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).

This application of unilateral measures, however, may lead to double taxation. Therefore, a coordinated global solution is necessary to create fairness, simplicity and certainty regarding the taxation of the digital economy. Countries that have already adopted digital services taxes (DSTs) or other unilateral measures have committed to terminating the application of such measures once a global consensus is reached. Optimism about reaching the objective has grown significantly as the US has recently shown positive signs for the arrival of a consensus.

First, the US terminated its Section 301 investigations into the European Union, the Czech Republic, Brazil and Indonesia by March 31, 2021, given that those countries had not implemented DSTs. After a previous investigation into a French DST on June 2, 2020, the US Trade Representative launched investigations into the adoption or consideration of DSTs in 9 countries and one international body: India, Italy, Austria, the UK, Spain, Turkey, the Czech Republic, Brazil, Indonesia and the EU. The investigation reports and the proposed actions for the other six countries have been released as those countries have adopted DSTs. However, the US has not taken punitive action against those six countries.

The termination of the investigation into Indonesia is good news for Jakarta. There will be no more worries that the US will take retaliatory measures by increasing import tariffs on Indonesian products as was proposed for France.

Second, the US recently announced its position on Pillar One and Pillar Two and suggested that a global consensus be reached on both pillars. This is positive progress that may speed up the arrival of a global consensus.

The US proposes that Pillar One adopt a comprehensive scope that covers all industry sectors to prevent discrimination against certain industries, including American multinational enterprises, and to provide simplicity. The current scope of Pillar One is limited to automated digital services (ADS) and consumer-facing business (CFB).

The US also suggests that no more than 100 multinational enterprises be affected by Pillar One to reduce administrative and compliance costs. That threshold would be higher than the current Pillar One proposal, which is a minimum consolidated revenue of 750 million euro. According to OECD economic analysis from 2020, the multinational enterprises within the scope of 750 million euro are around 2,300.

For Pillar Two, the US proposes a 21 percent global minimum tax. The US corporate income tax rate is currently 21 percent, but the US has announced a plan to increase the rate to 28 percent. The Pillar Two minimum rate has not been agreed upon, but in the Pillar Two discussions at the OECD, the proposed rate is 12.5 percent.

Pillar One may benefit developing countries, since under the current regulation, market countries are struggling to impose tax on income from the digital economy. According to a report on Pillar One, a market country could have taxation rights on income from the digital economy even if the foreign company has no physical presence in the market country, provided that the foreign company has sustained engagement in the market country, for example, significant sales.

Pillar Two, meanwhile, may benefit developed countries, which are commonly the bases for parent companies. This is because Pillar Two will allow the country of the parent entity to tax the income of a multinational enterprise through the global minimum tax.

For example, if a multinational enterprise with a parent company in the US has a subsidiary in Indonesia and Indonesia provides a tax holiday for that subsidiary, the US may tax the subsidiary’s income that is not taxed in Indonesia, up to the global minimum tax.

The US proposals regarding the design of Pillar One and Pillar Two might be constructive and provide more simplicity. With US support, optimism that a global consensus can be reached by mid-2021 will increase.

However, deeper economic analysis must be performed to assess the impact of the proposals on businesses and developing countries in order to create a level playing field.

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The writer is a tax analyst at the Finance Ministry’s Fiscal Policy Agency. The views expressed are personal.