Taxing Tech Titans: Policy Options for the Global South | IGF 2023 WS #443

Arguments

The audience members are seeking a clear understanding of how digital tax calculations are done, particularly for companies that operate remotely and do not charge for their services.

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Report

The audience members, including Bagheesha from the Internet Governance Project at Georgia Tech, Kosi from Benin's Ministry of Economy and Finance, and Kunle, are seeking a clear understanding of how digital tax calculations are performed for companies that operate remotely and do not charge for their services.

They believe that it is crucial to establish a clear and detailed process to tax companies like Facebook that do not have a physical presence in certain countries but are extensively used by its people. Bagheesha, a PhD scholar working with the Internet Governance Project at Georgia Tech, shares their perspective on the matter.

Their expertise in the field makes their comment valuable in gaining insights into the complexities of the issue. Kosi, a senior representative from Benin's Ministry of Economy and Finance, also highlights the need for this information for policy purposes. This indicates that governments and policymakers are grappling with the challenge of effectively taxing digital companies in the absence of a physical presence.

Furthermore, Kunle raises an important question regarding quantifying the amount that digital companies should pay. This aspect adds another layer of complexity to the discussion, as determining the appropriate tax amount for companies operating remotely can be challenging. The sentiment of the audience is neutral, indicating that they are not taking a strong position on the issue.

This is likely because they are seeking clarification and information rather than advocating for a particular stance. In terms of related topics, the discussion encompasses Digital Tax, Internet Governance, Remote Working, and Social Media. These topics are closely connected as they all contribute to the broader conversation surrounding the digital economy and its impact on taxation.

The discussion also relates to Sustainable Development Goals (SDGs) 9, 10, and 17. SDG 9 seeks to promote industry, innovation, and infrastructure, while SDG 10 focuses on reduced inequality. Moreover, SDG 17 emphasizes the importance of partnerships for achieving sustainable development goals. The linkage to these SDGs underscores the significance of addressing digital tax calculations and ensuring a fair and equitable system.

Overall, the audience seeks clarity on how to calculate digital tax for companies operating remotely. They believe that a detailed process is necessary to tax companies like Facebook, which have a significant user base in certain countries but lack a physical presence.

The insights provided by Bagheesha, Kosi, and Kunle, along with the broader topics and SDG connections, highlight the multidimensional nature of this issue and the need for effective policies and partnerships to address it.

Arguments

Countries don't need a treaty to collect taxes; they can introduce domestic law measures

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UN option of Article 12B is a better option for developing countries for tax collection

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The net method of Article 12B provides the least revenue and less than the OECD solution

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The gross method provides a treaty-based solution to eliminate double taxation for digital service taxes.

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The net method provides a simple formula to calculate net profits.

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If Cambodia introduces a digital service tax, it would not lose anything but UK companies will face double taxation.

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The common threat of companies passing the cost on to consumers due to digital service taxes is mostly not followed through.

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The negotiation on the digital economy has been going on for more than 10 years and progress only started when countries began introducing national measures such as digital service taxes

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The US has historically refused to share tax information on a multilateral basis and has not agreed to join major tax treaties

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Multinational companies have tried to stop developing countries from implementing their own digital tax measures

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Taxation in digital economy should be handled differently than traditional economy

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Countries can impose tax on online advertising payments to tech giants regardless of physical presence

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Abdul Muheet Chowdhary believes the U.S. and other OECD countries should ratify amount first before taking the next steps

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Report

The debate revolves around tax collection and the implementation of digital service taxes. One argument presented is that countries do not necessarily need tax treaties to collect taxes; they can adopt domestic law measures to achieve this. It is highlighted that tax treaties do not grant taxing rights but rather restrict them.

Additionally, even without a tax treaty, the residence jurisdiction can still provide unilateral relief. The argument emphasizes that tax is a fundamental aspect of sovereignty. Another argument put forth is that the United Nations (UN) option of Article 12B provides higher revenue potential for developing countries compared to the solution proposed by the Organisation for Economic Co-operation and Development (OECD).

