International rules for taxation of digital economy progress next stage

In mid-October, the OECD released for public comments its revised rules for the taxation of the digital economy. The final version of the rules including draft legislation is planned to be issued in mid-2021. The rules are still based on a two-pillar principle: the first pillar gives states the right to tax income generated in their territory even without the physical presence of the person generating the income; the second pillar ensures a minimum level of overall taxation.

The new rules are contained in Blueprint for Pillar One and Blueprint for Pillar Two. The main principles agreed upon in these documents have the support of the world's largest economies expressed at the G20 level. Still, a number of technical issues need to be resolved and agreed on.

The rules will apply to enterprises engaged in automated digital services (such as internet advertising, internet search engines, social networks, sale of data) and to consumer facing businesses with total gross revenues for the MNE (multinational enterprise) group exceeding EUR 750 million per year. The change from the current rules is primarily the right to tax income (profit) in states where the enterprise is not physically present, or only present to a minimum extent, but where income or profit is generated. To these states, i.e. source states, a portion of the total consolidated profits of the MNE will be allocated, based on an agreed-upon allocation formula (Amount A). The new rules also stipulate Amount B, which shall belong to the source state if the enterprise carries out certain marketing or distribution activities in that state through a permanent establishment or a subsidiary. To minimise disputes between individual states, a uniform mechanism should determine the profits relating to such activities. The rules should also stipulate procedures for determining the tax base including loss carry-forwards, and the elimination of double taxation.

The second pillar contains rules for the fair taxation of MNE groups, for instance if some states select not to use the taxation options under the first pillar. However, the plan for the second pillar has been released for comments without consent having been reached on its principles, and may therefore still undergo substantial changes.


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