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July G20 summit and digital economy taxation

The July G20 summit in Saudi Arabia, a meeting of finance ministers and central banks governors of the world’s major developed and emerging economies, brought a certain shift in their effort to set global rules for the taxation of the digital economy. Even though owing to the COVID-19 crisis the final political decision about individual programme pillars has already been postponed until October, the July summit brought a revival of actions the OECD had promised to complete by the end of 2020.

In our previous article about digital economy taxation we commented on the withdrawal of the USA from debates at the OECD level. According to a report issued after the July summit, however, the US administration seems to have taken a more conciliatory approach and debates regarding Pillar I may be resumed in the second half of 2020. A consensus regarding Pillar II is expected to be reached as promised, i.e. by the end of 2020.

The report provides information on the progress that has been made with respect to individual pillars since the last meeting in January 2020:

Pillar I

The proposal from January 2020 contains 11 basic building blocks (principles) on which Pillar I stands and which should facilitate the effective allocation of taxable income to a country in which such income was generated. The individual principles have been discussed in detail since January and have subsequently been adjusted by the OECD. Nevertheless, a number of questions are yet to be resolved. Most of all, the entire process must be simplified to prevent double taxation.

Pillar II

Similarly as with Pillar I, the finalisation of individual rules before October 2020 has been the most important action relating to Pillar II. It will also be necessary to set Pillar II in a manner to allow its functioning along with the US GILTI and BEAT regimes (US tax laws to avoid tax evasion). Finally, the OECD also plans to reduce expenses that will have to be incurred by individual parties to ensure compliance of their regimes with Pillar II.

The issued report also mentions the positive impacts of both pillars: preliminary analyses show that their implementation would result in a significant increase in world income from the collection of taxes and would improve the allocation of income between the countries by taxing income directly on the markets on which the values were created.

For the OECD, it will be crucial whether the proposed version of individual pillars will be approved at a rescheduled date in October. If this does not happen, it is hard to imagine that the project of setting new global taxation rules will be completed this year.