ARTICLE Digital Services Tax: Analytical View of Challenges and Successes in Kenya and the United Kingdom Kgomotso Mponwana* & Jane Ndlovu**,*** The rapid expansion of digital services is dramatically reshaping the panorama of global taxation. This transformation is notably impacting multinational enterprises (MNEs) that operate in countries where they lack a physical presence. In this study, the authors focus the attention on the implications of digital services offered by these non-resident MNEs operating in the Republic of Kenya and the United Kingdom and representing developing and developed economies, respectively. The article delves into how the burgeoning digital economy challenges international tax laws by scrutinizing the implementation of the digital service tax (24DST) and highlighting the weaknesses of the two-pillar plan in comprehensively addressing the digitalization of the economy. It also broadens the comprehension of the unique obstacles and potential opportunities inherent in the digital economy from an international taxation perspective. The significance of this research lies in its potential to inform tax policy in an increasingly digitalized global economy. Policymakers can develop strategies that are more effective in ensuring fair taxation practices by understanding the nuanced interactions between digital services and international tax regulations. Additionally, MNEs can use this research to better navigate the complex tax implications of their digital services in various economic contexts and thereby foster sustainable and ethical business practices. Keywords: Digital economy, digital service tax (DST), Kenya, multinational enterprises (MNEs), organisation for economic co-operation and development (OECD), pillar one and pillar two, taxation, tax base, unilateral tax measure, United Kingdom (UK). 1 INTRODUCTION Digitalization and the digital economy have brought about a profound transformation in the functioning of economies and businesses that has necessitated corre- sponding changes in the laws that govern them. The advent of technologies like mobile applications on smartphones, chatbots, intelligent virtual assistants (IVAs), web scraping, artificial Intelligence (AI)-dri- ven price monitoring tools, e-wallets, image search engines, and warehouse automation technologies have facilitated various functions including service delivery and online trading. One notable outcome of digitaliza- tion is the rapid growth of electronic commerce (e-commerce) since its introduction in the early 1990s with the COVID-19 pandemic further fuelling its expansion.1 The growth in e-commerce has significantly impacted the operations of multinational enterprises (MNEs) and has led to a substantial increase in cross-border transactions. Statista projects a 13.21% growth in e-commerce in a developing country such as South Africa from 2023 to 2027 which will result in a market volume of USD 15.10 billion.2 Notes * University of the Witwatersrand (WITS), Johannesburg, South Africa. ** Senior Lecturer, Department of Taxation, School of Accountancy, University of the Witwatersrand (WITS), Johannesburg, South Africa. Email: Jane.Ndlovu@wits.ac.za. *** Acknowledgments: This work is based on the research supported in part by the WITS Chancellor’s Female Academic Leaders Fellowship (FALF) research grant. Gratitude is extended to all the reviewers for their invaluable insights that significantly contributed to enhancing its overall quality. 1 See Alexandra Loffstadt, Jane Ndlovu & Misha Padia. Do South Africa’s E-commerce VAT Rules Measure Up to International Trends and OECD Guidelines?. 16(1) J. Econ. & Fin. Sci. 1–15 (2023), doi: 10.4102/jef.v16i1.815. Globally, the surge into e-commerce has surpassed traditional brick-and-mortar establishments in recent years with retailers consistently seeking online expansion. The primary catalyst for this trend is the increased accessibility of international markets through internet platforms coupled with the appeal of e-commerce as a lower-risk method for expansion offering the potential for rapid penetration into new markets. A significant driver of this expansion over the past two years has been an unforeseen consequence of the COVID-19 pandemic. The global response to the pandemic marked by widespread government-imposed lockdowns aimed at reducing physical contact has heightened consumer reliance on e-commerce purchases. 2 Statista, E-commerce – South Africa: Statista Market Forecast (2023), https://www.statista.com/topics/11038/e-commerce-in-south-africa/#topicOverview (accessed 7 Dec. 2023). 294 INTERTAX, Volume 52, Issue 4 © 2024 Kluwer Law International BV, The Netherlands The expansion in the digitalization of the economy has evolved into an indispensable component of our economic framework and has fostered unparalleled connectivity.3 This transformative shift positions digi- tal technologies, digitalization, and the digital econ- omy as powerful catalysts for innovation, enhanced efficiencies, and the increased rapidity of services.4 They consequently play a pivotal role in fostering inclusive and sustainable business growth especially at the brink of a third (or arguably fourth) industrial revolution driven by the relentless digitalization of the economy. Reflecting on history, the genesis of the first industrial revolution dates back to the early eighteenth century which marked the onset of a contemporary economic era.5 This transformative epoch instigated significant social upheavals that fostered phenomena such as population expansion and the burgeoning of urban centres.6 The second industrial revolution unfolded in the late nineteenth century and was char- acterized by mass production and the revolutionary introduction of assembly lines.7 This era not only redefined the paradigms set by its forerunner but also meticulously moulded the economy.8 As stated by the Greek philosopher Heraclitus, ‘the only con- stant in life is change’, and our economy has indeed done so with four industrial revolutions. However, our taxation laws appear to lag behind the pace of change despite these profound occurrences. Accordingly, it is crucial for governments and tax authorities globally to address existing loopholes and establish effective tax laws governing e-commerce transactions and digital services to minimize potential loss of tax revenue. The imperative to rectify tax loopholes within the framework of taxing the digital economy is driven by the rapid advancements in technology and the expan- sive surge of e-commerce detailed earlier. The trans- formative forces of digitalization are reshaping the business environment and ushering in a new era with profound implications for taxation. This evolution extends beyond mere adjustments to tax legislation; it permeates the very structure of tax administration.9 This is because digitalization presents a plethora of challenges that affect tax policies and their execution at both domestic and international scales. Yet, it has also sparked a revolution in business models and is unlocking wider customer demographics, cultivating new revenue avenues, and promoting operational effi- ciency and cost-effectiveness.10 Furthermore, digitali- zation empowers MNEs to conduct business operations without a physical presence which introduces complex- ities for jurisdictions that heavily depend on residency as the primary factor for tax obligations. Notes 3 Pistone & Weber, infra n. 5. 4 See Loffstadt, Ndlovu & Padia, supra n. 1, at 1–15. An e-commerce business model proves to be highly adaptable and efficient as well as seamlessly integrating with various business facets such as sales and marketing. The advantages of employing these types of models are numerous including expanding the business to a wider market and minimizing operational costs traditionally associated with brick-and-mortar establishments. 