a completely clear and consensus-based analysis of the problem (or problems) for which a solution is sought, which also includes the rationale and objectives of any required response. This goes a long way towards explaining the diverse (and, arguably, contradictory) threads that are combined in the two-pillar approach currently pursued.

International Tax Rules for Unruly Times

International Tax Rules for Unruly Times

Reconstruction of International Tax Rules to Meet the Challenges of Digital Economy

The current cross-border income tax collection rules of “positive income is levied in the source country and passive income is levied in the resident country” seriously violate the benefit principle in practice. The corporate income tax system is the institutional root of the failure of the above rules. The digital economy with data as the key production factor, invisibility and liquidity, relying on user participation and natural monopoly intensifies the negative impact of the corporate income tax system on the current rules. Starting from the principle of benefit and combined with the theory of value creation, this paper advocates the reconstruction of the cross-border income tax collection rule system, which takes the whole multinational enterprise group as the tax subject, takes the formula distribution as the method, takes the progressive tax rate as the improvement direction, and adopts “positive income is levied in the resident country and passive income is levied in the source country”.

Multinationals’ Sales and Profit Shifting in Tax Havens

We show that US multinationals record sales and the profits from these sales in tax havens while their goods and services are physically sold in other countries. We propose a framework illustrating the strategy of sales shifting. Our results reveal the importance of tax havens, which attract a disproportionate fraction of worldwide sales. Our quantification shows a large contribution of sales shifting to multinationals’ profit shifting, which amounted to $80 billion in 2013. Our findings suggest that international corporate tax rules based on sales may not address profit shifting efficiently if the policy designs are unable to identify sales by destination. (JEL F23, H25, H26, H87, L25)

Do Italian and International Tax Rules Require a Literal Application of the Value Test under Article 9(4) of the MLI? Possible Remedies to the Disproportionate Tax Treatment of Capital-Intensive Inbound Investments

Italy has opted for article 9(4) of the MLI. Taxpayers will shortly be confronted with the new “immovable properties clause” of article 13(4) of the OECD Model (2017). A literal interpretation of the “immovable properties clause” will discourage inbound investments. International law countering discrimination supports a purposive interpretation.

The Parallel Rise of Multinational Enterprises and the Historical Development of International Tax Rules – Introspection for the New Rules to Tax the Digital Economy

This article traces the rise of multinational enterprises (MNEs) and the effectiveness of measures that countries have employed to ensure that MNEs pay taxes in the jurisdictions in which they transact. The article shows that, as countries enacted various taxing measures, MNEs devised tax avoidance schemes to exploit arising loopholes.

Countering Commodity Trade Mispricing in Low-Income Countries: A Prescriptive Approach

ABSTRACT Commodity trade mispricing, especially the undervaluation of commodity exports, disproportionately harms low-income countries that depend on commodity exports for most of their export earnings. Such countries should (re)consider adopting rule-based pricing methods as a prescriptive alternative to transaction-based valuation systems. This article firmly grounds rule-based pricing in market parameters. It calls for a hybrid form of market-based price regulation in the framework of public–private models of supply chain governance, also integrating advice from independent experts. This article addresses this policy option within the parameters set by international law, considering state regulatory scope under international trade and tax law. It challenges the popular objection that prescriptive pricing methods breach international trade and tax rules. Instead, it emphasizes the complexity of any such legal assessment under international economic law.