Market Jurisdictions Research Articles

Is There Any Consensus about Market Jurisdiction among Pillar One Participating Jurisdictions? – Comparing Source Rules for Taxing Online Advertising Services

This article examines the limited consensus among Pillar One participating jurisdictions regarding market jurisdiction. It explores the reasons behind such limited consensus and its broader implications for international tax law.

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 The OECD/G20 Inclusive Framework aims to reform the ‘outdated’ international tax rules by promoting the Pillar One project on the tax challenges of digitalization in order to enable greater taxing rights by market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.

Exploring minimal indirect digital economy taxation as a post-COVID-19 economic recovery strategy for African revenue mobilisation

The COVID-19 pandemic and its aftermath continue to devastate most areas of society and continue to reveal inherent structural vulnerabilities in the economies, social, and health systems in countries. In addition, the Russia-Ukraine conflict of 2022 and the geopolitics of its resolution continue to create shocks across the globe- evidenced by rising inflation, increased sovereign debt level, recession, and reduced public expenditure among others. While many sectors of the economy were crippled by the back-to-back global economic shocks of the Covid-19 pandemic and the Russia-Ukraine conflict through reduced economic activities resulting in a global recession and reduced tax revenues for public expenditure, the digital economy has surprisingly boomed and continues to grow in this period of uncertainty. This has been directly attributed to the 'lure of the alternative', caused by the social and economic lockdowns imposed by countries, which pushed many persons and companies to explore the next available option- online platforms to conduct business. Although the rise in the use of digital platforms for business activities is commendable, this development has some implications for traditional business frameworks which in turn affects revenue mobilisation for funding public infrastructure projects and services. This is because, in Africa, the digital economy is not as well-regulated as the traditional economy. This creates an avenue for tax evasion and avoidance, arising from the dynamic and complex nature of digital transactions. This challenge requires that urgent solutions be found for the effective taxation of the digital economy. There will be a need to review/reform economic and fiscal policies and laws to ensure a faster recovery from the economic effects of the COVID-19 pandemic. There would also be a need to create digital tax policies that are equitable for source and market jurisdictions and, lastly, there will be a need for cooperation in tax law and policies across Africa that capture the reality of the growth and ubiquitous presence of digital multinationals in Africa.

Pillar One and Mobility – A Truly Global Solution?

Mobility should be at the core of the reallocation of taxing rights debate. With such a premise in mind, this contribution addresses this issue within Pillar One in its two components: the apportionment of taxing rights to market jurisdictions on residual profits of the most significant MNEs worldwide (Amount A) and the standardization of the remuneration of related party distributors that perform baseline marketing and distribution activities in market jurisdictions (Amount B). The aim is to show that not only the mobility of individuals but also that of MNE structures when deciding on their presence in market jurisdictions are relevant in building new paradigms on the allocation of taxing rights at a cross-border level through the specific impact of the said OECD proposal. Even if Pillar One seems doomed to fail, lessons learned from its design and its specific impact on mobility matters should inform further developments in reshaping international taxation. OECD, Pillar One, MNEs, digital economy, transfer pricing, mobility, developing countries, market jurisdictions.

Principles Justifying the Reallocation of Taxing Rights to Market Jurisdictions: Do We Need Them?

This article argues that the taxing right of market jurisdictions under Pillar One is justified by commonly invoked and widely accepted principles in international taxation. This is not just a desirable outcome of the international coordination on the allocation of taxing rights but a moral demand that the inter-state allocation of taxing rights must comply with. A principle-based allocation of taxing rights is a precondition for the legitimacy and thus the equity of the international tax regime. Principles, such as ability to pay, the benefits principle and economic allegiance, provide a normative justification for asserting tax jurisdiction. Despite the criticism regarding their vagueness, indeterminateness, and overlaps between their meaning, the benefits principle and economic allegiance have a definite function in the international tax regime insofar as they designate the countries that have a legitimate claim to tax international income. Pillar One, international tax coordination, equity in international taxation, internation equity, legitimacy, principles, justification of taxation, justification of tax jurisdiction, benefits principle, economic allegiance.