5 Pasquale Pistone & Dennis Weber, Taxing the Digital Economy: The EU Proposals and Other Insights, Taxing the Digital Economy 1–355 (2019). 6 Ibid. 7 Ibid. 8 Ibid. 9 See Loffstadt, Ndlovu & Padia, supra n. 1, at 1–15. Companies and individuals can capitalize on tax disparities between countries and even circumvent taxation altogether in some cases as the inherent nature of direct e-commerce business models renders cross-border movements of goods, capital, and labour less transparent. Consequently, conventional tax regulations prove inadequate in effectively addressing the challenges posed by direct e-commerce business models. 10 Q. Zhang, Y. Fan & B. U. Roy, E-commerce Across Borders Logistics Platform System Based on Blockchain Techniques, in The International Conference on Cyber Security Intelligence and Analytics 321–329 (2023). Digital Services Tax 295 Figure 1 The ‘Four Horsemen’ of Technology MNE11 Notes 11 Kgomotso Mponwana & Jane Ndlovu, 2023. 12 See Wall Street Journal Markets Financials for Apple Inc. (AAPL (US: Nasdaq)) (2022) https://www.wsj.com/market-data/quotes/AAPL/financials/annual/income-statement. 13 See Wall Street Journal Markets Financials for Amazon.com Inc. (AMZN (US: Nasdaq)) (2022), https://www.wsj.com/market-data/quotes/AMZN/financials/annual/income- statement. 14 See Wall Street Journal Markets Financials for Meta Platforms Inc. (META (US: Nasdaq)) (2022), https://www.wsj.com/market-data/quotes/META/financials/annual/income- statement. 15 See Wall Street Journal Markets Financials for Alphabet Inc. (GOOG (US: Nasdaq)) (2022), https://www.wsj.com/market-data/quotes/GOOG/financials/annual/income- statement. Intertax 296 To illustrate, a cohort of highly successful MNEs pri- marily hailing from the United States and prominently exemplified by the ‘Four Horsemen’16 – specifically Apple, Amazon, Facebook, and Google17 – has attained an unparalleled position of global economic prominence.18 Despite their substantial market valuations and profit- ability that are reflective of the accumulation of signifi- cant rents or quasi-rents,19 their overall global tax contributions remain relatively modest compared to the US corporate tax rate of 21%; this is illustrated in Figure 1 below. This phenomenon exemplifies MNEs’ adeptness in generating income without clear national affiliations and thus manifesting a capacity to engender stateless revenue.20 The taxation quandary for MNEs’ ability to do so gained prominence as these entities began leveraging tax havens or jurisdictions with minimal or absent tax laws thereby reducing their tax liability or relocating profits to low-tax regions with scant economic activity. To combat this predicament, the Organization for Economic Co- operation and Development (OECD) initiated a compre- hensive action plan on base erosion and profit shifting (BEPS) in 2015. The principles developed to mitigate this did not alleviate the concerns regarding the adaptability of existing tax policies to the rapidly digitalizing econ- omy. The OECD consequently introduced a two-pillar solution in 2021 via the OECD convention in order to address these matters.21 Pillar one focuses on realigning sovereign taxing rights by employing the nexus rule and ensuring the taxation of large MNEs based on their mar- ket participation.22 In contrast, pillar two empowers jur- isdictions to tax profits falling below a certain minimum rate.23 The two pillar approach introduced by the OECD was effectuated by a wave of digitalization and profoundly impacted global tax laws. The OECD responded to the advent of MNEs generating income without clear national affiliations. The two pillar approach attempts to address challenges in applying the territoriality principle. The challenge of apply- ing it to tax MNE profits in the digital era stems from the current international taxation framework that is contingent upon a dual attribution of taxing rights.24 On one hand, the residence state is granted the authority to tax the global income of companies based on factors such as the place of effective management (POEM) or incorporation under its jurisdiction.25 On the other hand, the source state is confined to taxing income generated solely within its borders. In this context, the territoriality principle signifies the imposition of taxes exclusively within a sovereign state’s territorial jurisdiction.26 Essentially, a state’s authority is measured by its ability to assert and enforce tax jurisdiction over all income originating within its boundaries.27 Concerning MNE profits, scholarly discourse suggests that source state taxation is considered legitimate only Notes 16 See SeekingAlpha ‘Is “FAANG” More Dangerous Than The “4 Horsemen” Of The Late 1990s And The “Nifty Fifty” Of The Early 1970s?’, 9 Aug. 2017. The term ‘the four horsemen’ originated during the late 1990s technology boom which is a period marked by investor fascination with the remarkable stock value appreciation of four prominent mega-cap public corporations: Microsoft (MSFT, Fortune 500), Intel (INTC, Fortune 500), Cisco (CSCO, Fortune 500), and Dell (DELL, Fortune 500). These high-profile public technology companies were recognized for their unparalleled influence and were anticipated to consistently deliver robust growth to investors. Each of these entities played a pivotal role for nearly two decades in propelling the technology sector forward through their contributions to the personal computer domain: Intel manufactured processors, Microsoft developed software, Dell produced personal computers, and Cisco facilitated their networking. According to David Goldman’s article, ‘The new four horsemen of tech’, dated 5 Jan. 2012, these companies were deemed the ‘four horsemen’ due to their strategic positions as key drivers of technology’s growth engine during that era. Notably, Apple (AAPL, Fortune 500), Google (GOOG, Fortune 500), Amazon, and IBM (IBM, Fortune 500) have emerged as the contemporary successors to the original four horsemen. Strikingly, all currently lead in either mobility or cloud computing. Facebook is proposed to replace IBM in a modification to the initial set and align with the evolving backdrop of influential companies in the technology sector. 17 See Christian Sarkar ‘The Four Horsemen’ – An Interview With Scott Galloway (20 Oct. 2017). The entities collectively referred to as ‘The Four’ – Apple, Amazon, Facebook, and Google – have generated an extensive number of well-remunerated employment opportunities and have pivotally participated in the provision of a diverse range of products and services that have become integral to the daily routines of billions of individuals. 18 D. Shaviro, Digital Services Taxes and the Broader Shift from Determining the Source of Income to Taxing Location-Specific Rents, NYU Law and Economics Research Paper 19–36 (2019). 19 Rent constitutes unearned income whereas quasi-rent represents a necessary payment. Unlike the former which is permanent, the latter is of a temporary nature. Rent is derived from land and other natural endowments while quasi-rent stems from man-made capital equipment. Additionally, the first emerges across both long and short periods whereas the second arises exclusively in brief periods. 20 Shaviro, supra n. 18. 