The end of June 2024 has come and gone, and the extended deadline of June 30 for the OECD to reach an agreement on Pillar One’s Amount A has passed without a deal. According to the OECD, progress has been made and negotiations are still ongoing. Although that may be true, as long as the US is not in favor of Pillar One it cannot be enforced. Due to the lack of global consensus, countries are considering keeping the existing interim Digital Services Taxes (“DSTs”) in place or implementing DSTs. Canada just authorized the implementation of a DST as of 28 June 2024 with retroactive effect to 1 January 2022. Are there any more DSTs on the horizon?

Below we provide a brief update on Pillar One, its current status and the future of taxation of digital(ized) companies. Our team has extensive experience in strategy, advocacy, litigation and compliance related to digital taxation, so please feel free to reach out.

Background Pillar One

In 2019, Pillar One was introduced as a key part of the OECD's Base Erosion and Profit Shifting project, which was meant to address the tax challenges arising from the digitalization of the economy. As a result of this digitalization, multinational enterprises (“MNEs”) are able to generate profits in countries where they have little or no physical presence, creating a mismatch between where profits are taxed and where value is created.

Pillar One aims to rectify this by reallocating taxing rights to market jurisdictions—essentially, ensuring that digital MNEs pay taxes in the jurisdictions where their users and customers are located. This involves developing new rules for allocating profits and establishing nexus (taxable presence), based on a company's significant and sustained engagement with a market. Amount A is designed to reallocate a portion of the residual profits of digital MNEs to market jurisdictions where their services are consumed, regardless of physical presence. By doing so, the OECD hopes to create a fairer global tax system that prevents tax base erosion and profit shifting, ensuring that all countries get their fair share of tax revenue.

Current Status Pillar One

Despite intensive negotiations and the extended deadline of 30 June 2024, the OECD has not achieved consensus on Pillar One. The main hurdles have been geopolitical and economic disagreements among member countries of the OECD/G20 Inclusive Framework. The reallocation of taxing rights has been a contentious issue. Countries differ on how much tax revenue should be shifted from the home jurisdictions of MNEs to the jurisdictions where these companies have significant consumer interactions. Another sticking point has been the scope of the new rules, particularly which companies should be subject to the new taxing rights and whether the rules may be discriminatory towards a specific group of (US) companies.

Additionally, there have been disagreements on the technical details of the profit allocation and nexus rules, making it difficult to reach a unified agreement. This failure to secure global consensus has a significant impact on the international tax landscape, as it leaves a gap in the regulation of digital taxation and creates uncertainty for MNEs operating in multiple jurisdictions. This especially applies because many countries have decided to unilaterally implement DSTs at their own discretion.

Future of Digital Taxation

As a result of the global non-consensus surrounding Pillar One, we have seen a widespread introduction of (interim) unilateral DSTs across various jurisdictions in the past years. Global consensus on Pillar One still seems far from reached. Therefore, we expect to see that unilateral DSTs will expand in the coming period as countries want to avoid missing out on potential tax revenue. For instance, we just learned that Canada moved forward with the implementation of their DST as of 28 June 2024 with retroactive effect to 1 January 2022. Additionally, we see that India has a domestic DST in place and is ready to move forward with the implementation. As an alternative to the global approach, there are already some politicians that state that the EU may also move forward with a European DST. Discussions on the implementation of an independent EU digital levy are being raised again. During these discussions, it was suggested that an EU digital levy might be similar to the failed 2018 proposal for an interim EU DST Directive.

• Canada: As the 30 June 2024 deadline has lapsed without consensus, Canada is moving forward with its unilateral DST. This unilateral DST passed through the legislative procedure last month, still awaiting the outcome of the OECD regarding Pillar One. As the deadline passed, the implementation was just announced.
• India: India, which had been awaiting the OECD's decision on Pillar One’s Amount A, may now proceed with expanding or reinforcing its existing equalization levy, a form of DST which targets digital services from foreign companies.
• European Union: Observing the stalled progress, we believe the EU might consider implementing a union-wide DST, as the likelihood of global consensus appears small and harmonization is much needed in order to prevent the detrimental effects of unilateral DSTs.

The current spread of unilateral DSTs raises significant concerns. Amongst others, these taxes can result in double taxation as some companies are faced with both corporate income tax and DST on the same income. Also, DSTs create economic distortions, potentially disadvantaging digital companies in certain regions.

Conclusion

In the words of the OECD: progress has been made and negotiations are still ongoing. However, there is a lot of disagreement surrounding the topic of digital taxation and we believe an agreement is far from reached. Therefore, we expect that more and more countries will move toward implementing unilateral DSTs, as we have already seen in these past years. Nevertheless, we believe harmonization is much needed to avoid the detrimental effects of DSTs on certain digital companies, such as potential double taxation and economic inefficiencies. The EU could play a significant role in this process. 

Achieving a coordinated, multilateral approach to digital taxation is crucial in order to establish a fair, efficient and predictable tax environment for the global digital economy. If you, as a digital company, are impacted by Pillar One and DSTs, we are here to help. With extensive experience in strategy, advocacy, litigation and compliance related to digital taxation, we are well-equipped to navigate this new type of tax legislation. For more details on our expertise, please feel free to reach out.