Rethinking An Approach To Business Taxation On Digital Platforms

In 2020,the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting("IF")moved forward to launch a 2 Pillar Blueprint under which the economic presence perusing to Pillar 1 was also proposed by the Organization for Economic Co-operation and Development("OECD")for a solution of determination of taxing right and profit allocation.It is found that this new approach through economic presence is debatable as it seems to be one size fits all,which may not be applicable to certain businesses effectively,e.g.,a digital platform that has a specific business nature.In addition to that,some pieces of opinion are absent in the Unified Approach under Pillar One,especially the perspective of developing countries,probably resulting in disproportionate profit allocation to market jurisdictions which possibly violates the principle of effectiveness and fairness by virtue of the international taxation framework.In so doing,the main research question is brought up on how the approach to taxation on digital platforms should be.In order to beat up this challenge,four related sub-aspects have been taken into account,namely(1)particular characteristics of the digital platform,(2)in-scope business,(3)nexus,as well as(4)profit allocation.First of all,it is found that digital platforms exert either direct or indirect network effects.The value of the digital platforms has been created through users’ participation,which eventually results in revenue creation.Moreover,the digital interface without a physical presence is another specific characteristic of a digital platform that explains how it is different from a traditional platform.As such,the proposed regimes such as in-scope business(businesses under the scope of Amount A)and nexus may not be in line with this specific nature of business,possibly leading to a chain of problems on a profit allocation rule.Secondly,as it was proposed and agreed by the IF member,in-scope businesses which will be subject to the new taxing right under Amount A refer to MNEs operating an in-scope activity determined under a positive list of the automated digital service(ADS)business that is known as "in-scope activity test."The positive list is invented for the sake of tax certainty between taxpayers and the tax administration.Therefore,the categories of the ADS business thereunder can be overlapped and not exclusive,resulting from an application of the same nexus and profit allocation rule.This could lead to a limitation of taxing rights of jurisdictions and unfair distribution of profit on digital platform business.Towards the positive list,the specific ADS business and the general ADS business should be separated.This would be in accord with the consumer-facing business(CFB)that has a physical presence test as its additional nexus.In this context,the digital platform shall be subject to the specific ADS businesses,which would have its particular regimes on nexus and profit allocation rules so as to align with its business nature.In order to consider whether the MNE would be under the platform business,it shall consist of the elements of(1)an automated system,(2)processing of user data,(3)digital interface on a platform,(4)the function of facilitation of the interaction between users,(5)exclusion of goods or services of the platform owner inventory.In addition to the activity test,where an MNE satisfies the requirement of a threshold test,the de minimis test,which is proposed by the Blueprint,shall be applicable.It has an essential function of whether a total revenue arising from a foreign source,which satisfies the requirement of Amount A,is greater than the prescribed percentage determined by the IF members.This function is to mitigate the compliance and authority costs from the application of the prospected rules.Nevertheless,as the specific ADS businesses are proposed,which may result in another cost of compliance,this paper proposes an additional function of the de minimis test by considering revenues from digital platforms.In this supplemented rule,the revenue of the digital platform under the specific ADS business is greater than that of other specific ADS businesses plus general ADS businesses under Amount A.In the event that the revenue of the digital platform is higher,an additional nexus of the Blueprint and additional element of profit allocation rule under the Unified Approach shall be applied,which could mitigate the costs of business compliance and authority assessment.Thirdly,since the proposed nexus rule of ADS business under Amount A is determined by the IF members in the case where an in-scope MNE earns revenue from such jurisdiction of at least 1 million euros and 250,000 euros for a jurisdiction with a GDP less than 40 billion euros,the jurisdiction would have solely a taxing right based on revenue which may not be in line with the characteristic of the digital platform business,possibly bringing about forfeiting the taxing right based on the number of local users.Thus,to be in assent with the business model of the digital platforms,the number of users should be considered an alternative nexus,irrespective of whether the revenue that the MNE derives exceeds the determined Amount or not.This approach could pertain to a taxing right of jurisdictions towards the digital platform business.Finally,this paper found that the Unified Approach proposed by the OECD Secretariat favors developed countries,while a perspective of developing countries is missing.The thesis proposes that the number of users apart from ADS revenues should be considered a component of the profit allocation equation under Amount A for the digital platform business.