Towards an Amended Arm’s Length Principle: Tackling Complexity and Implementing Destination Rules in Transfer Pricing

The arm’s length principle (ALP) is the cornerstone of multinational enterprises’ (MNEs) profit taxation. However, despite extensive improvements by the OECD’s Base Erosion and Profit Shifting (BEPS) Project, two aspects of the ALP has been widely criticized. First, market jurisdictions where MNEs serve their customers have little access to the MNEs’ profits because there is often no place of supply for tax purposes or, if there is, the profits reported there are very low. This reduces the perceived fairness of profit allocations and the acceptance of rules by taxpayers and jurisdictions. Second, the rules governing the ALP have continuously become more complex and difficult to implement. Whereas the first point of criticism will presumably be addressed by Pillar One, the second has not yet been dealt with and is even more exacerbated by the BEPS Project. The authors suggest amending the ALP by attempting to effectively focus on its complexity and implementing destination rules. The former can be achieved with a reduction of functional analyses and information requirements as well as a standardization of margins reduces complexity while the latter target the allocation of MNEs’ profits to market jurisdictions which they have in common with Pillar One. However, in contrast to Pillar One that rests on a multilateral agreement, the amended ALP is embedded in a bilateral context (usually a double tax agreement (DTA) and underlying transfer pricing guidelines). Keeping the bilateral character significantly reduces conflicts of interest between jurisdictions, simplifies tax enforcement, and offers important benefits for dispute resolution. This is assumed to increase the perceived fairness of profit allocations and acceptance of the ALP. A stylized example is used to demonstrate how the amended ALP can be applied.

Market Jurisdiction: Opportunity for Imposing Income Tax for Potential User Countries in the Era of Economic Digitization

Market Jurisdiction: Opportunity for Imposing Income Tax for Potential User Countries in the Era of Economic Digitization

BEPS Project and International Tax Reform: The 2021 Agreements on Taxing Multinational Companies.

The globalization of commercial exchanges and capital movements reveal new ways of obtaining value in economic activities, and the differences in the tax burden of companies, depending on where they reside, have become threats for countries to exercise the right to tax business profits generated in its jurisdiction. This problem, together with tax competition between countries, causes a transfer of tax bases towards countries with lower tax rates and tax havens. The lack of agreement in the international community on how to find a solution to the problems has caused several countries to choose to establish special taxes for certain activities of multinational companies in their jurisdictions, resulting in inefficient taxes. This paper analyzes the agreement reached in October 2021 in the G20 and in the OECD in which measures are adopted within the BEPS project to prevent the erosion of tax bases in market jurisdictions promoted by multinational companies. After studying different aspects, we found fundamental reasons for not having an optimistic view on the effective solution to the problems above: unrealistic forecasts on the amount of the new estimated tax bases for Pillar 1 and the high administration and compliance costs. In conclusion, it is not foreseeable that the tax bases derived from the provision of digital services will suffer a territorial redistribution. We do not expect that a minimum tax rate of 15% in corporate tax will be carried out effectively or that the benefits that are transferred to tax havens will be significantly reduced.

Tax Challenges of the Digital Economy: An Evaluation of the New OECD Nexus Rule Based on Revenue Thresholds

The author, in this article, having established the general aspects regarding the new nexus rule based on revenue thresholds, evaluates the development of the rules as proposed by the OECD in Pillar One, Amount A, based on the revenue threshold that a non-resident company acquires in a foreign market jurisdiction.

ANALISIS PENYELESAIAN ISU PEMAJAKAN EKONOMI DIGITAL: STUDI KASUS GOOGLE ASIA PACIFIC Pte Ltd.

Digitalization raises taxation issues for the market jurisdiction authority including Indonesia, both on the aspect of direct taxation and indirect taxation, due to the capability of the digital multinational entities (MNEs) to avoid physical presence to exercise a transaction with the customer in the market jurisdiction. In terms of indirect taxation, issues raised by Google Asia Pacific Pte Ltd (Singapore) related to the business to customer (B2C) model on service and intangible transactions to the consument in Indonesia, especially the nonregistered taxable business consument (nonPKP). In general, the consumption of services and intangibles from abroad by resident in Indonesia is taxed using the mechanism of reverse charge. Due to its ineffectivity and ineffeiciency at the implementation, in 2020, Indonesia government appointed several nonresident MNE including Google Asia Pacific Pte Ltd (Singapore) to collect the VATs. Meanwhile, issue in direct taxation raised by Google Asia Pacific is due to the provision of Indonesia and Singapore tax treaty that still oblige the degree of physical presence to measure the existence of permanent establishment. After the publication of BEPS Action 1: Final Report (2015), the Indonesian government has made several policy decisions, both in terms of domestic regulations to the international realm, such as the signing of multilateral instruments (MLI) and tax treaty negotiation. In addition, currently a negotiation is underway regarding the consensus on digital economy taxation proposals known as the two pillars. One of the proposals initiated was the first pillar proposal (unified approach) which focus on updating rules related to nexus and profit allocation. The purpose of this study is to identify the alternative for VAT and income taxation against Google Asia Pacific Ltd by considering the principles of international taxation. The research used qualitative method with a case study approach. The research data were collected using literature study.

