Tax Challenges Arising from Digitalisation – Economic Impact Assessment

Abstract

The integration of national economies and markets has increased substantially in recent years, putting a strain on the international tax rules, which were designed more than a century ago. Weaknesses in the current rules create opportunities for base erosion and profit shifting (BEPS), requiring bold moves by policy makers to restore confidence in the system and ensure that profits are taxed where economic activities take place and value is created.

The impact of the Pillar One and Pillar Two proposals on MNE’s investment costs

“…Using these datasets, the model is calibrated to reflect the case of an investment in the location of the UPE, i.e., the ultimate parent jurisdiction. 5 Accordingly, the investment is assumed to be subject to the tax provisions available in the ultimate parent jurisdiction, e.g., regarding statutory CIT rates, depreciation allowances or allowances for corporate equity, as indicated in OECD Corporate Tax Statistics (OECD, 2020 [5]; OECD, 2020 [9]). The analysis covers all jurisdictions in OECD Corporate Tax Statistics with the exception of Latvia and Estonia, who have corporate income tax systems that only apply to distributed profits.…”

“…The model underlying this analysis follows the methodology proposed by Devereux and Griffith (2003[6]) and considers the effective taxation of a hypothetical investment in the form of a one-period increase in the capital stock. 9 18.…”

“… Firms with a profitability ratio below ̅ are not affected by the new taxing right. If ≤ ̅, the firm's ETRs will remain unchanged under Pillar One, as defined for the standard case by equation (9).  Firms with profitability ratios above ̅ will be subject to the new taxing right.…”

“…The inflation rate is set to 1% and the real interest rate to 3% in line with the low interest rate and inflation scenario in Corporate Tax Statistics (OECD, 2020 [9]). The pre-tax rate of return of the investment, , is set to 20%, which is the standard value in the modelling of forwardlooking ETRs (ZEW, 2015 [11]; Hanappi, 2018[12]).…”

“…25 The fiscal depreciation rules refer to the year 2019 and are provided by country delegates through the OECD corporate effective tax rates data collection. The methodology is in line with that underlying Corporate Tax Statistics (OECD, 2020 [5]; OECD, 2020 [9]). The financing of these investments is considered to be retained earnings, and for the purpose of simplification personal income taxation is not accounted for.…”