21 See Wei Cui, 2021. Given the ongoing OECD’s tax project titled ‘Address the Tax Challenges Arising from the Digitalisation of the Economy’, the underlying rationale appears pivotal in current deliberations on international tax collaboration. Nevertheless, the inferred requirements for coordination seem relatively moderate and indirect. Two specific needs have been discerned in this context. First, regulations that restrict and assign taxation rights based on the PE and related concepts are typically embedded in bilateral tax treaties. Consequently, treaty revisions are necessary to alleviate the constraints imposed by such rules on new corporate income tax (CIT) policies. By nature, coordination is essential to uphold the legal framework of treaties in response to evolving policies. Second, albeit less clearly defined, it is posited that any alteration in policy enabling a country to tax the profits of foreign MNEs may introduce the risk of ‘double taxation’. 22 Renato E. Reside, Digital Services Taxes: Multilateral and Unilateral Efforts and an Overview of Recent Economic Models (University of the Philippines School of Economics 2022). 23 Ibid. 24 Pistone & Weber, supra n. 5. 25 Ibid. 26 Ibid. 27 See Pistone & Weber, supra n. 5. Within its territorial confines and free from external constraints, a state’s sovereignty is accentuated by its capacity to exercise tax jurisdiction over all income. Specifically, the residence state establishes a robust link between the worldwide income of an enterprise and its territory through predetermined criteria like incorporation or the POEM. This attachment grants the residence state the authority to exert sovereignty over the entirety of the income. In contrast, the source state confines its sovereignty to the income generated within its geographic boundaries. Digital Services Tax 297 when an economic connection exists between income gen- eration and the state’s territory.28 This implies that not only should the income possess a geographic nexus for source jurisdiction to be asserted, but this attachment must also be economic indicating that the income must be produced within that territory.29 Such production is exclusively attributed to human activities as only animate individuals have the capacity to generate income.30 Therefore, the intellectual component emerges as the pivotal element in income production as it is through the actions of these individuals that value is added to a given entity.31 One of the ways in which this borderless value is generated is when social media companies collect data from individuals that they monetize through advertising revenue. In her study, Dourado32 argues that the predo- minant theme in existing literature aligns with advocat- ing a unified approach to address this taxation challenge linked to the digital economy and specifically emphasizes the necessity for reform within the international tax system.33 However, Dourado presents a counter perspective34 and further asserts that a distinct tax levied within the market states in a digitalized economy is a viable recommendation. This particularly concerns the sale of data and associated business activities subsequent to the collection of data freely obtained when individuals engage with social networks and other online platforms. While digital taxes such as the digital service tax (DST) may be a possible solution to the taxation quandary, their implementation can present challenges for jurisdictions that chiefly use residency as a foundation for tax liability. This is particularly valid when dealing with MNEs operat- ing within their jurisdiction without a physical presence. In April 2020, the DST was launched as a unilateral measure to acknowledge the value of digital MNEs and address the global concern of under-taxation of interna- tional digital services. The United Kingdom exemplifies a nation that has successfully implemented the collection of taxes from digital MNEs via DSTs. As per data from the UK National Audit Office (NAO),35 DSTs accrued GBP 358 million from large digital MNEs during the 2020/21 tax year that exceeded the initial projection by 30% and confirmed the tax’s revenue-generating efficacy. However, despite this favourable outcome, the UK NAO warns that His (formerly Her) Majesty’s Revenue and Customs (HMRC) may face further obstacles in enforcing compli- ance especially when dealing with MNEs devoid of a physical presence within the United Kingdom.36 While a number of international rules have become more effective and have managed to alleviate certain defi- ciencies, others have inadvertently introduced new loop- holes that legislatures continue to address. The recent amendments put forth by the OECD convention have sparked international debates and deliberations. The cur- rent deliberation scrutinizes how the complexity of DST rules can be overwhelming for many African countries with smaller economies. It also examines the impact of the restrictive definitions of DSTs and the ramifications for countries that did not reach consensus on these rules.37 Notably, there are African nations that have implemen- ted DSTs successfully. For instance, in Nigeria, the Finance Act of 2021 implemented a 6% DST and targeted non-resident companies engaged in substantial economic activities. Nigeria generated an estimated NGN twenty- five million (USD 54, 230) in annual revenue from DST.38 Nigeria’s fiscal measure reflects a broader regional trend as several other African nations have likewise intro- duced taxes on digital services provided by non-resident companies. Zimbabwe established a DST rate of 5%, Tunisia at 3%, and Tanzania at 2%.39 Sierra Leone and Notes 28 See Pistone & Weber, supra n. 5. Taxation by the source state is grounded solely in the presence of an economic nexus between income generation and the territorial boundaries of the state. This requirement posits that the income not only needs to demonstrate a geographical link to establish source jurisdiction but must also be economically generated within that specific territory. The OECD Model succinctly outlines this interaction between residence and source states in Art. 7 and asserts that the profits of an MNE are taxable solely in the residence state unless the MNE maintains a permanent establishment (PE) in the other contracting state. Additionally, the latter is empowered to tax only the portion of profits attributed to the PE located in its territory and treat it as an ‘independent and separate enterprise engaged in similar activities under comparable conditions’. This consideration encompasses the functions performed, assets employed, and risks assumed by the enterprise through the PE and the enterprise’s other segments. The primary obstacle to advancement seems to lie in the existing versions of tax treaties based on the OECD Model that confine source taxation exclusively to scenarios where a PE is formally recognized. 29 Pistone & Weber, supra n. 5. 30 Ibid. 31 Ibid. 32 Ana Paula Dourado, Taxing Consumer-Facing Business as a Regulatory Currency, 13.4 World Tax J.-Amsterdam 533–573 (2021), doi: 10.59403/jfng6b. 33 See ibid. There is a discernible reluctance toward endorsing specific taxes tailored to target digital business models that is often referred to as ‘ring-fencing’. This hesitancy is grounded in the overarching digitization of the economy and poses difficulties in clearly distinguishing between digitalized and non-digitalized sectors. A prevalent focus in literature opposed to ring-fencing revolves around seeking solutions that facilitate the allocation of taxing rights to the market state. 34 Dourado, supra n. 32. 35 National Audit Office, Press Release: Investigation into the Digital Services Tax (23 Nov. 2022), https://www.nao.org.uk/press-releases/investigation-into-the-digital-services-tax/ (accessed 7 Dec. 2023). 36 Ibid. 37 Digital Economy and Taxation Policy: National Treasury, PBO & SARS input, PMG (2020) Parliamentary Monitoring Group , https://pmg.org.za/committee-meeting/30416/. 