Justifying Source Taxation in the Digital Age

I chose to write on a theoretical jurisprudential topic which, in my view, is anchored to a practical problem. In fact, with the rise of the digital economy, it has become the most critical functional problem in the tax world of the 21st century. This article attempts to establish a justification for the taxation of income earned by highly digitalised businesses in the source or market jurisdiction. The article explains why this theoretical question is such an important issue in international tax.

Administering Profit and Consumption Taxation in Market Jurisdictions: Selected Similarities in the Digital Era

In this article, the authors consider profit and consumption taxation in the digital era, specifically comparing the existing system of VAT as it applies in the European Union with the OECD’s proposals under Pillar One in relation to corporate income tax.

What Is the Road Ahead for Unilateral Digital Tax Measures?

In the past couple of years, countries across the globe have implemented several unilateral measures for digital economy taxation to tackle the tax challenges arising from taxation of the digital economy. On the global front, the Organisation for Economic Co-operation and Development (OECD) hosted negotiations with countries that are part of the Inclusive Framework on Base Erosion and Profit Shifting for more than half a decade and came up with a Two-Pillar Solution. The United Nations proposed a new article 12B, which aims to allow market jurisdictions to withhold tax on payments made for digital services. However, many open questions still need to be resolved, probably the most relevant of all – is there a certainty that multinationals covered in Pillar One or Pillar Two would not be doubly taxed on the same digital income? Considering this background, the paper starts with the discussion on the current state of affairs, then it moves on to the debate surrounding the taxation of the digital economy. It also discusses the various unilateral digital tax measures currently in existence across the globe and the macro and micro impact of these measures on the economy and businesses. It concludes with a discussion on what lies ahead for the countries adopting the OECD-proposed Two-Pillar Solution and the fate of the unilateral digital tax measures.

The Impact of Taxation Accounting of Value-Added-Tax in the Engineering of the Iraqi Economy

This study analyses the causes behind the difficulties encountered by Iraqi economy in rebuilding, provision of value added tax (VAT), formation and implementation effects in case of applying it to the Iraqi markets. In contrast to accounts that lay stress on Iraq’s statist past, we argue that the sustained decline in formal institutions and poor tax administration is the best explanation for Iraq’s economic decline. In addition to the selected micro-economic interventions, we recommend policies that more dependably and equitably distribute oil rents, such as a universal basic value added tax collection. Our recommendations thus contrast sharply with the approaches that emphasize a reduced role by the state. The aim is to facilitate the development of VAT model under conditions of lowered conflict and greater stability, a binding constraint on development for Iraqi economy. The development process for the VAT operational management in Iraqi markets. VAT operates as a transactional sales tax, often compliance in Iraqi market jurisdiction can be compromised where purchasers are a part of a scheme that operates a fraud mechanism or where supplies are made to consumers without any physical presence in destination countries. In this context, enforcement nexus must be reinforced through several mechanisms suggested in the literature.

