What is the tax problem in the digital economy?
Globalization and new technologies have brought new challenges to tax administrations around the world when they seek to tax economic transactions carried out by companies that do not maintain a presence in those jurisdictions.
The increase in successful and profitable technology businesses where the provision of services does not require a presence in the source jurisdictions has exposed the difficulties and denoted the need to rethink fiscal and tax principles that had been designed several decades ago.
In general, there are large technology companies that can access markets remotely and without the need for a physical presence in those jurisdictions where they operate and that make considerable profits. Nevertheless, As they do not have a presence in the countries in which they operate – and by application of these rules designed for another era and market – they are not subject to taxes on the income obtained there. Moreover, it happens many times in these new business models that these companies are residing in jurisdictions with low tax burden; Thus, not only are they not taxed at source, but they also do not do so in the country of residence (or, where appropriate, they do so with a low effective tax rate).
Consequently, around 140 countries within the inclusive framework of the OECD have been analyzing possible solutions for these technology businesses to be taxed in the jurisdictions where they operate and entail a fairer taxation of these businesses and digital companies. This has been exposed and explained even by career technical officials and experts in the field of international negotiation.
The Agreement of October 8, 2021
On October 8, 136 countries (representing more than 90% of world GDP), have reached an agreement regarding a solution to address these difficulties of digital businesses and a new framework for taxation with an implementation plan of new rules planned for 2023. A small number of countries that are also part of the Inclusive Framework have not yet accepted this settlement agreement.
The solution is based on two pillars: reallocate profits from large multinational companies to the countries where they operate; and ensure that multinational companies are subject to a 15% tax rate.
The so-called Pilar 1 It aims to reach a number of large multinational companies (as long as certain conditions are met). In this sense, this solution would apply in the case of companies that have a worldwide turnover higher than the 20,000 million euros and have a profitability (ratio between profits and income) greater than 10%. Countries in which these groups of companies obtain revenues of more than one million euros (or 250,000, in the case of small countries) will be entitled to receive a part of tax on a surplus of profitability generated in the country where the firm has its business. campus.
The so-called Pilar 2 aims to provide a solution as a global anti-erosion proposal (GloBE proposal), designed to address the rest of the challenges derived from the erosion of tax bases and the transfer of profits. In a nutshell, The proposal aims to guarantee that all large businesses that operate internationally pay a certain level of taxes (15%).
Argentina accepts despite disagreeing
The Minister of Economy has referred to this agreement and stated that it does not maintain too many benefits for the country. In particular, he has stated that “Developing countries are forced to choose between something bad and something worse, and that the worst scenario would be to get nothing, and the bad is what they would be getting.”
However, it has been decided to accept this agreement, which entails resignations of powers and new positions on issues that for years were part of the tax policies set by the country.
Resignation of regulation of digital services
Although Argentina does not have a specific tax on digital services, with the global solution accepted on October 8, the country has assumed the commitment to eliminate any unilateral measure in this matter, and the obligation not to legislate a tax that falls on this activities.
With this agreement, Argentina renounces tax authority; Furthermore, it is estimated that a specific tax on digital services (if Argentina decided to implement one) could be collected more than through the measures of Pillar One of the global solution agreed on last October 8.
In other words, Under this agreement, Argentina will eventually receive some tax for the activities of these multinational giants.; But it has renounced taxing digital services provided even by companies that are below the thresholds set by this regulation, and therefore can continue without taxing in the country.
Policy Change Regarding Arbitration
The commitment assumed by Argentina entails a change in the country’s position regarding tax arbitration and can be seen as a resignation of autonomy to exercise its tax legislation in a sovereign manner. Arbitration, until now, had been a resisted stance as international tax policy by developing countries, including Argentina.
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Right Approach
The determination of the new tax on Pilar 1 it presupposes a binding and mandatory tax certainty mechanism for the countries involved. To avoid adjustments to the tax obligation of the same company made by the tax administrations of multiple countries, a dispute resolution mechanism is envisaged to which the OECD member countries and the G20 member countries must adhere, even if they were not. agree (arbitration).
To this day, Argentina had not submitted to arbitration in any international tax treaty. With this agreement, a resounding change is observed for the country, which implies an unprecedented and important event in tax policy.
It is worth remembering that arbitration had not reached consensus among the countries to be incorporated as a minimum standard or best practice at the time of adoption of the Final Report of BEPS Action 14. Nevertheless, Argentina now abandons that position in an unprecedented way in light of the fiscal position that was constantly maintained for years.
Likewise, it is worth reflecting and denoting here that Argentina has not had good experience in arbitration proceedings, particularly in the field of International Center for Settlement of Investment Disputes (ICSID), so this decision adopted on 10/8 may raise questions regarding the convenience, strategy, and way in which the country will prepare for these types of arbitrations that may arise in the future.
The 15% rate would not be enough at the discretion of the executive
The Pilar 2 aims to put a limit on tax competition in corporate income tax by introducing a minimum global corporate tax of 15% that countries can use to protect their tax bases (the GloBE rules). This pillar does not eliminate tax competition, but establishes multilaterally agreed limitations.
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The national Executive Power argued that this rate is not a solution to tax competition but also that a global 15% would be low. However, and despite these publicly expressed objections and little perceived effectiveness, the country has agreed to be part of the agreement and implement measures that it already understands as inefficient.
Final words
Argentina has made an international commitment despite not agreeing with the provisions or their effectiveness. Furthermore, it has publicly recognized that some of the commitments assumed may be detrimental to the interests of developing countries, and in particular Argentina.
Tax benefits for Argentina appear to be minimal or null and the costs that are assumed have been made with full knowledge of them since several of these issues have been made public by the Executive Power.
Despite this, it has been decided to sign this agreement and commitment. Time will tell us if the decision has been beneficial or not for the country or if it had been agreed to depart from this commitment and adopt much more efficient unilateral measures to regulate these situations. More in a situation of economic crisis where higher taxes on certain sectors will not be well received by society.
David William is a talented author who has made a name for himself in the world of writing. He is a professional author who writes on a wide range of topics, from general interest to opinion news. David is currently working as a writer at 24 hours worlds where he brings his unique perspective and in-depth research to his articles, making them both informative and engaging.
