Digital Services Taxes suspended for one year as 140+ countries need to reach agreement on Pillar 1 at the OECD talks
In a recent meeting, members of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (Inclusive Framework) reached a consensus on the Two-Pillar Solution* to address the tax challenges arising from the digitalisation of the economy. This landmark agreement aims to ensure fairness and equity in tax systems and strengthen the international tax framework.
In a recent development, the suspension of Digital Services Taxes (DSTs)*** has been extended for an additional year, allowing more time for 140 countries to reach an agreement on the ongoing Pillar 1** negotiations led by the OECD. While this decision impacts indirect taxes, it is important to note that Canada and certain other countries have raised objections.
Here are some key developments
Suspension of DSTs
- The temporary suspension of Digital Services Taxes (DSTs), which primarily affect digital services, has been prolonged for another year. Note that the implementation of the Multilateral Convention (MLC), which encompasses the broader tax reforms, including DST, is expected to enter into force during 2025.
- The extension aims to provide an extended timeframe for negotiations and consensus-building on Pillar 1, which addresses tax challenges arising from the digitalisation of the economy.
Pillar 1 Negotiations
- The ongoing negotiations under Pillar 1 of the OECD/G20 Two-Pillar Solution are crucial in addressing tax challenges related to digitalisation.
- Pillar 1 focuses on establishing a taxing right for market jurisdictions, preventing the proliferation of DSTs, avoiding double taxation, and enhancing stability and certainty in the international tax system.
DST and indirect-tax implications
- The extension of the DSTs suspension directly impacts indirect taxes, such as Digital Services Tax (DST), as it allows more time for countries to determine a unified approach in addressing the taxation of digital services.
- The negotiations under Pillar 1 will influence the future framework of indirect taxes, ensuring fairness, and addressing the tax challenges arising from digitalisation.
Objections raised
- Canada and certain other countries have expressed their objections to the decision of extending the DSTs suspension.
- These objections highlight dissenting viewpoints and the need for further discussions and negotiations to reach a consensus.
As the negotiations continue and countries work towards a global agreement on Pillar 1, the extension of the suspension provides an opportunity to carefully address the challenges associated with the taxation of digital services. The outcome of these discussions will have far-reaching implications for indirect taxes and pave the way for a fair and equitable international tax framework in the digital economy.
*Two-Pillar solution: A comprehensive approach proposed by the OECD/G20 Inclusive Framework to address the tax challenges arising from the digitalisation of the economy, focusing on both Pillar 1 and Pillar 2 measures.
**Pillar 1: The allocation of taxing rights and profit allocation for market jurisdictions, particularly concerning highly digitalized businesses, aiming to ensure a fair distribution of taxation and prevent the proliferation of unilateral measures.
***Digital Services Tax (DST): A form of indirect tax imposed on certain digital services provided by multinational companies, typically targeting revenues generated from user participation and digital or electronic services, as a means to capture tax from digital transactions and address tax challenges posed by the digital economy.
Source: oecd.org
