A consensus-based effort to tax the digital economy

The manner of doing business has changed significantly over the years with the advent of internet. An organization can now do business and participate in the economic activity of a country without having any significant physical presence in that country. For instance, a US-based technology company can provide cloud-based computing services to an Indian company without having any office in India. Similarly, a social media company headquartered in the UK may have a global user-presence and can generate advertising revenue from multiple jurisdictions without actually having to maintain an office in any of the jurisdictions.

The moot question that arises is whether the international tax laws are aligned to the fast-changing business models, as most of the tax regimes were built around the traditional ‘brick and mortar’ business models.

To address this issue, the Organisation for Economic Cooperation and Development (OECD), while laying down its Base Erosion and Profit Shifting (BEPS) Action Plans considered tax challenges arising from digitalisation as part of its Action 1.