A major change is expected to incur by the end of the new year 2020 in the tax environment at an international level, since new tax rules shall apply on digital economy.

The tax challenges of the digitalisation of the economy were identified years ago, as one of the main areas of focus of the Base Erosion and Profit Shifting (BEPS), since digitalisation has created opportunities for aggressive tax planning through the shift of profit of MNE entities to zero or low tax jurisdictions, leading to tax avoidance and loss of tax revenue by the governments.

The traditional international tax principles cannot apply on the modern global economy which is facilitated by digitalisation and intangible value drivers (i.e. intangible assets, importance of data). All the above, make the physical presence irrelevant and therefore the traditional tax rules not fit for purpose.

Therefore, there is a need for a new set of tax rules at an international level in order to address the tax challenges from digitalisation.


The work on the formation of the new tax rules in relation to the digital economy was initiated years ago as the gaps and mismatch in the tax rules were identified through the BEPS Action Plan 1 in 2015, following the OECD’s 1998 Ottawa report on Electronic Commerce.

The Inclusive Framework delivered an Interim Report on the tax challenges from digitalisation, in March 2018.

Endless discussions as to the various proposals on the possible tax rules held in 2018by the Task Force on the Digital Economy (TFDE) of the Inclusive Framework, resulted to a slow-moving progress that entailed to loss of tax revenue by a number of countries.

As a result, various countries were forced to adopt unilateral measures. Also, the EU Commission in 2018, published proposals for a new set of tax rules for the digital economy. The first proposal relates to an approach to be followed in the long term, by which Member States will tax profits that are generated in their territory, on the basis that a virtual permanent establishment is created based on significant digital presence nexus, subject to certain criteria. Whereas, a second proposal to be followed in the short term as an interim measure, until the comprehensive reform is implemented, by which Member States will apply a digital service tax at a rate of 3% that covers the certain digital activities, subject to conditions.

In response to the above unilateral actions, the OECD/G20 in January 2019 grouped the various proposals under consideration in two Pillars.

Pillar 1:

Relates to the new nexus and profit allocation rules to determine how taxing rights should be allocated among countries where the value is created. Within Pillar 1, three proposals have been put forward for determining the taxing rights. The common characteristic of all the above proposals is the existence of a new nexus to taxing rights even without physical presence.

Pillar 2:

Relates to the new global anti-base erosion rules to ensure that a minimum level of tax shall be imposed.

In February 2019, public consultation document was released in an attempt to obtain feedback on the Pillars from external stakeholders

In May 2019 the work was further intensified through the adoption of the “Program of Work” whose purpose was the development of a consensus solution to the tax challenges from the digitalization of the economy. The Program outlined that in order to arrive at a consensus solution by end of 2020, an agreement should be reached on the proposition of taxing rights under Pillar 1.

The importance lies on the increased number of uncoordinated tax measures adopted by jurisdictions which undermines and threats the sustainability of the international tax framework. For example, Austria, Italy and France[1] adopted a digital services tax. Whereas other countries adopted a virtual presence tax, such as Israel and India. The aforementioned pioneers also influence many other countries which have either announced or proposed unilateral actions for taxing digital profits, such as the Czech Republic, Turkey, Spain, Canada, etc.

Therefore, in light of the need for a clear and immediate response, in October 2019 the OECD has proposed a Unified Approach, in an attempt to reduce the options available and accelerate the progress of reaching a consensus under Pillar 1.

[1] In January 2020, France agreed to postpone imposture of digital service tax until the end of 2020, which is the agreed timeline for the consensus-based taxation by the OECD/G20.


The Unified Approach (the “Approach”) is based on the commonalities of the proposals under Pillar 1 and refers to highly digital business models and consumer-facing businesses.

As in Pillar 1, provides for a new nexus and profit allocation rule to determine how taxing rights should be allocated.

The new nexus linking the taxing rights of a country to the digital profits of a company goes beyond the physical presence and instead is mainly based on sales.

The new profit allocation rule is following a combination of the formulary approach in certain cases, and the current approach, subject to the transfer pricing rules based on the arm’s length principle is followed.

Finally, the Approach provides for a three tier profit allocation mechanism aiming for tax certainty for taxpayers and tax administrations and consists of:

  • The deemed residual profit (i.e. the profit that remains after allocating the deemed routine profit on activities to the countries where the activities are performed) would be allocated to the market countries through a formula.

  • Distribution and marketing functions in market countries shall remain taxable according to existing rules (i.e. transfer pricing under the arm’s length principle), with the possibility of using fixed remunerations.

  • Any dispute between the market country and the taxpayer would be subject to dispute prevention and resolution mechanisms.

The Approach was developed considering the difficulties in reaching a consensus on the new international tax rules, and therefore was designed aiming the support from all members of the Inclusive Framework. However, it does not represent the consensus view of the members of the Inclusive Framework as further developments on the subject matter are expected to come.


The unilateral actions undertaken by the various countries and the proposition of the EU form a constant pressure on the OECD/G20 for an instant and immediate respond.

The timeline agreed for the consensus-based taxation of the digital models in the G20 is by the end of 2020. In this respect groups heavily relying on digital business models will need to take into account from now these highly possible changes.