Natural Gas Has Role in Decarbonizing the Australian Electricity Supply

This article, written by JPT Technology Editor Chris Carpenter, contains highlights of paper SPE 202210, “Future Roles for Natural Gas in Decarbonizing the Australian Electricity Supply Within the NEM: Total System Costs Are Key,” by Stephanie Byrom, University of Queensland; Geoffrey Bongers, Gamma Energy Technology; and Andy Boston, Red Vector, et al., prepared for the 2020 SPE Asia Pacific Oil and Gas Conference and Exhibition, originally scheduled to be held in Perth, Australia, 20–22 October. The paper has not been peer reviewed. Electricity systems around the world are changing, with the Paris Agreement of 2015 a catalyst for much current change. The Australian government ratified the agreement by committing to 26–28% emissions reductions below 2005 levels by 2030. Reduction in emissions from electricity generation has become the focus of these targets. To decarbonize the grid to meet targets while building firm, dispatchable generation capacity to support the system, a new metric is required to measure success. The complete paper explores the outputs of the model of energy and grid services (MEGS), illustrating outcomes if a single technology group is favored. Introduction The majority of electricity in the Australian National Energy Market (NEM) is provided by synchronous thermal power generation, which also has delivered services required for grid stability such as inertia and frequency control. The NEM commenced operation in December 1998 and includes five regional market jurisdictions: Queensland, New South Wales (including the Australian Capital Territory), Victoria, South Australia, and Tasmania. In 2020, the NEM incorporated approximately 40,000 km of transmission lines and cables, connecting approximately 57 GW of generation capacity to consumers. This thermal generation mostly has consisted of coal- and gas-based technologies. Electricity grids are also changing from largely centralized electricity generation systems to more decentralized ones and from unidirectional electricity flows to bidirectional flows as part of the effort to reduce emissions. However, with increasing penetration of variable renewable energy (VRE) generation, it is important to plan for and manage generation-asset investment to track the lowest possible total system cost and highest reliability path to a low-emissions future. A Competent, Diverse Grid A competent electricity grid is one that can keep the lights on, so to speak, within the legislated tolerance for outages and performance. A competent grid is adequate, reliable, secure, operable, and robust against externally driven disruptions. In practice, the reliability of the electricity grid often seems to be taken for granted; however, it is an essential element of the modern economy, and, with a changing grid, reliability is increasingly important. When a decision must be made to build or replace an individual power plant, stakeholders (individual investors) have traditionally considered the levelized cost of energy (LCOE) of the alternative generation options, which di-vides the total cost of an installation or plant by the kilowatt-hours it produces over its lifetime. However, metrics such as LCOE, based on grid-independent formulae to help power plant investors to maximize returns, are inappropriate for comparing technologies that deliver and demand a complex menu of services specific to the grid. A different metric is required to evaluate each technology’s contribution to the grid.

Evaluation of the effectiveness of vehicle roll stability control (RSC) for high center of gravity light passenger vehicles in Australasia

Objective Rollover crashes, which occur when the vehicle’s side or roof makes impact with the ground, present particularly serious injury risk. Higher rollover risk has been found for high riding vehicles – those with a relatively high center of gravity compared to the width of the wheel track. Electronic Stability Control (ESC), which automatically applies brakes to individual wheels and reduces engine power to help drivers regain control when traction is lost, has been shown to be effective in preventing a proportion of rollovers. A newer safety technology, Roll Stability Control (RSC), uses similar technology aimed specifically to reduce rollover risk. This study sought to estimate rollover crash rates associated with the fitment of RSC compared to non-fitment for high center of gravity (CG) light passenger vehicles using an induced exposure analysis. Methods Police-recorded Australasian crash data were studied for the years 2008-2017. A quasi-induced exposure analysis was restricted to vehicles already equipped with ESC as vehicles fitted with RSC always have ESC fitted. Rollover risk associated with RSC fitment was assessed, controlling for year of crash, speed limit at crash location, year of vehicle manufacture, vehicle market group, driver age, driver gender and jurisdiction identifier. Results The analysis found a statistically significant rollover risk ratio of 0.76 (95% CI 0.62-0.93), representing a 24% reduction in rollover risk, associated with RSC fitment for vehicles manufactured between 2008 and 2017. Analysis by particular market groups found significant risk ratio reductions for commercial utilities and large SUVs, but not for the other high CG market groups individually. Conclusions These results suggest that RSC is a highly effective safety feature for high CG vehicles. Fleet data from Australia and New Zealand showed declining rates of RSC fitment over recent years for SUVs, meaning the potential road safety benefits of the technology are not being fully realized.

