Options To Address the Direct Tax Challenges Raised by the Digital Economy--A Critical Analysis

This article examines recent initiatives relating to measures that governments may adopt to deal with the direct taxation challenges raised by the digital economy. The expansion and increasing interconnection of technologies to facilitate global commerce have created gaps in the tax net, which have been exploited by multinational companies to minimize or avoid taxation in their home countries. One strategy in particular--the relocation of activities and profits to low-tax or no-tax jurisdictions--has generated concern about the loss of substantial tax revenues among governments across the globe. Accordingly, at the request of the Group of Twenty (G20) countries, the Organisation for Economic Co-operation and Development (OECD) has undertaken a comprehensive study of the problem of base erosion and profit shifting (BEPS), with a view to developing recommended actions that governments may implement to protect their tax base. The OECD published interim reports on these actions in 2014 and final recommendations in 2015. These include proposed measures that are specifically directed at direct taxation issues associated with the digital economy. This article presents a critical analysis of the options set out by the OECD, in the hope that this will assist governments in deciding which measures will best address the impact of the BEPS problem on the fairness and integrity of their tax systems.