The UN's Article 12B, particularly with its broad scope, is seen to provide developing countries with almost double or sometimes even triple the revenue compared to the OECD solution. In terms of digital service taxes, the gross method is described as offering a treaty-based solution to eliminate double taxation.

This method, which was developed by the United Nations, involves withholding a portion of each payment made for a digital service as a tax by the government. It is presented as a means to address the issue of double taxation effectively.

Interestingly, despite concerns that the introduction of digital service taxes would lead to companies exiting markets, this has not been observed in practice. Examples, such as Kenya, Uganda, and Tanzania, which have implemented a 5% digital service tax, demonstrate that company investments have not been significantly affected.

Moreover, the claim that companies would pass the cost of digital service taxes onto consumers is largely unsubstantiated. Little empirical evidence supports this notion, suggesting that the common threat of companies transferring costs to consumers is often not followed through.

One noteworthy observation is that multinational companies have attempted to prevent developing countries from implementing their own digital tax measures. This signifies the conflict of interest between multinational companies, which aim to minimize their tax liability, and developing countries seeking to collect taxes from these companies.

Another notable insight is that non-compliance with taxation in the digital economy can potentially be addressed through banks. For instance, Pakistan has implemented a process where banks are responsible for withholding taxes in the digital economy, ensuring greater compliance. Furthermore, India has introduced an "equalisation levy" strategy, imposing a 6% tax on online advertising targeting companies like Facebook and Google.

This strategy restricts payment to tech companies and forces them to file tax returns, enabling India to collect taxes from these firms regardless of their physical presence. Finally, Abdul Muheet Chowdhary advises waiting for the ratification of the tax measures by the United States and other OECD countries before proceeding with further steps.

This suggests the importance of ensuring international cooperation and agreement in tax matters. In conclusion, the debate surrounding tax collection and digital service taxes is multifaceted. Arguments range from the necessity of tax treaties to domestic law measures, the revenue potential for developing countries through Article 12B, and the effectiveness of the gross method to eliminate double taxation.

The lack of observed market exits and limited evidence supporting cost transfers to consumers challenge these concerns. Additionally, the actions of multinational companies, the role of banks in tax compliance, and the implementation of strategies like equalisation levies provide further insight into the complexity of the issue.

Ultimately, international cooperation and ratification by key countries are deemed critical to progress in this domain.

Arguments

Tax issues have become more complex with the intensification of global digital services

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Social networking taxes have had negative long-term effects, pushing people off networks and reducing telecoms operators’ revenues

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Countries should consider signing up to the OECD's BEPS program

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Alison Gillwald argues for a universal, binding agreement for taxing tech companies, particularly those without national presence

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Alison Gillwald supports signing up for the OECD, but conditionally

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Report

The taxation of global digital services has become increasingly complex, with many countries relying on telecommunications operators as their primary tax base. However, a significant issue is that policies surrounding taxation are often developed in isolation, failing to consider the interconnectedness between various sectors such as trade, competition, and digital rights.

This siloed approach neglects the potential impact of taxation policies on these sectors and can lead to unintended consequences. One specific example of these unintended consequences is seen in Uganda, where taxes on social networking and mobile transactions have had negative long-term effects.

These taxes have pushed people off networks and reduced the profitability of telecoms operators. This undermines initiatives such as the Digital Uganda program and highlights the need for a more comprehensive and balanced approach to taxation. Countries are encouraged to consider signing up to the OECD's BEPS (Base Erosion and Profit Shifting) program.

By doing so, they would be able to tax multinational corporations regardless of whether they have a physical presence in the country. This is particularly relevant in the digital age where multinational corporations can generate significant profits without a physical presence.

The implementation of a 15% taxation rate through BEPS could provide a significant revenue boost, even for countries with low internet penetration rates. Outdated tax systems are identified as a key hindrance to potential revenues for states. These systems fail to adapt to the rapidly changing global landscape and often lack the streamlined and integrated approaches necessary for effective taxation.

There is a clear need for tax systems to be updated and modernised to ensure governments can capture the appropriate levels of revenue. Caution is advised when it comes to the potential negative impacts of trade agreements on revenue generation.