38 Amamchukwu Okafor, . Will African countries align with the OECD framework on digital service tax?. 14 Jun. 2023. 39 Ibid. Intertax 298 Kenya instituted DSTs at a rate of 1.5%. The latest entrant into this wave is Uganda which put forth a proposed DST of 5% effective from July 2023.40 The collection of DSTs has proven effective in countries with larger economies like the United Kingdom, however, issues related to the physical presence of MNEs still present significant challenges. Enforcing compliance con- tinues to be a daunting task particularly with entities lacking a physical presence despite the success of tax collection initiatives. The DST tax regime has essentially witnessed a continuous evolution aimed at addressing loopholes exploited by MNEs to evade or reduce their tax liabilities. 2 RESEARCH PROBLEM, IMPORTANCE AND METHODOLOGY As mentioned, numerous countries have instituted DSTs as a means to impose levies on non-resident digital MNEs. However, the delineation of which goods and services fall under the DST purview exhibits significant variation among nations.41 The categories subject to DSTs are typically broad encompassing online advertising services, online gaming, streaming services, and more.42 The majority critically focuses on the same set of MNEs despite disparities in the specific rules applied by each country.43 This convergence is inherent in the design of the DSTs that primarily target large digital corporations with substantial revenue thresholds which creates various concerns.44 Furthermore, there is a burgeoning advocacy particularly among US Republicans for replacing the cor- porate income tax (CIT) with a destination-based cash flow tax. This indicates ongoing efforts to align tax frame- works with the dynamic challenges presented by the digital economy.45 Moreover, the implementation of DSTs demonstrates variations from one country to another. For example, Australia applies it to digital electronic services such as streaming and e-books while Poland extends it to services encompassing online advertising and data transmission.46 France’s DST is directed at companies involved in online advertising, data sales for advertising, and acting as intermediary platforms.47 France’s DST applies to compa- nies with a global revenue exceeding EUR 750 million from relevant projects and earnings exceeding EUR twenty-five million from such projects in France.48 The tax rate on income from relevant projects is stipulated at 3% with an anticipated tax yield of approximately EUR two billion over the next four years.49 Notably, France’s DST has faced criticism for seemingly targeting American corporations, particularly the online advertising company Criteo which potentially makes it the solely affected French entity.50 Despite the diversity in the specific laws governing these unilateral measures, a common thread emerges whereby each country has adopted them for similar reasons. First, there is a recognition that existing international rules struggle to progress at the same rate as the rapidly evolving digital economy thereby necessitating reform. Second, there is a widely identified need to tax digital business models and companies operating in the digital realm. 2.1 Statement of the Problem This article explores the impact of DST implementation in both Kenya and the United Kingdom while scrutiniz- ing its influence on revenue collection and the taxation of digital services. Both nations stand among those that have embraced DSTs. As previously noted, the United Kingdom introduced DSTs on 1 April 2020 to target MNEs by intending to tap into profits generated in the markets where value is created irrespective of physical locations. The UK’s DST primarily focuses on large MNEs offering online services like social media, search engines, or digital marketplaces to UK users. The country applies a 2% tax rate to a group of companies under the same controlling interest. In con- trast, Kenya’s DST was effective beginning 1 January 2021 and applies to both resident and non-resident enti- ties. It imposes a tax rate of 1.5% on income earned or accrued within the country from services facilitated through a digital marketplace. To evaluate the effectiveness of DSTs, this research conducts a comparative analysis of its application in Notes 40 Ibid. 41 Christoph Jescheck, The Substantive Scope of Tax Treaties in a Post-BEPS World: Article 2 OECD Model Convention (Taxes Covered) and the Rise of New Taxes, 45(5) Intertax (2017), doi: 10.54648/TAXI2017030. 42 Ibid. 43 Ibid. 44 Ibid. 45 Ibid. 46 D. González, Digital Services Tax (DST): Alive and Well, CIAT (2022) , https://www.ciat.org/digital-services-tax-dst-alive-and-well/?lang=en (accessed 7 Dec. 2023). 47 Ibid. 48 Ibid. 49 Ibid. 50 Ibid. Digital Services Tax 299 Kenya which is a developing economy and the United Kingdom which is a developed economy. The study addresses two main research issues: (1) How do unilateral measures for taxing the digital economy, specifically the implementation of DSTs, address challenges posed by the digital economy, and what are the principal concerns and impacts associated with the introduction and subsequent repeal of DSTs in Kenya and the United Kingdom? (2) Furthermore, how can a comparative analysis of the implementation of DSTs in these two countries inform recommendations for future tax policies in the context of the evolving digital economy? Drawing from insights from the experiences of the United Kingdom and Kenya with DSTs, the study explores the repercussions for the jurisdictions that enacted this legis- lation. The article aims to dissect DST regulations within each jurisdiction, identify challenges faced, and contem- plate the potential repeal of DSTs as the OECD advances its two-pillar solution. The selection of the United Kingdom and Kenya as comparative subjects in this analysis stems from a stra- tegic choice aimed at capturing a spectrum of economic and developmental characteristics. The United Kingdom has a highly developed economy with a well- established digital infrastructure and a significant pre- sence of MNEs engaged in digital services. On the other hand, Kenya is a developing economy and provides a contrasting perspective characterized by emerging digi- tal markets and evolving regulatory frameworks. By juxtaposing the United Kingdom’s advanced digital economy with Kenya’s developing digital ecosystem, this study seeks to offer insights into how the DST is applied and experienced as well as its impact in diverse economic contexts. The comparative analysis aims to uncover potential nuances in the challenges faced, effec- tiveness of DST implementation, and implications for future tax policies thereby contributing to a comprehen- sive understanding of the global implications of taxing the digital economy. 