Taxing the Digital Economy: Issues with the implementation of Pillar One in Developing Economies

Nowadays, a major part of international transactions takes place within multi-national groups and related enterprises. In this context, the Transfer Pricing discipline has evolved throughout the decades with continuous updates reflecting the changes of the modern economies. Under these circumstances, the basis of the modern tax systems, designed more than sixty years ago, may result obsolete or unsuitable to tackle current tax challenges. The increasingly reliance on intangibles and the digitalization of the economies constitute the single most relevant issue in the international tax discipline today. In response to such challenges, the OECD designed a huge project known as BEPS to avoid base erosion and profit shifting, which includes a Two-Pillar solution to regulate the taxation of businesses operating digitally. Pillar One has been designed to reallocate taxing rights to market jurisdictions, often likely to be developing countries. The approach would lead to a new paradigm in the taxation of multinational corporations, but it is incredibly complex in its implementation and requires the jurisdictions to renounce the possibility of applying specific Digital Service Taxes by signing a Multilateral Convention. On the other hand, UN has designed an alternative to Pillar One known as Article 12B which provides less modifications to the current tax system and is more likely to be in line with Developing Countries’ approach to taxation. Given the complex scenario, this thesis provides the analysis of the OECD Progress Report on Amount A of Pillar One and its general state of implementation tying to frame the developing countries’ point of view. The analysis will be focused on the last elements of Amount A still open to negotiation, namely Marketing and Distribution Safe Harbors and the mechanism for Elimination of Double Taxation. The result of these negotiations will be decisive for the future success and subsequent adoption of the new taxing right “Amount A” in both developed and developing economies. The thesis concludes with an analysis of negotiations with respect to developing countries’ point of view and a possible response to the adoption or not of the Pillar One solution.