Initial Thoughts on the OECD’s Inclusive Framework “Work Plan” to Resolve the Taxation of the Digital Economy

May 31, 2019

The Organisation for Economic Co-Operation and Development (OECD) has just released a 44-page “programme of work” document outlining the process by which the more than 130 member countries in the OECD’s Inclusive Framework will come to an agreement on how to tax multinational businesses in the digital age.[1]

While tax professionals pore over the document’s technical discussion of such things as residual profit splits and global minimum tax, by far the most important element of this work plan is found in Chapter IV, “Economic Analysis and Impact Assessment.” It is here where the OECD acknowledges that the path to a consensus agreement will require “early political steer informed by economic analysis and impact assessment of the possible designs of a solution.”[2]

This is a welcome and long overdue acknowledgment by the Inclusive Framework that members cannot make informed decisions about how to resolve these issues without an understanding of the economic consequences of the various measures. Indeed, until now, economic analysis and impact assessments have been glaringly missing in OECD reports on the digital tax issue.

When the OECD asked for public comments to its January Public Consultation Document, Tax Foundation economists highlighted the lack of economic impact assessments and called upon the OECD to measure the effect of these proposals on taxpayer behavior, incentives for investment, cross-border capital flows, and country revenues and GDP. As we stated, “[A]ny technical solution should be based on a set of principles grounded in sound economics. Solutions that ignore the economic consequences of the policy risk harming users, domestic businesses, global trade, and domestic economies.”[3]  

Perhaps the biggest omission in the new Inclusive Framework workplan is the lack of a requirement for countries that have implemented unilateral measures—such as France’s Digital Services Tax—to abolish such measures once a consensus is reached on a new set of global tax rules. As we wrote in our public comment, “It would be quite unfortunate, and perhaps even a failure of the OECD process, if an international agreement was reached, but individual countries still felt it necessary to continue to administer unilateral policies that go against that agreement.”[4]

Two Pillars

There are two main avenues or “pillars” on which the member nations will focus their efforts to solve the technical challenges to implementation:

  • Pillar One requires members to find common ground on a menu of proposals that would reallocate taxing rights among countries. Currently, taxing rights are largely determined by where a company is headquartered or resident, or where it has a physical presence. The new rules being considered would give more taxing rights to “market” countries, where a company’s customers or users reside.  
  • Pillar Two asks member countries to consider rules governing a “Global Anti-Base Erosion” proposal (GLoBE), which could mean implementing measures such as a minimum tax or allowing countries the ability to “top up” a tax payment if the profits were generated in a country with a low tax rate.

Economic Analysis Will Inform the Possible Designs of a Solution

Chapter IV of the programme-of-work document outlines the economic issues that will be investigated in order to fully inform the members of the Inclusive Framework on the implications of their policy options.

As is outlined here in Note 4.2, the OECD will be asking its economists to answer all the right questions regarding the economic impact of these policies. Will these policies shift economic activity among countries along with taxing rights? Who will bear the economic burden of these tax changes: workers, consumers, or owners of capital? How will these policies impact the flow of capital between countries and foreign direct investment? How will these policies change business behavior?

These are challenging questions to answer, and the Secretariat has been instructed to “assemble a multidisciplinary team across a number of the OECD’s directorates.”[5] According to the work plan, this team will “need to draw upon the existing public finance literature and will also require new empirical research to be undertaken.”[6] 

An open question, however, is: Does the OECD have the staffing required to do this work and can it conceivably be completed by the self-imposed deadline of January 2020? It appears that the answer is no since the OECD is currently circulating job announcements for economists with experience in economic and tax revenue modeling. It will be a monumental challenge to fully staff up and complete the full range of economic analysis in the time allotted.

4.2. Economic analysis and impact assessment

The programme of work would require that an economic analysis and impact assessment be carried out. This analysis would explore the following key questions:

  1. What are the pros and cons of the proposals with respect to the international tax system?
  2. How would the proposals affect the incentives for:
    • Taxpayers (e.g., profit shifting, investment and location of economic activity)?
    • Governments (e.g., tax competition)?
  3. What is the expected economic incidence/impact of the proposals?
  4. What are the expected effects of the proposals on the level and distribution of tax revenues across jurisdictions?
  5. What economic impact will the various proposals have for different types of MNEs, sectors and economies (e.g., developing countries; resource-rich countries; R&D intensive economies, etc.)?
  6. What data sources and methodologies could jurisdictions use to assess the proposals?
  7. What are the expected regulatory costs of the proposals?
  8. What would be the impact of the proposals on investment, innovation and growth?