Adopting BEPS Inclusive Framework in Indonesia:Taxation Issues and Challenges in a Digital Era

This research is intended to discuss the new framework of taxing a highly digitalized economy, known as Base Erosion and Profit Shifting (BEPS) Inclusive Framework. This research discusses challenges that will be faced by Indonesia while adopting that new framework into domestic jurisdiction despite its potential benefit for state revenue. Taxing a highly digitalized economy under the physical-presence concept has been considered obsolete and tends to encourage Multinational Enterprises to shift their profit into low tax jurisdiction. This research applies a qualitative approach and research method. The data collection was done through a literature review and expert interviews. Organization for Economic Cooperation and Development (OECD), with the support of G20 members, proposes the solution based on global consensus. The solution is to establish a nexus to allocate taxing rights and profit allocation to the market jurisdiction. Indonesia has formulated a domestic legal basis despite myriad challenges. The challenges include coverage of the establishment of technical legal implementing guidelines and the improvement of the tax authority to optimize its performance. Essentially, this study highlights the legislation and organizational capacity of the Indonesian context. The study finds the ability to establish the technical regulation is seems questionable and similarly to the organization's capability to implement the project.

A Potential Legal Rationale for Taxing Rights of Market Jurisdictions

Although there seems to be consensus in the current debate of addressing tax challenges arising from economic digitalization that more taxing rights need to be allocated to market jurisdictions, the legal rationale supporting it is far from clear. This article argues that the reallocation of taxing rights itself is the issue at stake manifested by, instead of brought by, economic digitalization, which is why a principle to ensure the fair allocation of taxing rights is in urgent need. Among various candidates, a revised benefit principle is the best to deal with this issue and could provide a potential answer to the legal rationale for the taxing rights of market jurisdictions. Pursuant to the revised benefit principle, market taxation could be justified by deeming users as a conduit through which market jurisdictions provide public goods.

Taxing Profit and Consumption in Market Jurisdictions: Equity and Administrability in the Digital Era

Against the backdrop of a digitalized economy and a multitude of digital business models, policymakers from around the world are seeking consensus concerning an appropriate allocation of taxing rights. While there is widespread acceptance that consumption taxes should be levied in market jurisdictions, this is not yet the case in corporate income taxation. In an effort to counteract base erosion and profit shifting and more generally, reduce tax avoidance opportunities, the international community is now working to advance the ‘destination principle’ in a broader context. The notion of taxing profit and consumption in market jurisdictions can further equity among states. However, taxation in market jurisdictions can be afflicted with considerable tax compliance and enforcement difficulties, which can lead to inequitable results among taxpayers. To effectively tax digital business models in market jurisdictions, innovative approaches in substantive tax law and tax enforcement are needed. As the authors argue in this paper, proxies can be useful regulatory tools to ensure administrability of a destination-based tax system. In this context, however, policymakers must strike a balance between administrability and equity. The common system of value added tax (VAT) in the European Union (EU) has utilized various proxies and structural enforcement mechanisms to simplify tax compliance and enforcement in the digital context for years. In the authors’ view, they enhance effectiveness of the tax system without renouncing tax equity and have set an example for novel regulatory approaches currently under debate for corporate income taxation.

Common features of video games and social networks: importance for international taxation

In the last decade, significant review and change have been done regarding the taxation of profits from multinational companies. The OECD BEPS Action 1 is focused on granting additional taxing rights to jurisdictions where the customers of the service are located. This is because consumers add to the value creation process (prosumers), together with the company itself. Many enterprises do not have a physical presence at market jurisdictions because of the worldwide digitalization of the business process. With distant sales, they avoid sufficient taxation at the source countries. Multiple jurisdictions, businesses, and individuals provided various taxing rights allocation proposals. OECD considered some of them as possible ways to address the issue of under-taxation at market jurisdiction. This article evaluates the applicability of the OECD analysis of the value creation to the video games industry under the angle of differences and similarities between single-player and multi-player video games with social networks. This work is focused on the differences related to user participation and network effects for the value creation process. It explores the importance of the user participation and network effects for the value creation process of single-player and multi-player video games, to find if that respective taxing rights allocation should be different for these types of video game. It also analyses main proposals on taxing rights allocation, their applicability to the industry, and if these proposals acknowledge the differences in value creation based on the network effects of the video game. It was found that the existing proposals are not always consistent with the preparatory work on value creation analysis performed by the OECD and do not consider the named differences. The results of this work support the position that the proposals, including the most recent one, meet the existing urge for the taxing rights reallocation, but are mainly politically-driven and not always in line with the existing principles of international tax law.