The African continental free trade area, for example, may reduce intercontinental trade taxes, potentially impacting revenue streams for countries. It is crucial to carefully assess trade agreements and consider the impact they may have on taxation systems. Alison Gillwald, a prominent advocate for fair taxation, argues for a universal and binding agreement for taxing tech companies.

She emphasises the need for a level playing field in which tech companies, especially those without a national presence, are subject to fair and appropriate taxation. Gillwald notes that the current taxation of tech companies is subpar given their super profits and points out that the US is holding out on international taxation agreements.

She believes that unless there is universal agreement and binding commitments, the situation will not improve. Gillwald supports signing up for the OECD's initiatives but conditions her support on the potential for countries to exert pressure and increase taxation percentages.

She suggests that a digital multinational corporation pullout may be necessary from the 15% tax, as it may only apply to giant monopolies rather than multinational corporations as a whole. This highlights the need for careful consideration and negotiation when participating in international tax agreements.

In conclusion, the taxation of global digital services presents complex challenges for governments. It is essential to move away from siloed policies and towards a more integrated and comprehensive approach. This includes considering the interconnectedness of taxation with sectors such as trade, competition, and digital rights.

By signing up for initiatives like the OECD's BEPS program, countries can improve their ability to tax multinational corporations and generate crucial revenue. Updating outdated tax systems and carefully assessing the impact of trade agreements are also crucial steps in ensuring fair and effective taxation.

Achieving a universally agreed and binding international taxation system for tech companies is a key goal, with collective action within the OECD having the potential to bring about significant change.

Arguments

Large technology multinational companies generate substantial revenue from countries in the Global South yet often sit outside of the formal tax regulations of these countries

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There are multiple options for taxing the digital economy, including domestic measures such as direct and indirect taxes, and treaty-based options such as the UN's Article 12B and the OECD/G20's Inclusive Framework

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The deadline for OECD convention negotiations keeps getting shifted

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Some countries have implemented low national level taxation policies and intended to maintain them until an OECD agreement is reached

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Companies have been cooperative with tax authorities in India and Nepal, adopting a light touch approach

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Not necessary for Global South to sign up to the OECD now

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Report

Large multinational technology companies generate significant revenue from countries in the Global South, yet often operate outside the formal tax regulations of these countries. Over 60% of the world's population are now online, with the majority residing in the Global South.

These countries accounted for around 30% of Meta's (formerly Facebook) revenue in 2022, with the remaining 70% coming from the US, Canada, and Europe. To address this, several countries in South and Southeast Asia, including India, Pakistan, Nepal, Vietnam, and Malaysia, have implemented digital taxes.

Tax rates range from 2% in India and Nepal to 10% in Pakistan. Different tax options are available, such as domestic measures like direct and indirect taxes, and treaty-based solutions like the UN's Article 12B and the OECD/G20's Inclusive Framework.

However, there are concerns about the OECD/G20 multilateral system. Countries that agree to the deemed 'first best solution' under the OECD/G20 amount A convention must limit the implementation of domestic measures until the end of 2024. The convention's implementation depends on the US signing it, adding further uncertainty.

Moreover, the deadline for OECD convention negotiations has been repeatedly postponed, reflecting the complexity of reaching an agreement among participating countries. In the meantime, some countries have implemented low national-level taxation policies and intend to maintain them until an OECD agreement is reached.

There is also uncertainty about whether tax payment cooperation will continue under the Mountie Convention. Gayani Hurulle questions whether companies' compliance with tax payments will change under the Mountie Convention, an alternative to the current tax system. Despite these developments, tax officials in India and Nepal have reported a cooperative attitude from companies in paying taxes, adopting a light touch approach to taxation.

It is worth noting that it is not necessary for the Global South to sign up to the OECD agreement now. These countries have the option to wait and observe before deciding to join later. In conclusion, the issue of taxing large multinational technology companies in the Global South is complex and multifaceted.

While countries in the region have taken steps to implement digital taxes and explore various tax options, challenges and uncertainties persist regarding the OECD/G20 multilateral system and the implementation of tax regulations.

