Taxation of Digitalized Corporations Derived from the Unified Approach Proposal

Albert Bothe, Mads Hvestendahl & Mikkel Barslund Nielsen

Student thesis: Master thesis

Abstract

Traditionally, multinational corporations have had a physical presence in a market in order to operate. However, in recent years digitalized companies are becoming more present in the global economy. Digital corporations do not have the same need for a physical presence in a market, as they can operate cross border online. The determination of a corporation’s tax liability to a market jurisdiction is based on the permanent establishment principles, which focuses on physical presence and personnel. Thisseems less functional regarding modern digital companies. Representatives of OECD and G20 have launched an initiative for a new tax scheme called Unified Approach. Unified Approach seeks to reallocate the tax base of multinational corporations to the market jurisdictions where the revenue is generated.
The purpose of this thesis is to analyze how multinational corporations are being taxed in relation to prevailing law and Unified Approach proposal. Unified Approach introduces a three-tier allocation system, where both digital and traditional corporations are affected. The analysis outlines the competitive situation between digital and traditional corporations concerning the current market structure and the implications of Unified Approach. The thesis finds, that a company with a higher effective tax rate will not be able to supply the whole market in all cases, despite being more efficient. Therefore, the differentiated effective tax rate negatively affects the competitive situation. One of the intentions behind Unified Approach was to equalize the competitive situation between digital and traditional companies, however, this objective is not fulfilled. The thesis finds that the potential implementation of Unified Approach will not reduce the gap between the effective tax rates between the digital and the traditional corporations.
The thesis concludes that Unified Approach does not meet the specific issue examined in this thesis. The differentiated effective tax rate will still be present and will not solve the dissimilarity in the competitive situation between traditional and digital corporations. Therefore, the thesis does not assess the Unified Approach as an optimal solution for the tax problems resulting from the digital economy.

EducationsMSc in Commercial Law, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2020
Number of pages158
SupervisorsMichael Tell