Digital economy taxation: What we recommend

As the world’s economy gets ever more digital, governments worry that outdated international tax rules are leading to lost tax revenues. Learn how CPA Canada is contributing to the global project tackling these concerns.

The world’s network of tax treaties was formed in the old, purely bricks-and-mortar environment, and the principles they set for taxing international activity — which depend primarily on having a physical presence in a country — are falling behind the times.

As the world’s businesses grow their digital footprints, global policy makers are especially concerned that outdated international rules create opportunities for base erosion and profit shifting (BEPS). How can governments make sure they get their share of tax from transactions that are done virtually across borders — with little or no physical presence needed?

The OECD and G20 countries are leading a worldwide consultation to address these risks through Action 1 of the Action Plan on BEPS. In February 2019, the OECD released a public consultation document. We responded to the consultation with a short submission that outlines our concerns and presents suggestions for the proposal’s design. This submission and those of other organizations, including the International Federation of Accountants (IFAC), are available from the OECD in a package of comments received.

On May 31, 2019, the OECD published a package of possible approaches in its Programme of Work to Develop a Consensus Solution to the Tax Challenges Arising from the Digitalisation of the Economy.

The OECD’s proposed framework comprises two pillars:

  • Pillar 1 examines new ways of determining nexus and allocating profits among countries
  • Pillar 2 looks at a broad global proposal for preventing base erosion


This pillar explores potential solutions in determining where tax should be paid — based on a concept known as “nexus” — and what portion of profits are taxed in each jurisdiction the business operates in — known as “profit allocation.”

The OECD’s working groups are exploring three proposals to expand the taxing rights of foreign countries beyond physical presence to put more weight on where value is created:

  • User participation: This solution focuses on digitalized business models that create value in a country with no physical presence. 
  • Marketing intangibles: This approach considers the value of returns on intangible assets such as brand names, trademarks and customer data. 
  • Significant economic presence: This solution takes into account both physical and digital presence. 

The OECD’s working groups are debating these proposals and starting technical work toward developing:

  • new profit allocation rules that go beyond traditional transfer pricing methods
  • expanded nexus rules that may be incorporated in the permanent establishment provisions of the OECD’s model tax treaty
  • guidelines for eliminating double taxation and resolving disputes


Working alongside Pillar 1, the OECD’s second pillar aims to ensure international companies pay a minimum level of tax. The proposals would give countries more tools to protect their tax bases and stop companies from moving profits to jurisdictions that tax the profits at rates lower than the minimum.

To meet these goals, Pillar 2 outlines two interrelated rules:

  • an income inclusion rule that ensures shareholders pay a minimum rate of tax
  • a rule that taxes base-eroding payments to low-tax jurisdictions by denying deductions or treaty benefits

The proposals are complex, and the OECD has an ambitious deadline for achieving international consensus on proposals under both pillars by the end of 2020.

Responding to the OECD’s public consultation document, CPA Canada’s submission makes a number of recommendations that are generally in line with comments submitted by the International Federation of Accountants.


1. Global collaboration and agreement are essential

It is crucial that countries agree on common rules and apply them consistently. If they don’t, there is a significant risk that unilateral measures by countries acting on their own would heighten complexity, raise more uncertainty for businesses, and cause more lost tax revenues for governments. 

2. Focus on how business is done in the digital world, not just digital businesses

As technology advances, all businesses are becoming more digital, but the user participation proposal under Pillar 1 seems to segregate digital businesses. This is an area of significant debate, and we believe the proposals should deal with all business that have digital elements.

3. Ease versus accuracy

We suggested that a key OECD consideration should be to balance accuracy against the ability of taxpayers and administrators to apply the rules at a reasonable cost. 

4. Strong, efficient and timely dispute resolution will be crucial

The proposals carry the risk that countries may not implement them consistently, and that tax administrators and taxpayers may disagree on how to apply them. We suggested that more work is needed to enhance international mechanisms for avoiding disputes between tax authorities in different countries and with taxpayers.  We also suggested that, once developed, the dispute resolution mechanism should be released for stakeholder feedback. 

Looking ahead, we will monitor the OECD’s work and continue taking part in the global debate on the most efficient, effective and fair principles for taxing economic activity across borders in the digital age. We also look forward to providing insight and advice to the Department of Finance Canada and the Canada Revenue Agency when it comes to adopting the OECD’s ultimate recommendations in Canada.


What issues do you think should be top of mind as the OECD works to forge consensus on new tax principles for the modern age, and governments in Canada consider their positions? Post a comment below.


CPA Canada’s Tax Blog is designed to create an exchange of ideas on tax policy and practice issues, and their impact on those who practice tax. Your comments can provide helpful input into the public interest advocacy positions developed by CPA Canada.

About the Author

Bruce Ball, FCPA, FCA, CFP

Vice-president, Taxation, CPA Canada