Organization for Economic Co-operation and Development (OECD)

General FAQ arises is “What is OECD”??

The Organization for Economic Co-operation and Development (OECD) is an intergovernmental economic organization with 38 member countries, founded in 1961 to stimulate economic progress and world trade. It is a forum whose member countries describe themselves as committed to democracy and the market economy, providing a platform to compare policy experiences, seek answers to common problems, identify good practices, and coordinate domestic and international policies of its members.

The OECD works on a broad range of issues, including:?

• Economic growth and development
• Trade and investment
• Education and skills
• Employment and labor markets
• Social policy and well-being
• Science,?innovation,?and technology
• Environment and sustainable development
• Governance and public sector reform

The OECD is a valuable resource for governments, businesses, and individuals. It provides data, analysis, and policy advice to help countries make better decisions. The OECD also plays a leading role in international cooperation on a wide range of issues.

Here are some examples of the OECD's work:

• The OECD publishes annual economic surveys of its member countries,?which provide an assessment of each country's economic performance and policy challenges.
• The OECD's Education Working Group develops and promotes policies to improve the quality of education and skills.
• The OECD's Employment,?Labour and Social Affairs Directorate works on issues such as employment,?unemployment,?and social security.
• The OECD's Environment Directorate works on issues such as climate change,?air pollution,?and water quality.

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The Organization for Economic Co-operation and Development (OECD) has introduced a multilateral treaty to address digital services taxes (DSTs). The treaty, which was released on October 11, 2023, is part of a two-pillar solution to address the tax challenges arising from the digitalization of the economy.

The first pillar of the two-pillar solution reallocates taxing rights to market jurisdictions, where users and consumers are located. The second pillar introduces a global minimum corporate tax rate of 15%.

The multilateral treaty on DSTs requires countries that have, or are planning, national DSTs to drop them. It also ensures the repeal and prevents the proliferation of DSTs and relevant similar measures, secures mechanisms to avoid double taxation, and enhances stability and certainty in the international tax system.

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DSTs (Digital Services Taxes)

DSTs are taxes that are levied on the revenue of digital companies. They are typically calculated based on a company's turnover or gross revenue in a country.

DSTs have been introduced by a number of countries in recent years, including France, Italy, Spain, and the United Kingdom. The United States has also threatened to impose tariffs on French goods in response to France's DST.

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The history of digital services taxes (DSTs)

It can be traced back to the early 2000s, when concerns began to arise about the taxation of digital companies. Digital companies are often able to shift their profits to low-tax jurisdictions, which reduces their tax burden and creates a competitive disadvantage for traditional businesses.

In 2008, the European Commission published a report on the taxation of digital companies, which concluded that the current international tax system was not adequate to tax digital companies fairly. The report recommended that the EU consider introducing a DST.

In 2011, France became the first country to introduce a DST. The French DST was a 3% tax on the revenue of digital companies that generated more than €100 million in revenue in France.

Since then, a number of other countries have introduced DSTs, including Italy, Spain, and the United Kingdom. The United States has also threatened to impose tariffs on goods from countries that have DSTs.

The OECD has been working to develop a multilateral treaty on DSTs since 2018. The treaty was released on October 11, 2023, and it is expected to be ratified by a sufficient number of countries to enter into force in 2024.

The OECD's multilateral treaty on DSTs is a significant development in the taxation of digital companies. It will eliminate DSTs and other similar measures, and it will reallocate taxing rights to market jurisdictions. The treaty is expected to have a positive impact on both digital companies and market jurisdictions.

Why is the OECD introducing a multilateral treaty on DSTs?

The OECD is introducing a multilateral treaty on DSTs to address the following challenges:

DSTs are discriminatory. They target digital companies, while sparing traditional brick-and-mortar companies. This is unfair, and it could lead to a trade war.

DSTs are complex and difficult to administer. This is because they are based on a variety of different factors, such as a company's turnover, gross revenue, and number of users in a country.

DSTs are uncertain and unstable. This is because they are new, and they have been introduced by a variety of different countries with different approaches. This uncertainty is harmful to businesses and investors.

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What are the benefits of the multilateral treaty on DSTs?

