When the global project to address base erosion and profit shifting (BEPS) started 8 or so years ago, the challenges of taxing the digital economy was postponed for future consideration. The questions were hard, the issues were contentious, and the stakes were high. The Organisation for Economic Co-operation and Development (OECD) decided it might be best to tackle issues under the rest of its Action Plan on BEPS first.

Since then, the focus on the pervasiveness and impact of digitization across many industries has intensified.  Tech is upending business models, changing customer relationships and creating rich new opportunities that were once unimaginable.

Now that the OECD and members of the Inclusive Framework have taken up the challenges of digital economy taxation under BEPS Action 1, it’s become clear that the debate goes well beyond how purely digital businesses should be taxed. As more businesses are becoming digital businesses, any new tax principles that emerge from the OECD’s project could be much more fundamental than those developed in the OECD’s first BEPS round.

Here are just some of the statistics that get thrown around in the UK to illustrate just how fast things are changing:

Digital disruption graphic 1

Where all this change will lead us in the next 10 years is unknowable, and this makes the global policy goals under “BEPS 2.0” even harder to achieve. Like artificial intelligence, robotic process automation and blockchain, no one knows what the next game-changing technologies will be or what changes they will bring. 

Threat of unilateral measures and unraveling the global consensus boosts support for current work

Nevertheless, the OECD Inclusive Framework members are committed to getting international rules for taxing digital businesses right through their current work. Many believe that failing to win broad consensus or leaving questions open will lead to a proliferation of unilateral measures or require a future BEPS 3.0, both of which would benefit no one.

With the OECD’s current work, thinking has moved away from the notion that digitalized businesses can be ring-fenced for tax purposes. This can be seen in the two “pillar” approach to addressing the tax challenges of the digitalization of the economy set out in the OECD Inclusive Framework’s 31 January 2020 statement. The Pillar 1 proposals focus squarely on quantifying profits and allocating taxing rights to market jurisdictions for automated digital service businesses and for consumer-facing businesses. The Pillar 2 proposals extend the work that began with BEPS 1.0 by proposing a global minimum tax that implicates broader, more fundamental notions of profit shifting and challenges longstanding tax concepts on issues like; income inclusion, withholding tax exclusions, and the deductibility of outbound payments.

Getting the over 135 Inclusive Framework countries to agree on new fundamentals of international taxation will be tricky, especially given the divergent views and conflicting interests of the countries involved:

  • Market jurisdictions seek a greater portion of tax revenues associated with cross-border activity.
  • Headquarter jurisdictions are concerned about losing tax revenue.
  • Developing countries fear that complex solutions, will put them at a disadvantage relative to jurisdictions with more expertise and resources, so they want solutions that are formulaic and easy to administer.

Unless the majority of countries taking part are satisfied with the outcomes, we are likely to see  more fragmented unilateral actions, like the various forms of digital services tax (DST) being put in place in countries like the UK, France and the Czech Republic.

Digital services taxes — a temporary stop-gap pending a better global solution?

Currently these DSTs are seen by countries implementing them as a step on the road to a more globally coordinated consensus on taxing highly digitalized businesses. Some countries believe current tax rules and treaty clauses are not catching profits on the value of digital activity in their countries. They are putting DSTs in place for specific types of digital transactions, such as online advertising and sales of user data to raise revenues, while the global consensus is being forged. UK government officials, for example, have clearly signaled their intent to remove the DST if an acceptable global alternative can be achieved.

The OECD’s timetable for completing the current project is ambitious, and while it is possible to achieve a conceptual consensus, it is unlikely to produce a sufficiently detailed set of proposals within the agreed 2020 timeframe. Among large countries that are home to multinational companies, there is strong political will to gain some form of consensus — and the resulting certainty and stability.

5 key principles for driving broad consensus

Gaining broader agreement among middle market and developing countries and support from businesses means the proposals likely will need to address the following considerations:

Digital disruption graphic 2

With the number of players involved and the tight timeframe, coming up with proposals that take into account all of these considerations won’t be easy. Perhaps the best we can hope for by the end of 2020 is agreement on a high-level blueprint for reform and a set of detailed design and implementation questions to get us there, as well as agreement on how those questions will be resolved.

Takeaways for tax leaders

There’s much work for policy makers to do to develop new tax principles that will stand the test of time in the digital age. Even still, the energy and commitment that larger countries are putting into the BEPS 2.0 discussions makes it likely that global businesses will need to navigate some form of fundamental global tax reform in the next few years.

Tax leaders can help prepare their companies to manage the impact of digital disruption on global tax policy and chart their best course forward by:

  • Engaging directly in the OECD’s policy development work to influence solutions and ensure issues specific to their company’s business models and industry are addressed.
  • Engaging with governments, peer companies and industry associations to understand the effects of the OECD’s proposals and contribute to the development of consensus positions.
  • Engaging with their company’s senior management and strategy and business development teams to model and predict the effects of various scenarios on effective tax rates, cash flows and business models.
  • Elevating the profile of global tax issues across the company so all functions take tax into account early in the design and launch of new products, services and business models.
  • Doubling down on the quality and accessibility of the detailed transactional data that may be needed to comply with a new global tax regime.


Melissa Geiger
Partner and Head of International Tax
KPMG in the UK 

Matthew Herrington
KPMG in the UK

Jennifer Cooper
International Tax Director
KPMG in the UK

Manal Corwin
Principal-in-Charge of Washington National Tax
KPMG in the US

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Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.