The digitalization of the economy has raised significant challenges for taxation, especially income tax. The current rules, as circulated in the tax treaties, only allow market countries to tax income from the digital economy if a company has a physical presence in the market country.

Therefore, market countries are prevented from taxing income that digital businesses obtain from the country’s consumers through the internet if the company does not have a physical presence in that country.

The Organization for Economic Cooperation and Development (OECD), as mandated by the Group of 20, has proposed a multilateral solution to this problem, namely Pillar One and Pillar Two, which are expected to be approved by global consensus.

Pillar One will provide new taxation rights to market countries on income arising from the digitalization of the economy without solely relying on a company’s physical presence. Pillar Two will adopt a global minimum tax that will ensure large multinational enterprises (MNEs) pay at least that level of tax.

A report on both pillars was released in October 2020 for public comment. However, the consensus on the pillars was not achieved by the end of the year because of the COVID-19 pandemic and the United States’ withdrawal from the discussion. The new deadline for a global consensus is mid-2021.

In the absence of a global consensus on taxing the digital economy, some countries have adopted various unilateral measures to tax income arising from the digital economy, namely digital service tax (in France, Austria, Italy, the United Kingdom and Turkey), an equalization levy (in India) and a significant economic presence policy (in Nigeria and India).

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