While still in the quest for the Holy Grail… is (tax) uncertainty all we have?

By Andrea Laura Riccardi Sacchi

The appraisals expressed in this comment belong to the author and do not compromise any of the institutions to which she is related.

In March 2019, I shared here a blog post entitled “While in the quest of the Holy Grail, Uruguay is already taxing income from Uber and Netflix” and presented what this small-sized Latin American country was doing to tackle the digital economy, in particular, in relation to income taxation. By those days, a public consultation document presenting different proposals for addressing direct tax challenges arising from the digitalization of the economy, being discussed at the G20/OECD Inclusive Framework on BEPS (hereinafter, IF), was capturing the attention of the international tax community. Indeed, in January 2019 a policy note had been delivered, announcing the reorganization of the work on Action 1 under a two-pillar -and “without prejudice”- approach to find a global consensus-based solution. Though this novel and promising approach, to which I also referred in the past (A claim for a ‘principle-based solution’ but ‘principle-shopping’?), inaugurated the so-called BEPS 2.0 era, one year and a half later, not only has the “quest for the Holy Grail” not come to terms yet, but we do not know if it will continue at all.

However, we should not be surprised if this quest takes time. This is because, “[r]eforming international taxation -how national tax systems interact with each other- is an issue that is always technically complex, often economically significant, and sometimes politically explosive” (Bird 2016). This phrase from Prof. Bird, which I repeatedly quote, is very enlightening and perfectly explains the current international situation. Add the COVID-19 crisis and its implications, and we may have more than an “explosive cocktail”. As a result, the outcome of the international tax debate is highly uncertain.

In this scenario, let me recap the Uruguayan experience in relation to income taxation[1] as it may provide countries with some hints on finding a solution. With its strengths and weaknesses and, I stress, being far from perfect, the Uruguayan case at least represents a pragmatic approach which is working and seems to be fulfilling the objectives originally set, which may also be on other countries’ agendas: (i) establishing a level playing field between “digital” providers and “traditional” ones, (ii) granting tax certainty to taxpayers, (iii) formalizing underlying economic activities and, simultaneously, facilitating tax compliance for smaller taxpayers who may not have the expertise to determine and fulfill their tax obligations.

Uruguayan efforts to address the tax challenges of the digital economy commenced some years ago with the introduction of different measures within the income tax and VAT systems, i.e., without creating new taxes. Focusing on income taxation, from January 2016 onwards, income from advertising services, including online advertising, has been taxed in Uruguay if supplied to businesses effectively taxed in Uruguay. In 2017, taxation of digital platforms intermediating in the demand and supply of land passenger transport was specifically addressed and, later, as from January 2018, more general rules were introduced, though limited to two types of digital models[2]: intermediation in the demand and supply of services (not just land passenger transport) and transmission of audio-visual content. In my previous blog post you may check nexus rules, connecting factors and taxable amounts introduced by the legislation.

In relation to the implementation of these measures and to grant an efficient tax collection, the innovation – as, in general, Uruguayan legislation foresees the withholding as the tax collection mechanism in cross-border B2B service transactions – was the introduction of a “fast track” package in relation to registration, documentation and payments requirements, enabling digital providers to register and directly pay the corresponding tax in Uruguay.

Collaboration has been the key for the whole Uruguayan experience; from the beginning the government maintained a collaborative dialogue with digital providers and other interested parties, building a feasible solution, which also reached to cover income taxation of those who operate through digital platforms. Indeed, this is case for the land passenger transport sector. In December 2016, digital platforms intermediating in land passenger transport were jointly appointed responsible for the tax obligations corresponding to unregistered transport suppliers (drivers) and, in 2017 these platforms started withholding the drivers’ tax and providing information on their activities to the Tax Administration.

The Uruguayan solution may evidence some aspects in common with the Pillar One proposal but also differences. Though the broad scope of the so-called Amount A (automated digital services and consumer facing businesses) is certainly wider, the amount of tax eventually assigned to individual market jurisdictions, such as the Uruguayan, will probably be much less. Not to mention that an amount will be assigned only if all the “never-ending” thresholds and requirements are satisfied. Connecting factors may also differ, e.g., for online advertising, where Pillar One opts for the place where viewers of the ads are located (the “eyeballs”).

In a nutshell, this is the Uruguayan case and illustrates a national experience which is working. Other countries have made other choices, such as India which took its first steps with the equalization levy in 2016 and has broadened its scope recently. What is worth mentioning is that these domestic measures are inserted in national tax systems, which reflect economic, social and political elements of each country. This is the main issue: how to articulate a global solution in a context where national tax systems, despite the existing international trend to tax standardization, still evidence their specificities. What is more, if the global solution is intended to rule particularly “digital giants”, would its implementation lead to the application of different tax principles depending on the sector and size of the business?

Just to end, a final thought on the interaction of Pillars One and Two, as it is highly possible the latter will come to a conclusion by the end of 2020. While Pillar Two seeks that MNEs globally pay a minimum level of tax, Pillar One, which was said to address tax challenges posed by the digitalization of the economy beyond BEPS, is intimately linked with the principles and rules delineating the exercise of tax sovereignty and in particular, may represent a deviation from the indefensible double tax treaties permanent establishment standard. The limitations the latter has historically represented for the exercise of taxing rights by source countries are no news to mention.

Having said this, in this search for a global solution, it seems reasonable to first agree on how and where (and based on what arguments) “digital” profits should be “captured” – this may be the main issue if the aim is to seriously address the digital economy – and afterwards, to introduce, if necessary, balanced – i.e. not just for effective application by residence jurisdictions[3] – measures of an “anti-abuse” type.

[1] Uruguay also introduced measures for VAT purposes.

[2] Other types of digital businesses, e.g. cloud computing or digital intermediation in the supply and demand of goods, have to be analyzed under general principles of taxation contained in the domestic legislation and, if corresponds, tax treaties signed by Uruguay.

[3] As for the current design of Pillar Two there is a clear preference for rules applicable by residence jurisdictions over source jurisdictions. For a further analysis by the author, see Riccardi Sacchi, A. “Implementing a (Global?) Minimum Corporate Income Tax: An Assessment from the Perspective of Developing Countries”, Copenhagen Business School, CBS Law Research Paper No. 20-25 (August 2020).


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