2.2 Importance of the Research Countries advocating for DSTs as a temporary or unilat- eral solution are driven by concerns over inadequate cor- porate tax payments from digital platform corporations, such as Google and Facebook, within the countries where their user bases are located (hereafter referred to as the user country).51 Complicating matters are existing inter- national taxation regulations that pose challenges in effec- tively applying corporate taxes to platform corporations operating within these user countries.52 To understand this conundrum, consider the example used by Watanabe53 that has been adapted for purposes of this article. Google is a US-based company that generates profits by selling advertisement slots to a German auto- mobile company targeting users in Kenya or the United Kingdom.54 From the perspective of the two countries, Google is not recognized as a PE.55 Even if it was deemed as such, the advertising profits would not be attributed to it.56 Users in the United Kingdom and in Kenya access Google’s services at no cost and it amasses substantial information from user searches there despite its dominant position in search services.57 The analysis and processing of this information empower Google to deliver targeted advertisements to users interested in purchasing German vehicles.58 This mechanism enables it to sell advertising slots to German companies targeting car sales in the United Kingdom and in Kenya.59 Each of the three involved parties – the German car company (in Germany), the user (in the United Kingdom or Kenya), and Google (in the United States) – potentially faces taxation on their earnings within the users’ two countries.60 First, the German car company’s taxation is typically regarded as the sale of manufactured goods through a subsidiary or a UK/Kenyan branch store (PE). This can be taxed in either country as sales profit given that the German car company has sold the product exclusively within them, and existing taxation rules adequately address this scenario.61 Secondly, there is the users’ taxation.62 Despite see- mingly using the search service for free, it can be Notes 51 Tetsuya Watanabe, Rationales and Challenges for a Digital Service Tax: Focusing on Location-Specific Rent’, 17(1) Pub. Pol’y Rev. 1–17 (2021). 52 Ibid. 53 Ibid. 54 See Watanabe, supra n. 51. Case example adapted for this article. 55 Ibid. 56 Ibid. 57 Ibid. 58 Ibid. 59 Ibid. 60 Ibid. 61 Ibid. 62 Ibid. Intertax 300 conceptualized as an exchange for their personal information.63 While it might be argued that the user engages in a barter transaction by selling their personal information and purchasing the search service, the raw or unprocessed personal information holds only minimal value.64 This significantly increases through big data – col- lecting, analysing, and processing large amounts of perso- nal information which is a task performed by the platform corporation rather than the user.65 Consequently, even if the user was to be taxed, it would likely be limited to a negligible amount.66 Additionally, users of video stream- ing services such as YouTube encounter advertisements while using the service akin to those in commercial tele- vision broadcasting.67 Historically, viewers watching tele- vision for free have not been subjected to taxation, and a parallel perspective suggests that taxing YouTube users is not realistic under prevailing circumstances.68 Last, the focus shifts to the taxation of Google. The income derived from advertising profits is sourced from the personal information of users in the United Kingdom or Kenya.69 However, other than DSTs, existing taxation rules do not permit them to tax these earnings as both are not the taxpayers’ source or residence country.70 This article therefore assumes profound significance in addressing the overarching question of how unilateral measures, specifically the implementation of DST, con- tend with the above challenges posed by the digital economy. The rapid evolution of the digital realm and the subsequent emergence of MNEs operating globally without clear national affiliations have prompted coun- tries like Kenya and the United Kingdom to adopt DSTs. Understanding the effectiveness, challenges, and implica- tions of such unilateral measures is crucial for policy- makers, tax authorities, and businesses navigating the intricate dynamics of digital taxation. Moreover, the objective of this research is to unravel the multifaceted layers of DST implementation by comparing the experiences of a developed economy like the United Kingdom and a developing one like Kenya. Insights garnered from this comparative analysis can inform not only these specific jurisdictions but also contribute to a broader discourse on the future of digital taxation. As the digital economy continues to reshape global business dynamics, this study also seeks to provide valuable per- spectives that can aid in formulating informed policies and strategies adaptable to the evolving digital terrain. 2.3 Research Methodology In pursuit of its overarching objective, this article has meticulously embraced a qualitative research approach characterized by its intrinsic interpretative nature. This methodological choice aligns with the complex and nuanced nature of the research subject, specifically the implementation and impact of DSTs in the United Kingdom and Kenya. The selected qualitative research framework intends to delve deeply into the multifaceted dimensions of DSTs by recognizing that the effectiveness and implications of this taxation mechanism extend beyond mere quantitative metrics. By employing the doc- trinal research method, the study engages in inquisitive and analytical processes and meticulously examines legal doctrines, legislative provisions, and scholarly interpreta- tions to construct a robust foundation for understanding the intricacies of the DSTs in both jurisdictions. The commitment to rigorous data collection, the analysis, and interpretation is paramount for ensuring the reliabil- ity and validity of the study’s findings and fostering a comprehensive understanding of the subject matter. It also contributes valuable insights to the broader discourse on the taxation of the digital economy 3 LAYOUT OF THE ARTICLE The article is systematically structured in order to provide a comprehensive understanding of the complex principles sur- rounding the implementation and impact of DSTs in the United Kingdom and Kenya. The subsequent section explores the concept of value creation within the digital economy. Following this foundational investigation, the narrative unfolds into a discussion on the global adoption of unilateral measures for taxing the digital economy that is underpinned by the OECDBEPSModel as a reference point. The section comprehensively examines the role of digitaliza- tion in reshaping the tax sector and offers a panoramic over- view of unilateral initiatives to tax digital services. Central to this analysis is an exploration of DSTs as a unilateral measure complemented by an in-depth examination of the European Union (EU) proposal on significant digital presence and the OECD Pillar One Amount A as multilateral measures. This section further delves into the peculiarities and challenges associated with its implementation in order to provide a nuanced understanding of DSTs. Notes 63 Ibid. 64 Ibid. 65 Ibid. 66 Ibid. 67 Ibid. 68 Ibid. 69 Ibid. 70 Ibid. Digital Services Tax 301 Continuing, the article transitions to a focused discus- sion on the introduction of DSTs as a response to the challenges posed by the digital economy. Here, the prin- cipal concerns surrounding them are meticulously exam- ined. The narrative then shifts to a rigorous evaluation of the impact of DST implementation in both Kenya and the United Kingdom. This involves a detailed exploration of the introduction of DSTs in these countries, the chal- lenges encountered during implementation, and their subsequent repeal in both jurisdictions. The analysis com- mences with an examination of Kenya’s DST by scrutiniz- ing its definition, subsequent amendments, and the incorporation of an additional measure of value added tax (VAT). The challenges faced by Kenyan taxpayers under the DST and VAT regimes are also comprehen- sively explored. Turning the focus towards the United Kingdom, the article focuses on the regulatory framework for its DST and probes potential challenges that surfaced during its implementation. Its influence on the United States is also investigated. Intriguingly, the article also discusses the significant development of Kenya’s repeal of its DST to align with the implementation of Amount A of Pillar One and examines its implications on both the UK and Kenyan tax systems. The article culminates by offering a comparative analy- sis of DST implementation in both countries and con- cludes with insightful recommendations. 