BEPS 2.0 SERIES PILLAR ONE – A PARADIGM SHIFT IN CONVENTIONAL TAX LAWS – PART I

(This article is written under the mentorship of CA PINAKIN DESAI)

TAXATION OF DIGITAL ECONOMY - A GLOBAL CONCERN

1.1. The digital revolution has improved business processes and bolstered innovation enabling businesses tosell goods or provide services to customers remotely, without establishing any form of physical presence (such as sales or distribution outlets) in market countries(i.e. countries where customers are located).1.2. However, fundamental features of the current international income tax system, such as permanent establishment (PE) and the arm’s length principle (ALP), primarily rely on physical presence to allocate taxing rights to market countries and hence, are obsolete and incapable of taxing digitalised economy (DE) effectively. In other words, in the absence of physical presence, no allocation of income for taxation was possible for market countries, resulting in deprivation of tax revenue in the fold of market jurisdictions.1.3. For example, instead of using a local sales office in India, foreign companies can sell goods to customers in India through a website. In the absence of a PE, India cannot tax profits of the foreign company from the sale made to Indian customers. Another example is that a foreign company esta