OECD’s Global Tax Reform Surprisingly Positive for Developing Countries
ResearchZEW Study Evaluates Global Tax Reforms for the Digital Economy and Developing Countries
In October 2023, the OECD released a multilateral agreement reigniting the debate on the taxation of the digital economy. The UN proposed an alternative tailored to the needs of developing countries. Both proposals aim to grant states new taxing rights. While the OECD approach has been criticized in academia for not adequately addressing the tax needs of developing countries, a new study by ZEW Mannheim and the Universities of Mannheim and Kiel now reaches a different conclusion.
“Our research results show that the OECD approach is likely to generate higher tax revenues for developing countries and better addresses the specific interests of these states compared to the alternative UN proposal,” explains Jost Heckemeyer, Research Associate at ZEW Mannheim and professor at the University of Kiel. “Overall, the OECD approach leads to more fairness in international taxation than the UN proposal,” adds Inga Schulz, PhD student and researcher at the University of Mannheim.
Why the OECD proposal is convincing
Both proposals aim to tax more where consumption takes place. The OECD approach is more attractive to developing countries because they will not lose existing taxing rights in exchange for their new ones. Furthermore, the OECD opts for an internationally coordinated solution that applies to all participating countries with a single agreement. In contrast, the UN proposal requires intergovernmental tax agreements. However, developing countries have few such agreements and find themselves in a weak negotiating position. Additionally, companies can easily circumvent the UN proposal, rendering the regulation ineffective.
Both proposals highly complex
The OECD approach, in particular, is characterized by a high degree of complexity. At the same time, its scope is limited to a few very large and profitable companies worldwide, making administrative efforts manageable. In contrast, the administrative burden of the UN proposal is unpredictable as its implementation is determined bilaterally. In addition to the initial high burden of implementing the UN proposal, its application is costly as companies may be affected regardless of their revenue or profitability.