The multilateral treaty on DSTs has a number of benefits, including:

• It eliminates DSTs and other similar measures, which are discriminatory, complex, and uncertain.
• It reallocates taxing rights to market jurisdictions, which is fairer and more efficient.
• It enhances stability and certainty in the international tax system.

Challenges of implementing the multilateral treaty on DSTs

• Ratification:?The treaty needs to be ratified by a sufficient number of countries before it can enter into force.?This could be a challenge,?given the political opposition to DSTs in some countries.
• Domestic law:?The treaty needs to be implemented in a way that is consistent with domestic tax laws.?This could be challenging in some countries,?which may need to change their tax laws in order to comply with the treaty.
• Monitoring and enforcement:?The treaty needs to be monitored and enforced to ensure that it is effective in eliminating DSTs and other similar measures.?This could be challenging,?given the complexity of the international tax system.
• Protecting developing countries:?The treaty needs to ensure that developing countries are not disadvantaged by the reallocation of taxing rights. For example, developing countries may lose tax revenue if digital companies are taxed in market jurisdictions instead of source jurisdictions.

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The future of international taxation in the digital age

• Increased focus on digital goods and services.?As the digital economy continues to grow,?tax authorities will need to focus on how to tax digital goods and services in a fair and efficient way.
• Greater cooperation between tax authorities.?Tax authorities will need to cooperate more closely with each other to ensure that multinational companies are taxed fairly and efficiently.
• More use of technology.?Tax authorities will increasingly use technology to improve their tax administration and enforcement capabilities.
• Greater transparency.?Tax authorities are likely to demand greater transparency from multinational companies about their business activities and profits.

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Implications for digital companies

For digital companies, the treaty eliminates the risk of being taxed multiple times on the same income. This is because the treaty reallocates taxing rights to market jurisdictions, where users and consumers are located. This means that digital companies will only be taxed on their profits in the countries where they generate those profits.

The treaty also reduces the tax compliance costs for digital companies. This is because digital companies will no longer have to deal with a variety of different DSTs with different rules and requirements.

The treaty is therefore expected to make it easier for digital companies to do business internationally.

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Implications for market jurisdictions

For market jurisdictions, the treaty means that they will receive a greater share of the tax revenue from digital companies. This is because the treaty reallocates taxing rights to market jurisdictions.

The treaty is also expected to enhance the stability and certainty of the international tax system. This is because it eliminates DSTs and other similar measures, which are discriminatory and complex.

The treaty is therefore expected to boost the tax revenues of market jurisdictions and help them to fund public services.

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The OECD's multilateral treaty on DSTs is expected to have a significant impact on the global economy.

Positive impacts

• Reduced tax uncertainty and complexity.?The treaty eliminates DSTs and other similar measures,?which are discriminatory and complex.?This will reduce tax uncertainty and complexity for businesses,?which will boost investment and economic growth.
• Increased tax revenue for market jurisdictions.?The treaty reallocates taxing rights to market jurisdictions,?where users and consumers are located.?This will increase tax revenue for market jurisdictions,?which can be used to fund public services and infrastructure.
• Fairer taxation of digital companies.?The treaty ensures that digital companies are taxed fairly in the countries where they generate their profits.?This will reduce tax avoidance and create a more level playing field for all businesses.

Negative impacts

• Reduced tax revenue for source jurisdictions.?The treaty reallocates taxing rights to market jurisdictions,?which means that source jurisdictions will receive less tax revenue from digital companies.?This could lead to cuts in public services in source jurisdictions.
• Increased tax compliance costs for businesses.?The treaty will require businesses to comply with a new set of rules for taxing digital activities.?This could increase tax compliance costs for businesses,?especially small and medium-sized businesses.
• Disputes between countries.?The treaty is a complex document,?and there is a risk that countries will disagree about how to interpret and implement it.?This could lead to disputes between countries,?which could harm the global economy.

In Short

The OECD's multilateral treaty on DSTs is a welcome step towards addressing the tax challenges arising from the digitalization of the economy. The treaty is fair, efficient, and stable. It will eliminate DSTs and other similar measures, and it will enhance stability and certainty in the international tax system.

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