Arguments

Nigeria does not have a digital services tax, it has a nexus rule that connects businesses of non-resident persons to Nigeria for tax purposes

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The advancement of technology makes it possible for businesses to operate without physical presence in Nigeria

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With the option of significant economic presence, Nigeria taxes businesses that make transactions exceeding a certain threshold

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Monitoring businesses and their transactions is possible through financial institutions and self-declarations of businesses

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The intention of Nigeria is not to strangulate businesses, it is just to ensure that taxes are paid where business transactions are carried out

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Nigeria has been part of the discussions with the OECD since 2014

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Developing countries should be cautious before signing the OECD treaty, considering its potential impact on their revenue

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Report

Nigeria currently does not have a digital services tax in place. Instead, the country relies on a nexus rule, which connects businesses of non-resident persons to Nigeria for tax purposes. This means that if a non-resident business carries out transactions in Nigeria without a physical presence, the income or profits arising from those transactions can still be taxed in Nigeria.

The advancement of technology has made it possible for businesses to operate without a physical presence in Nigeria. Examples of such businesses include online businesses, international consulting firms, and telemedicine services. This technological progress has expanded the scope of taxation for countries like Nigeria, allowing them to tax businesses that exceed a certain threshold of transactions within their jurisdiction.

To ensure compliance with tax regulations, monitoring businesses and their transactions is made possible through financial institutions, as payments need to pass through the banking system. Additionally, companies are also given the option to self-declare their transactions, further enhancing transparency and accountability.

Nigeria's intention with its tax approach is not to harm businesses but to ensure that taxes are paid where transactions take place. The goal is to create a fair and level playing field where businesses contribute their fair share in the countries they operate in.

This approach is similar to that taken by countries like India and Nepal. Nigeria has adopted simplification methods and tax rates that will not significantly affect the profitability of businesses. Nigeria has actively participated in discussions with the Organisation for Economic Cooperation and Development (OECD) since 2014 regarding tax rules and regulations.

However, Nigeria did not sign the OECD treaty in October 2021 due to concerns with several elements of the rules, particularly surrounding issues related to Ammon's aid. This decision by Nigeria highlights the country's commitment to carefully evaluate the potential impacts on its economy and ensure that any international tax agreements align with its specific needs and circumstances.

The case of Nigeria not signing the OECD treaty also serves as a cautionary note for developing countries in general. It emphasizes the importance of thoroughly scrutinizing the specific impacts on their revenue before signing any international tax treaties. Matthew Olusanya Gbonjubola shares a similar cautious stance, underlining the need for developing countries to fully understand and consider the implications on their revenue before committing to such agreements.

In conclusion, Nigeria currently relies on a nexus rule rather than a digital services tax to tax non-resident businesses. The advancements in technology have allowed businesses to operate in Nigeria without physical presence, and as a result, Nigeria has implemented measures to tax businesses that exceed a certain transaction threshold.

Nigeria's approach aims to ensure taxes are paid where transactions occur, without significantly impacting business profitability. While Nigeria has actively engaged in discussions with the OECD, the decision to not sign the OECD treaty in 2021 highlights the country's commitment to carefully evaluate the potential impacts on its economy.

This also serves as a reminder for developing countries to carefully consider the implications before signing international tax treaties.

Arguments

There is a need for revenue in Southern countries due to current economic challenges

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There is a conversation about digital justice as majority world or global south countries provide a lot of content and users but don't see a proportionate share of the tax revenue

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There are various options for collecting tax revenue from big tech, yet no clear winner at this point

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The majority of the world's internet users live in the global south, generating substantial revenue for tech MNCs

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Big Tech often lies outside formal tax nets of the countries it operates in

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Countries have multiple policy options for taxing the digital economy

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One-year goal post keeps getting shifted in terms of financial regulations

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Countries are implementing their own DSTs and then signing up for the OECD

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UN proposal expects every country to bilaterally negotiate with other countries to be able to tax

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Revenue potential from taxation is a significant concern for countries

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Article 12B provides two methods for taxation: gross and net method.

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Countries can introduce domestic law measures and start collecting taxes without needing a treaty.

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Tax treaties do not grant taxing rights, but restrict them.

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Even without a tax treaty, the residence jurisdiction can always give unilateral relief to its taxpayer.