4 VALUE CREATION IN THE DIGITAL ECONOMY This section delves into the nuanced discussion surround- ing the value generated by MNEs engaged in providing digital services. The paramount significance of this exploration lies in gaining a profound understanding of the appropriate taxation frameworks applicable to these dynamic entities. At its core, a digital economy encompasses various components including but not limited to e-commerce, online advertising, and cloud computing. Broadly char- acterized, it refers to an economy where customers can access goods and services without the necessity of physi- cally visiting a business location. What sets the digital economy apart is its distinctive capacity to generate income and value that transcends national borders with- out reliance on physical offices or a substantial on-site personnel presence; this distinguishes it from traditional sectors of the economy. This inherent flexibility and borderless nature mark the digital economy as a dynamic and transformative force in contemporary business settings. The nexus for digital services is fundamentally estab- lished by the concept of value as evident from the preced- ing discussion. Identifying the origin of value is pivotal for tax authorities for ascertaining their taxing rights. The exploration of the definition of value is presented below to elucidate the intricate dimensions that underlie this cri- tical aspect. While a universal theory encapsulating a singular defi- nition of the concept of value remains elusive, the under- standing of value creation by organizational entities, especially MNEs, is undergoing a transformative evolution.71 It is notably propelled by the advent of digitalization and the myriad structural forms that busi- nesses now adopt that range from traditional value chains to intricate value networks and innovative value platforms.72 Within this context, two key realizations emerge: – the attribution of value creation in a complex and globally integrated economy to specific inputs, activ- ities, or territories is inherently challenging; and – the relative significance of factors contributing to value creation fluctuates based on the nature of undertaken activities and the characteristics of the goods and services serving as carriers of the relevant value.73 Concretely, within a framework that subscribes to a firm theory approach to value creation, generating, preser- ving, and utilizing knowledge increasingly emerge as pivotal factors in creating surplus value.74 This exacer- bates the complexity of ‘locating’ value creation even within a production-based paradigm due to the spatial indeterminacy inherent in the nature of such ‘knowledge’.75 In recent times, the rationale of value creation coupled with its spatial allocation has recurrently been invoked to warrant a comprehensive re-evaluation of the international tax framework.76 The OECD initiative addressing BEPS Notes 71 Werner Haslehner & Marie Lamensch, General Report on Value Creation and Taxation: Outlining the Debate, in Taxation and Value Creation 3–35 (2021). 72 See Haslehner & Lamensch, supra n. 71. Economists have extensively endeavoured to theoretically elucidate the genesis and significance of value attributed to products and services. Generally, these efforts can be categorized into ‘objective’ (or ‘intrinsic’) and ‘subjective’ value theories. Objective theories posit that value is an inherent property of things arising from the factors responsible for their creation (e.g., the labour theory of value that equates value with the cumulative labour required for a good’s production). In contrast, subjective theories anchor value in the individualized assessments made by those contemplating the acquisition of a good. 73 Haslehner & Lamensch, supra n. 71. 74 Ibid. 75 Ibid. 76 Ibid. Intertax 302 has specifically emphasized the concept of aligning taxa- tion with the locus of value creation.77 Proposals advocat- ing for formulary apportionment premised on the idea that ‘value’ is generated independently of the assets them- selves and is challenging to directly attribute to specific locations have gained prominence.78 Two additional theories of value creation are intro- duced: the value network and the value shop.79 The for- mer highlights the network as a pivotal factor in value creation emanating from endeavours to link MNEs with users and facilitate exchanges between them.80 MNEs aspiring to establish a value network concentrate on var- ious aspects including attracting and selecting users; establishing, maintaining, and terminating user connec- tions; and ensuring the upkeep and operation of physical and informational infrastructures.81 Conversely, the value shop operates within single-sided markets and is characterized by the application of sophis- ticated technology to address customer issues.82 It com- prises five fundamental activities, specifically83: – problem finding and acquisition involving document- ing, reviewing, and formulating – problems to be addressed; – problem solving entailing identifying and evaluating different alternatives; – choice encompassing all activities associated with determining the optimal solution; – execution where the solution is communicated, orga- nized, and implemented; and – control and evaluation by measuring the extent to which the initial problem has been – resolved. An increasing number of countries have introduced DSTs that gauge the ‘use’ of digital services as a determinant for establishing national tax bases and departing from the con- ventional criteria outlined in existing tax treaties based on the OECD Model.84 The foundational premise was that the evolution of value creation has undergone significant changes, particularly in the context of digitized MNEs that share common characteristics, distinctly85: – cross-jurisdictional scale without mass signifying that digitalized businesses can actively participate in the economic activities of a country without possessing a physical presence within its territorial boundaries; – dependence on intangible assets including intellec- tual property (IP) that is fundamental for supporting digital platforms, websites, and various other func- tions integral to the business model; and – emphasis on data, user participation, and their syner- gies with intellectual property given that many social networks, for instance, would be unsustainable with- out the incorporation of data, network effects, and user-generated content. MNEs embodying these attributes engage in competition within the distinctive digital market that is characterized by unique features when compared to other markets. These characteristics include86: – direct network effects wherein the utility derived from the consumption of a particular good or service is contingent upon the number of other end-users also consuming the same good or service; – indirect network effects manifesting in a multisided context where a specific group of end-users gains advantages through interactions with another group of end-users via the digital platform; – economies of scale attributed to the prevalence of fixed costs over variable costs; – switching costs and lock-in effects stemming from reliance on an operating system potentially hindering a seamless transition to an alternative system; and – complementarity of goods sold in different markets. These distinctive features culminate in the phenomenon wherein only a singular firm or a dominant entity can typically thrive and exert significant influence over mar- ket prices within each digital market.87 Additionally, the swift conclusion of transactions with end-users reduces the time needed for product development, idea sharing, mar- ket creation, and the identification, engagement, and cultivation of new customer bases.88 Moreover, the Notes 77 Ibid. 78 Ibid. 79 Mattia Calabrese, Taxation of the Digital Economy: A New Dawn for Multilateralism and Mutual Recognition’ in Taxing the Digital Economy. The EU Proposals and Other Insights (Amsterdam: IBFD 2019). 