Research Of New Taxing Rights Rules In The Context Of The Digital Economy

There are three characteristics of the digital economy in the area of taxation:firstly,cross-jurisdictional scale without mass,secondly,reliance on intangible assets,including IP,and thirdly,the data,user participation and their synergies with intellectual property rights,which have had a huge impact on the traditional international tax rules based on the permanent establishment as the rule of connectedness and the principle of independent transactions as the rule of profit allocation.Many market countries have difficulties in taxing remote transactions conducted by multinational companies using the Internet under existing international tax rules,while the massive use of intangible assets by multinational companies to shift profits has resulted in a significant loss of domestic tax base in various market countries.In response to the tax challenges posed by the digital economy,various countries have introduced unilateral digital service taxes to tax businesses that provide services over the internet.Unilateral digital taxes carry the risk of double taxation as well as uncertainty,creating significant costs for multinational businesses to operate,and finally leading to retaliatory trade measures counterattack.In this context,the Organisation for Economic Co-operation and Development has led the way in beginning to reform traditional taxing rights rules in an attempt to achieve a fairer and more equitable distribution of taxing rights on cross-border income across countries,while addressing the use of intangibles and tax havens by multinational companies to avoid tax through tax planning.OECD proposed BEPS Action Plan I in 2015,followed by a combination of the UK’s User Participation Programme,the US’s Marketing Intangibles Programme,India’s Significant Economic Presence Programme and now a further Pillar One programme,all of which seek to address the tax challenges posed by the digital economy.The second part starting from the nexus rules and profit distribution rules,the analysis is carried out based on the criteria of stability,flexibility,feasibility and significance to the digital economy.On this basis,it concludes that there are two main problems with the current international tax regime,one being the inability of market jurisdictions to tax locally generated income due to the entity-free scale of the automated digital industry,and the other being the fact that consumer-facing industries earn large profits in market jurisdictions through marketing-based intangibles without distributing the residual profits from this profit in the market jurisdiction(only a small,underlying regular profits),resulting in a loss of tax base in the market country.Pillar One combines the above options by modifying the existing nexus and profit-sharing rules to redistribute the remaining profits of multinational companies to create new taxing rights.However,there are still a number of problems with the Pillar I nexus and profit-sharing rules.Firstly,the profit allocation rules do not distinguish between automated digital services and consumer-oriented industries,which are mostly traditional decentralised operations,most of which have a permanent presence in the market country and therefore can be reallocated at a lower rate.Automated digital services,however,mostly operate centrally and lack a permanent presence in the market country,and a larger allocation ratio should be adopted for the distribution of their profits.Pillar One attempts to solve two completely different problems with one solution,resulting in measures that lack focus and rationality.Secondly,the Pillar One nexus rule allocates the right to tax a portion of the residual profits of a given multinational enterprise to the qualifying market country,using sales as the nexus point.However,this nexus rule is very demanding to apply and therefore the number of enterprises to which it applies is very small,resulting in the Pillar One solution being much less relevant for tax avoidance in the digital economy.Third,the rules for implementing new taxing rights under Pillar One are complex,costly and create certain disincentives to national tax sovereignty that are unaffordable for many developing countries,and the tax base that can be allocated to new taxing rights in developing countries will not be very large due to the small size of their markets,so many developing countries with small markets may not end up implementing the rules.Based on the summary and analysis of the above,the article concludes that the reform of the current international tax regime should revise the rules on nexus and profit allocation separately according to the business model of the different businesses,firstly by creating new nexus rules for sales without mass,taxing total profits(including regular and residual profits);secondly by reforming the rules on the allocation of profits arising from marketing intangibles.The article also analyses the implications of the Pillar One proposal for Chinese companies and how China should respond to the new taxing power.