Time to reform the global tax architecture

A new international taxation framework is sorely needed – one that advances the interests of developing countries and meets the challenges posed by the digital economy.

Antonio Salvador

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THE current international tax architecture was put into place more than one hundred years ago to allow countries to address tax issues related to foreign direct investments, transfer or sale of companies to another country, cross-border payment of dividends, cross-border provision of services, import and export of goods, and many others.

With the increase in international transactions, it became apparent that there were instances where the very same transaction was being taxed twice in two different countries: in the jurisdiction where the income was sourced, and in the jurisdiction where the person or corporation was domiciled. Thus, countries passed laws and/or entered into tax treaties in order to address this matter.

Unfortunately, there are corporations, individuals, accountants, lawyers, financial planners, etc. who have through the years learnt how to avoid and even evade the payment of taxes using a number of schemes – from legal to patently illegal – even as countries passed legislation and entered into tax treaties both to avoid double taxation and to limit tax abuse.

Meanwhile, we have witnessed an exponential increase in both the number and types of international transactions. Moreover, among the more important phenomena are the increasing importance of foreign direct investments, the increasing sophistication of global value chains, different business models, the increasing importance of intangible property, the advent of e-commerce – and the interaction and dynamics among all these factors combined.

It has become increasingly clear that the 100-year-old international tax architecture needs to be dramatically reformed in order to address the radical changes in the economy and international commerce, including the inability of developing countries to tax digital platforms. Since the digital platforms do not need physical presence nor permanent establishment in practically all jurisdictions other than their own resident country, they are not subjected to income and other taxes in those other countries where they operate virtually. Reform is also needed to address the ability of transnational corporations and rich individuals to use tax planning techniques to avoid or evade the payment of tax. 

What is being done?

In order to address the issue of taxation of the digital economy, also often referred to as e-commerce, the OECD/G20 came up with the Inclusive Framework on Base Erosion and Profit Shifting and on 11 July issued an Outcome Statement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy. Tax justice advocates have however consistently criticised the solutions prescribed as being wholly inadequate to tax the digital platforms, even as the process is far from inclusive. In forcing countries not to impose digital services tax on digital platforms that operate as non-resident foreign corporations, the solutions prescribed constitute a direct assault on the sovereign right of independent countries to impose taxes. Invariably, nations impose taxes through their respective legislative branches of government, which legislative power in fact emanates from the people. Thus, the OECD/G20 Two-Pillar Solution disenfranchises entire peoples.

Note that this is also a competition policy issue since tax-paying local companies would have to compete with these digital platforms.

On 30 December 2022, the United Nations General Assembly adopted a resolution on ‘Promotion of inclusive and effective tax cooperation at the United Nations’, which tax justice advocates see as an excellent opportunity to reform the international tax architecture in a comprehensive manner, with each member state negotiating as equals, as opposed to the so-called Inclusive Framework of the OECD/G20, where a number of, especially African, countries are not included.

The International Monetary Fund, the OECD, the European Union, etc. argue that since the OECD/G20 Inclusive Framework has been tackling the taxation of the digital economy for a number of years now, the same should no longer be included in the UN process. However, this would constitute a veritable carve-out in favour of the resident countries of the digital platforms, and to the disadvantage of developing countries. With the corresponding prohibition or discouragement of the ‘unilateral imposition’ of digital services tax, this translates into nothing short of a transfer of wealth from the developing to the developed countries.

Furthermore, their arguments betray the utterly condescending attitude that the developing countries do not have the technical capacity to deal with digital taxation, basically saying that while taxation may be within the powers of the developing countries, they simply cannot deal with it from the standpoint of tax know-how and political economy.                           

Antonio Salvador, a practising lawyer, is a consultant with the Third World Network working on tax, trade, health and workers' rights issues.

*Third World Resurgence No. 356, 2023, pp 24-25