80 Ibid. 81 Ibid. 82 Ibid. 83 Ibid. 84 Haslehner & Lamensch, supra n. 71. 85 Calabrese, supra n. 79. 86 Ibid. 87 Ibid. 88 Ibid. Digital Services Tax 303 capacity for cross-jurisdictional networks facilitated by the Internet has enhanced the functionality of multisided markets and giving rise to ‘barter transactions’ where valuable services are exchanged for other inputs, such as data.89 Paradoxically, the concept of value creation has been invoked at times to bolster proposals favouring rent-based over income-based taxation.90 In essence, this approach suggests limiting corporate taxation to exceptionally high returns on investment that investors would pursue regard- less of any tax burden.91 However, while solely taxing rents may seem economically efficient, it diverges from the fun- damental principle of taxing where value is created.92 This incongruity stems from the fact that rents often arise not only from creative entrepreneurial acts but also frequently due to external circumstances such as monopoly rights.93 Haslehner and Lamensch94 pose a compelling question: If an MNE generates value through the utilization of personal data belonging to a state’s citizens, can the state be attributed as contributing to the creation of that value? It may take on a nuanced character whether by allowing the company to exploit data due to a lack of legal regulation, facilitating IT infrastructure for data access, or providing citizens with unrestricted Internet access.95 While no default scenario is evident, it is clear that any jurisdiction capable of exerting authority significantly impacting the value creation process must offer at least tacit support.96 Notably, this situation differs from instances in which a country provides benefits like infrastructure, access to resources (including a skilled workforce), or legal protection of intangible assets. Crucially, within this framework, a physical presence in a country is not a requisite condition for asserting a taxing right.97 The complexities ushered in by the digitalization of the economy have ignited debates regarding the adequacy of current tax regimes in grappling with the transformative impacts of the digital economy, especially concerning the allocation of taxing rights among diverse jurisdictions.98 This can be segmented into the two key categories of indirect taxes that are designed to ensure effective tax collection and direct taxes that address both the preven- tion of double taxation and the equitable allocation of profits in cross-border activities within the digital economy.99 Current regulations dictate that income is taxed where the user is located, particularly in a digital economy. However, a contention arises that businesses generate income from foreign users and thus create a tax gap when there is no physical presence thereby exempting these MNEs from corporate taxes.100 In response to issues of misalignment and double non- taxation, the OECD has taken a leading role in spearhead- ing multilateral initiatives with the overarching aim of reforming international tax systems.101 The ultimate objective is to streamline the collection of revenues from MNEs in the countries where their consumers are situ- ated. Despite ongoing multilateral endeavours, several European and African nations have either implemented Notes 89 Ibid. 90 Haslehner & Lamensch, supra n. 71. 91 Ibid. 92 Ibid. 93 See Haslehner & Lamensch, supra n. 71. To elucidate this argument, consider the relationship between income and an economic rent. In neoclassical economic theory, rents are construed as income exceeding a normal market return for investment while accounting for entrepreneurial effort, skills, and risk-taking by the taxpayer. More precisely, the concept can be further nuanced to distinguish between pure rents and quasi-rents. The latter adheres to the definition of a rent and represents a return exceeding that required to incentivize the pertinent production factor’s involvement in the production process. Yet, it does not surpass long-run marginal costs which makes them indispensable for attracting investors. In contrast, a true rent constitutes a return surpassing the long-run marginal costs of production. Such rents are not incompatible with competitive markets; rather, they emerge even in conditions of full competition due to diverging costs among competing producers. For instance, those with a competitive advantage, such as particularly fertile land or unique human genius, would anticipate earning such ‘pure rent’ or ‘inframarginal profits’. 94 Haslehner & Lamensch, supra n. 71. 95 Haslehner & Lamensch, supra n. 71. Also see Dourado, supra n. 32, at 533–573. This business activity is denoted as knowledge discovery and data mining (KDDM) and encompasses the sale of profiles. This thereby enables manipulation in various decision-making processes including friend selection, purchasing decisions, forming opinions, and electoral choices. This lucrative undertaking is predominantly concentrated among technological giants and elicits substantial apprehensions. The ramifications of profile sales extend to companies’ abilities to reject insurance contracts or credit applications without divulging the rationale and depriving individuals of the opportunity to counter-argue. Moreover, it empowers governments to predict, control, and regulate the behaviour of their citizens and other entities within their jurisdiction. 96 Haslehner & Lamensch, supra n. 71. 97 See Haslehner & Lamensch, supra n. 71. A fundamental question in evaluating any tax policy pertains to the relevance of tax incidence. For the link between value creation and income taxation, it becomes imperative to inquire about the economic party on whom the tax burden falls. If, in practice, income tax does not burden the individual earning that income but is rather shifted to another entity, does it not erode the established connection between the value creator (and income earner) and the justification for imposing taxes within a specific jurisdiction? Admittedly, those who ‘create value’ do not necessarily receive equivalent income and, likewise, those who pay taxes on their ‘income’ may not bear the true burden of that tax. Nevertheless, once the decision to tax income is made, employing ‘value creation’ as a proxy for the allocation decision is not unreasonable given that income partly reflects capturing created value by the individual earning it. It is essential to recognize that income does not encompass the entirety of surplus value arising in a transaction. As the part captured by the consumer – the disparity between the market price and their actual valuation of the purchased good or service – is not considered income, any economic incidence of income tax on the consumer is still inherently linked to the value captured by either party in a market transaction. 98 OECD, OECD/G20 Base Erosion and Profit Shifting Project 2015 Final Reports (2015). 99 Ibid. 100 E. Asen & D. Bunn, What European OECD Countries Are Doing about Digital Services Taxes 25 (Tax Foundation 2021). 