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UN option under Article 12B provides better revenue potential for developing countries.

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Article 12B with a broad scope gives more revenue than the OECD solution.

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Net method under Article 12B gives the least revenue.

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The gross method is a treaty-based solution to eliminate double taxation for digital service taxes. It is a transaction-based tax with portions withheld by the government on every payment for a digital service.

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The net method, unlike the gross method, is paid at the end of the year. It calculates the net profits through a simple formula applied on local revenues generated by a company.

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Introducing a digital service tax outside of the income tax law in the Finance Act, prevents treaties from applying and might lead to double taxation faced by companies from countries that do not include Article 12B into their tax treaty with a certain country.

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Abdul sees potential benefits in Cambodia introducing a digital service tax and believes that the cost of such action will predominantly fall on UK companies due to double taxation.

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Nigeria does not have a Digital Services Tax (DSC) but uses a nexus rule to tax non-resident businesses

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Nigeria's tax approach involves using significant economic presence concept

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Monitoring and implementation of Nigeria's tax approach is achievable through the banking system and self-declaration by businesses

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There's skepticism around the tax plan, viewing it as a way for the big platforms to pay less taxes overall

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The negotiation on the digital economy has been going on since 2013 with very little progress

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The US has been resistant to sharing tax information and is not expected to sign the agreement.

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Importance of stakeholder engagement for government and multinational companies.

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Global tax rules can reduce complexity and uncertainty for multinational companies.

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Big tech companies should be taxed fairly, even if they don't have a physical presence within a country

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Calculating the costs and revenues of digital companies is a complex issue

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Digital companies can be taxed by analyzing their advertising revenue and subscriptions in a particular country

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National level taxation is essential to bring larger countries to the negotiation table

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Matthew proposes a threshold approach to exclude smaller entities from being heavily taxed

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Without a global consensus-based solution, the risk of uncoordinated unilateral measures and retaliatory trade sanctions is high

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Alison Gillwald supports signing up for the OECD but with conditions

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OECD might not be necessary for Global South countries to sign up immediately

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Report

The discussion centred around the urgent need for revenue in Southern countries due to the current economic challenges they are facing. Factors such as high inflation, the devaluation of local currencies, and the impact of the COVID-19 pandemic have led to an increased need for revenue generation in these countries.

One of the main concerns raised during the discussion was the unfair distribution of tax revenue from big tech companies. It was noted that the majority of tax revenue goes to a few countries, such as the United States and China, while countries in the global south that generate content and users receive only a small portion of the revenue.

This raises important questions about digital justice and the need for a more equitable distribution of tax revenue. The audience strongly supported the idea of imposing taxes on big tech companies, with 75% in favor of such measures. This indicates a growing consensus that addressing the issue of taxing big tech is crucial for achieving goals related to decent work, economic growth, and reducing inequalities.

Various policy options for collecting tax revenue from big tech were discussed, including direct taxation measures like digital services taxes and indirect taxes like consumption taxes. While there have been global, regional, and national efforts to collect tax revenue from big tech, there is no clear consensus on the most effective approach at this point.

The discussion also highlighted the significant revenue generated by the global south for tech multinational companies. With over 60% of the world's population online, countries such as India, Indonesia, Brazil, and Nigeria contribute substantially to the revenue of tech companies like Facebook.

However, many big tech companies often avoid formal tax nets in the countries where they operate, making it difficult to collect tax revenue. Countries have multiple policy options for taxing the digital economy, including both direct and indirect measures. This includes introducing domestic law measures and implementing treaty-based taxation systems.

However, each option comes with its own challenges, and there is ongoing debate on the most effective approach. Concerns were raised about the drawbacks of certain approaches, such as the high transaction costs associated with local Digital Services Taxes (DSTs) for companies.

Additionally, treaty-based options can reduce the risk of double taxation but come with challenges such as bilateral treaty negotiations and global and market-level revenue thresholds. Stakeholder engagement and the need for a fair and transparent international formula for taxing the digital economy were emphasized.

