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Covid reveals the shape of the digital economy and the tax authorities can see it

A fascinating article for anyone interested in the shape of the future international tax environment.

The current model of international tax relations is that companies are primarily taxed in the jurisdiction where they are resident or in places where they have a permanent establishment (a branch). The rise of the digital economy has exposed the cracks in this system. Countries are struggling through the OECD Inclusive Framework to establish a new method to be able to tax the digital economy more efficiently more closely related to the source of income than the residence of the income earning entity. That is proving more difficult than at first suspected. Several countries have proposed introducing domestic legislation to tackle this issue including Indonesia, Nigeria, India, Egypt, France, the UK, Austria, Spain, Italy, Turkey, and the EU. One of the main objections raised by those countries resisting the OECD initiative has been that the true shape of the digital economy cannot be seen, but the Covid 19 pandemic has exposed the boundaries of the digital world to the tax authorities and those objections will most likely drop away. 

Covid will also drive a major thirst for tax pounds from cash strapped governments who have borrowed heavily to keep their mothballed real world economies afloat whilst the likes of Amazon, Netflix, Apple and other online businesses have continued to make substantial profits. Politically, it will be attractive to charge taxes on the windfalls of internet giants which were inflated by Covid to help pay for the small mom and pop coffee shop which closed for three months in the national interest. 

The OECD aims for something workable by October. It will be interesting and may well shake the foundations of the global taxation system

said some countries disagree with those that claim that the digital economy cannot be ring-fenced. They argue that the COVID-19 pandemic reveals natural ring-fencing because main street shops are now closed while digital businesses are open and delivering goods to their customers.

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