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Over the last few years there has been a growing consensus among policy makers, academics and businesses that the international tax system has been outpaced by globalisation and the growth and scale of multinational enterprises. Since the financial crash in 2008 there has also been widespread public concern about the scale of corporate tax avoidance facilitated by these trends.

The OECD has co-ordinated efforts to reform the international tax rules through the ‘Base Erosion and Profit Shifting’ initiative (‘BEPS’). In 2015 G20 Finance Ministers agreed a series of recommendations for setting minimum standards in national tax systems, revising international standards for the way those systems interlock, and promoting best practices.

There is widespread agreement that these reforms, while significant, have not met the challenges posed by digitalisation and the emergence of major tech companies. In the 2018 Budget the Government announced it would introduce a Digital Services Tax (DST) from April 2020, to ensure that digital businesses paid tax that reflected the value they derive from UK users, pending any international agreement.

In autumn 2019 the OECD published plans for reforming the international tax system, based on two ‘pillars’:

  • proposals for determining where tax should be paid and on what basis (‘nexus’), as well as what portion of profits could or should be taxed in the jurisdictions where clients or users are located (‘profit allocation’) – Pillar One;
  • a proposal for a global minimum corporate tax level – Pillar Two.

Reaching consensus has proved difficult due to the practical impact of the Covid-19 pandemic on governments, and to strong divisions of opinion between participant countries. In particular, the US authorities have argued that individual digital service taxes, which several countries have introduced, discriminate against American tech companies, and have threatened retaliatory action in the form of tariffs, raising the prospect of an international trade war. After protracted negotiations in June 2021 G7 Finance Ministers announced an agreement which was widely reported as a major breakthrough. In turn in October 2021 the OECD announced over 135 countries and jurisdictions endorsed this approach, with a view to implementing these reforms from 2023.

This briefing discusses the context for these proposed reforms to the international tax system, before examing the introduction of the UK’s DST and the historical development of the OECD’s ‘Two-Pillar’ solution. The first section provides an overview of this long series of events.

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