Global tax rules were seen as a way to provide consistent approaches to allocating profits, simplify compliance, and reduce complexity and uncertainty for multinational companies. The moderator expressed support for reaching an OECD agreement on digital taxation but acknowledged the challenges and skepticism surrounding the process.

The importance of signing up for the OECD agreement was discussed, as it would bring larger countries to the negotiation table and potentially make compliance easier for all countries involved. The discussion also highlighted the need for clarity and further dialogue about the detailed elements of digital taxes, considering the diverse audience's varying levels of understanding and expertise.

Overall, the discussion underscored the complex nature of taxing big tech and the digital economy. It highlighted the need for fair and equitable distribution of tax revenue, the challenges in implementing effective tax measures, and the significance of stakeholder engagement and international cooperation in finding viable solutions.

Arguments

The OECD Amount A Multilateral Convention offers a comprehensive and inclusive approach to international taxation that holds substantial benefits for various stakeholders.

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Currently various countries have experimented with Digital Services Tax (DST) in the absence of a global solution, leading to possible distortions in market behavior and potential double taxation.

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The inclusive framework is a complex mechanism that tries to gain global consensus for fair taxation rules

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Victoria Hyde emphasizes the importance of stakeholder engagement

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The risk of uncoordinated unilateral measures and retaliatory trade sanctions is a serious concern without a global consensus-based solution

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Report

The analysis explores various perspectives on international taxation and global tax rules. One significant aspect is the commendation of the OECD Amount A Multilateral Convention for its comprehensive and inclusive approach to international taxation. The framework minimises tax arbitrage opportunities, reduces the risk of double taxation, and promotes responsible tax practices for multinational corporations.

It also addresses the unique challenges posed by the digital age. However, an alternative viewpoint emphasises the importance of tailoring tax policies to suit the economic, political, and administrative landscapes of individual countries. This approach promotes revenue generation in developing countries, addresses issues of profit shifting, tax havens, and harmful tax practices, and supports a fair redistribution of taxing rights.

It aligns with SDG 8: Decent Work and Economic Growth and SDG 16: Peace, Justice, and Strong Institutions. Regarding Digital Services Tax (DST), it is noted that several countries in Europe, as well as Malaysia, India, and Pakistan in Asia, have implemented DST in the absence of a global solution.

These taxes on imported digital services vary in scope and application. The lack of a unified approach to DST has led to potential market distortions and the risk of double taxation, highlighting the need for a global solution. The inclusive framework is recognised as a significant step forward in establishing international tax rules.

The OECD has sought input from various stakeholders, including countries, industries, trade associations, and non-governmental organisations. This collaborative approach aims to achieve global consensus for fair taxation rules, in line with SDG 10: Reduced Inequalities and SDG 17: Partnerships for the Goals.

The analysis also acknowledges the validity of the delay in implementing the inclusive framework, considering its complexity and long-lasting impact. The goal is to avoid unintended consequences by incorporating stakeholders' perspectives through an extensive and intricate process. Stakeholder engagement emerges as a crucial factor in developing and implementing tax arrangements.

Victoria Hyde emphasises the importance of engaging with stakeholders, as their concerns can significantly impact the success and effectiveness of tax systems. Furthermore, the support for globally agreed and consistent tax rules is reinforced. Standardised global tax rules can reduce complexity and uncertainty faced by multinational entities (M&Es) due to varying tax regulations.

This facilitates more transparent and predictable tax governance, simplifies compliance for M&Es, and enables them to determine their tax obligations across multiple jurisdictions more easily. These benefits align with SDG 10: Reduced Inequalities and SDG 17: Partnerships for the Goals.

The analysis concludes by addressing the risk of uncoordinated unilateral measures and retaliatory trade sanctions resulting from the absence of a global consensus-based solution. It highlights the need for a globally agreed approach to international taxation and tax rules to mitigate the potential for trade conflicts and ensure peaceful relations among nations.

Overall, the analysis highlights the multifaceted nature of international taxation and the complex considerations involved in establishing global tax rules. It emphasises the importance of inclusive and collaborative frameworks, stakeholder involvement, tailored tax policies, and globally agreed solutions to effectively address challenges and achieve desired outcomes in a fair and equitable manner.