And What Will Countries Do with the Answers?

Until now, members of the Inclusive Framework have been debating these issues in an economic vacuum—like Talmudic scholars arguing over how many angels can dance on the head of a pin. The results of the economic analysis and impact assessment will tell them how big the pin is, how much weight it can handle, and where the angels will land. The million Euro question is, then, how will countries react to this new economic information?

For example, the impact assessment could show that as these measures shift the allocation of tax rights, they may well also shift economic activity from some countries to other countries—much like the recent tariff wars are altering global supply chains. This may be the biggest hurdle of the Inclusive Framework—some countries will have to knowingly give up taxing rights, and maybe some economic activity, in order to arrive at some measure of tax stability across the globe.

Which governments would be willing to do that? Is the U.S. one of those? By most accounts, the new international tax rules contained in the 2017 Tax Cuts and Jobs Act—especially the Global Intangible Low-Tax Income (GILTI) provision—are now capturing a lot of so-called nowhere income that was largely untaxed abroad. Now that the apparent “holes” in the U.S. tax base have been patched by such measures, will the Trump Administration and Congress be willing to reallocate some of our tax base to other countries?   

What about small exporting countries such as Ireland and the Nordic states? They will no doubt be losers if more taxing rights are allocated to large market economies such as India, China, France, or even the U.S. These countries have been successful in blocking attempts by the European Union (EU) to enact an EU-wide digital services tax because of the threat it posed to their industries and taxing rights. Will they be as eager to sign on to a consensus OECD plan that would similarly reallocate their taxing rights?

Countries are already at odds about the impact of these measures on their own tax sovereignty and their ability to use tax policy as a competitive edge in attracting investment. This is an especially sensitive issue for countries that do not levy a corporate income tax or those whose corporate rates are competitively low.[7] 

And while some have expressed concern that reallocating taxing rights will simply result in a zero-sum reallocation of tax revenues among countries, equal concern should be given as to the impact of these measures on raising the effective tax rates of multinational companies. Higher effective tax rates mean an increase in the cost of capital for these firms, potentially slowing investment across the globe. A question for members of the Inclusive Framework is: Is the effort to capture a relatively small amount of additional corporate tax revenue worth the prospects of reducing global GDP? 

Because the debate has solely been about which country gets what share of taxes, there has been no consideration as to who bears the economic burden of these taxes. At the political level, the issue has focused on getting digital firms to pay more tax in the country where their users or customers reside, but little thought has been given to how the increased tax burden will ultimately impact those users or consumers. Should the impact assessment show that these new tax measures limit user access or reduce consumer choice, will countries be as gung-ho on moving to consensus?

The same question can be asked if the economic analysis shows that the policies stifle innovation and entrepreneurship. The decision for the members of the Inclusive Framework is, what is the price of more revenue?


The members of the OECD’s Inclusive Framework have set out an ambitious work plan to come to a consensus by 2020 on revising the way the digital economy is taxed. While the details of the policy changes under consideration are certainly important, equally important is the inclusion of a set of guidelines for performing comprehensive economic analysis of these policies and producing impact assessments that can inform member decision-making.

To date, the debate over how to change the global tax rules governing multinational companies has been conducted in an economic vacuum. It will be interesting to see how this debate changes when members have a better understanding of the economic trade-offs they must make in order to collect more corporate tax revenues.

[1] OECD, “Programme of Work to Develop a Consensus Solution to the Tax Challenges Arising from the Digitalization of the Economy,” OECD/G20 Inclusive Framework on BEPS, 2019,

[2] Ibid., 7, paragraph 14.

[3] Daniel Bunn and Scott A. Hodge, “Tax Foundation Response to OECD Public Consultation Document: Addressing the Tax Challenges of the Digitalization of the Economy,” Tax Foundation, March 4, 2019, 1,

[4] Ibid., 6.

[5] OECD, “Programme of Work to Develop a Consensus Solution to the Tax Challenges Arising from the Digitalization of the Economy,” 36.

[6] Ibid., 35.

[7] Ibid., 25, paragraph 53; and 33, reference note 2.

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The tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates.