The rapid pace of digital transformation and ever-increasing global interconnectedness create challenges and opportunities for international and domestic tax systems. Addressing those challenges and seizing the opportunities of digitalization is critical to ensure that tax systems are fair, foster resilient and sustainable economies, and generate revenue that governments need for public services and development.
To support countries, the OECD’s Center for Tax Policy and Administration has developed standards, guidance, and practical support across many key areas of taxation.
The Organization for Economic Cooperation and Development’s Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalization of the Economy has become our most high-profile effort to improve the fairness of the international tax system and to equip it for the modern world. This landmark agreement, reached in October 2021, is rapidly moving into implementation. Based on jurisdictions that have implemented or are implementing the Pillar Two global minimum tax, we estimate almost 90% of global multinational entities with revenue above 750 million euros ($794.9 million) will be subject to the minimum tax by 2025.
In a parallel effort, the work on the multilateral convention that will create new taxing rights under Pillar One is expected to be ready for signing in mid-2023. Important work is underway in other areas to support countries in adapting their tax systems to the modern world.
Strengthening value-added taxes systems, also known as goods and services taxes, to adapt to a globalized and digitalized economy is yielding results. Operating in over 170 countries, VAT and GST are the largest source of tax revenue on average in Africa, Asia Pacific, Latin American, and Caribbean countries. The rapid expansion of international trade, particularly e-commerce, requires VAT and GST systems to adapt to avoid trade distortions and protect countries’ revenue.
The global policy dialogue organized by the OECD identified rules and mechanisms that were incorporated into the international VAT and GST guidelines. These solutions, which were developed through the Global Forum on VAT, reflect consensus among more than 100 jurisdictions. The guidelines allow governments to secure VAT and GST revenue and ensure a level playing field between traditional brick-and-mortar businesses and foreign online merchants—without stifling innovation or economic growth.
There has been significant revenue impacts in the 90 countries that have already implemented these rules. Australia has seen increased VAT revenue of $2 billion since implementing their regimes for services, intangibles, and low-value imported goods. Reforms on services and intangibles led to a $481 million revenue increase in Chile in the first 22 months and in Thailand by $171 million in the first 10 months.
High demand from developing economies prompted the OECD to establish a dedicated technical assistance program. Moving forward, our priority will be to help jurisdictions develop robust strategies to tackle VAT fraud and non-compliance in digital trade.
Implementing International Standards
It’s critical to ensure all countries can implement these international standards at the operational level. Tax Inspectors Without Borders, one of our most innovative initiatives, is carried out with the United Nations Development Program. TIWB deploys international tax experts to provide hands-on audit and assistance to officials in developing countries. At the end of 2022, TIWB had started or completed 111 programs across 56 countries and jurisdictions with impressive results: over $2 billion in additional tax revenue collected and an additional $5 billion in taxes assessed in developing countries.
Additionally, in 2022, more than 5,000 officials from over 155 jurisdictions participated in live training events through our Global Relations Program. Complementing these events were self-paced tools, including 17 recorded webinars and video capsules, and three new e-learning modules used by more than 14,000 officials from 205 jurisdictions.
Other important efforts include our work to boost tax transparency and reduce tax evasion. The 165 jurisdictions participating in Global Forum on Transparency and Exchange of Information for Tax Purposes have implemented robust standards to improve transparency, including exchanges of information on request and, more recently, automatic exchanges of information . Since 2009, developing countries have identified more than 30 billion euros of additional revenue through offshore tax investigations, including EOIR, and voluntary disclosure programs preceding the first exchanges under the AEOI standard.
Building capacity is a crucial part of the Global Forum’s work. Last year, it gave bilateral technical assistance to 97 jurisdictions and trained 10,400 officials through events on tax transparency and administrative co-operation, e-learning courses, and alumni-led training. The forum is progressing peer reviews of the exchange of information standards to ensure effective cooperation between tax authorities.
Against a backdrop of rapid crypto-asset adoption, the OECD delivered a new global tax transparency framework in October 2022. The Crypto-Asset Reporting Framework establishes annual automatic information exchanges among jurisdictions where crypto-using taxpayers live, in a standardized manner similar to the Common Reporting Standard. The OECD is working on a detailed implementation package to ensure all countries can benefit from these rules.
The Forum on Tax Administration is helping countries take advantage of digital transformation opportunities through its flagship Tax Administration 3.0 program, which explores how to build tax processes into the systems taxpayers use to run their businesses, transact, pay, and communicate. This integration can avoid tax being an additional compliance process, requiring a separate IT system or other systems solely for tax purposes. It also avoids periodic bulk data transfers from taxpayers to tax administrations—and the costs and risks associated with such transfers—by focusing on the relevant data at the “right time.”
Achieving the Tax Administration 3.0 vision will help reduce persistent tax gaps, potentially bringing in large amounts of additional public revenue, increasing tax certainty, and reducing compliance burdens for taxpayer, which can free up their time to focus on growing their businesses.
Future Challenges
Digitalization has led to changes in labor markets that were accelerated by Covid-19, including a rapid uptake of remote work and the rise of new jobs such as platform workers, influencers, and bloggers. This poses several challenges for national tax systems, including where the income from such work is taxable, the potential creation of permanent establishments in jurisdictions where employees work remotely, and the location of tax residence for remote workers and companies.
The payment of social security contributions by remote workers—and their entitlement to benefits—pose similar challenges. These issues are important for businesses in attracting and retaining talent and for government revenue. We are examining these issues in depth to propose solutions for governments and businesses.
Finally, a challenge for governments worldwide is to transition to greener economies and to meet ambitious carbon emission reduction targets. This is why we launched the Inclusive Forum on Carbon Mitigation Approaches, which held its first meeting on Feb. 9–10, 2023. This initiative will look at pricing and non-pricing mechanisms to help improve the global impact of emissions reduction through better data and information sharing, evidence-based mutual learning, and inclusive multilateral dialogue.
As a safe space for peer exchange, multilateral dialogue and mutual learning, the IFCMA will enable policy makers to discern good practices and adopt mitigation policies that best suit their objectives and circumstances. Sharing information about the comparative effectiveness of different carbon mitigation approaches will help inform future policy decisions.
The first IFCMA meeting brought together more than 600 senior government officials and delegates representing more than 100 countries and other organizations. This initiative brings together three key policy communities—climate, tax, and structural economics—recognizing that effective climate mitigation requires a whole-of-government response. We are now going not only beyond the pillars but also beyond tax to support countries’ efforts to address the risks to our planet from climate change.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author Information
Grace Perez-Navarro is director of the OECD’s Center for Tax Policy and Administration. She leads all of the OECD’s tax work, both domestic and international.
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