101 OECD, Trust in Global Cooperation: The Vision for the OECD for the Next Decade (2021). Intertax 304 or expressed their intention to implement unilateral mea- sures, such as DSTs, to attempt to effectively address the challenges arising from the digital economy. International tax practitioners often contend that any perceived ‘risk’ regardless of its frequency and magnitude necessitates international coordination that exceeds mere adjustments to bilateral treaties.102 Before delving into these contentions, it is imperative to scrutinize their foundational factual premise. Notably, instances cited by the OECD and others as ‘challenges arising from the digital economy’ predominantly pertain to the ser- vices sector and encompassing distribution (e.g., online retail such as Amazon and content distribution platforms like Netflix and Spotify), advertising (Google and Facebook), transportation and lodging (Uber and AirBnB), business ser- vices (AWS, Apple), among others.103 Using the terminology of theWorld Trade Organization (WTO) General Agreement on Trade in Services (GATS), the international tax community appears primarily concerned with the rise of ‘Mode 1’ service trade at the expense of ‘Mode 3’ trade.104 The GATS classifies services trade into four modes of supply105 (refer to Figure 2): (1) Cross-border supply (Mode 1): Services provided from one country’s territory into another, such as through the internet. (2) Consumption abroad (Mode 2): Services delivered in one country’s territory to another country’s consu- mer, such as tourism. (3) Commercial presence (Mode 3): Services rendered by one country’s supplier through a commercial presence – like a controlled affiliate or branch – in the territory of another. (4) Presence of natural persons (Mode 4): A supplier from one country provides services through the presence of natural persons in the territory of another, such as consultants. Figure 2 The Four Modes of Supply in a Digital Economy Notes 102 Wei Cui, New Puzzles in International Tax Agreements, 75 Tax L. Rev. 75 201 (2021), doi: 10.2139/ssrn.3877854. 103 Cui, supra n. 102. 104 See Cui, supra n. 102. The widely accepted assumption that the digital economy is fundamentally altering international commerce is challenged by trade statistics, particularly in the context of services trade. The dominance of Mode 3 (traditional physical presence) in global services trade persists and comprised 58.9% in 2017 while Mode 1 (electronic means) constituted a 27.7% share. Developed economies show marginal changes in Mode 3 trade from 2005 to 2017, and there is considerable diversity among countries in service types and quantities. Contrary to the perceived shift from Mode 3 to Mode 1, most countries, including advanced economies, do not show indications of revenue loss due to such a substitution. This raises the question of the shared issue necessitating coordinated action, especially considering the principle of applying consistent tax rules to different forms of international commerce known as ‘no ring-fencing’. The challenge posed by remote business models seems less pronounced from a non-industry-specific standpoint. 105 Cui, supra n. 102. Digital Services Tax 305 The initial rationale for coordinated changes in inter- national tax is thus grounded in the assumption that traditional CIT rules primarily taxed Mode 3 service trade, and that this is now being significantly sup- planted by Mode 1 trade.106 5 GLOBAL IMPLEMENTATION OF UNILATERAL MEASURES TO TAX THE DIGITAL ECONOMY This section delves into the detailed discussion of the imple- mentation of unilateral measures. While both the United Kingdom and Kenya have opted for DSTs, it is noteworthy that various countries have chosen alternative tax strategies. Many nations have independently incorporated unilateral measures into their tax systems in the absence of a global consensus on multilateral measures to address taxation chal- lenges arising from the digital economy. This strategic approach aims to mitigate tax risks associated with digital businesses. Countries are increasingly resorting to unilateral actions and introducing innovative taxes that defy easy clas- sification for tax treaty purposes in tandem with coordinated efforts within the BEPS process.107 Some of these measures may not perfectly align to establish a fair and equitable tax system, however, they are widely perceived as interim solu- tions until a global consensus is achieved. Unilateral measures addressing challenges in the digital economy exhibit significant variations that are primarily rooted in their distinct designs.108 Across nations, a spec- trum of approaches exists. Some have adopted VAT for taxing digital services, others have embraced DSTs, some have introduced or modified withholding taxes, and a few have adopted a hybrid model combining these measures.109 Consequently, certain countries choose to tax gross revenue while others focus on reshaping the localization and alloca- tion of digital activities.110 These diverse rules are crafted with the explicit goal of resolving issues inherent in the digital economy, and the variety in their designs reflects the multifaceted nature of challenges presented by the digital economy.111 This evolving trend seems to signal a retaliatory response to tax planners who have proven to be adept at devising and employing hybrid structures to their advantage.112 In response, tax legislators are proactively introducing taxes crafted with specificity to navigate through gaps in treaty protection.113 Illustrative examples of these new taxes include India’s Equalization Levy,114 the UK Diverted Profits Tax (DPT), Australia’s Multinational Anti-Avoidance Law (MAAL),115 the announced DPT, the Netherlands Excessive Severance Tax, and the Belgian Fairness Tax.116 The UK’s DPT was enacted in 2015 as a response to counteract profit shifting by MNEs imposes a 25% tax in two specific scenarios.117 First, the tax is effectuated when there is either a UK company or a foreign company with a UK PE, and arrangements lacking economic substance exist resulting in an effective tax mismatch. This discre- pancy arises when a reduction in profits of the UK com- pany or UK PE is not counterbalanced by a corresponding increase in profits for the other party. The second scenario arises when a non-resident company provides goods or services within the United Kingdom and it is reasonable to assume that any activity is strategically designed to ensure that the foreign company does not establish a UK PE; this is commonly referred to as an ‘avoided PE’. Notably, it is essential to highlight that the DPT does not apply to small and medium-sized entities which pro- vides a targeted scope for its application. The taxable profits of an ‘avoided PE’ under the DPT align with what would have been generated if the foreign company had a UK PE.118 Moreover, both the DPT and corporation tax share analogous principles in profit calculation119 with the determination of the tax base considered the most pivotal factor for establishing similarity.120 Turning the attention to the Southern Hemisphere with a specific emphasis on Africa, the African Tax Administration Forum (ATAF) took a significant step in 2020 by introducing a framework for DSTs. It serves as a valuable guide for African countries contemplating the Notes 106 Ibid. 107 Jescheck, supra n. 41. 108 G. R. Faulhaber, The Internet Trap: How the Digital Economy Builds Monopolies and Undermines Democracy 444–447 (2019). 109 Ibid. 110 Ibid. 111 Ibid. 112 See Jescheck, supra n. 41. 113 See ibid. 114 See ibid. 115 See ibid. 116 See ibid. 117 See ibid. 118 See ibid. 119 See ibid. 120 See ibid. Intertax 306 enactment of DST laws by providing a structured and infor- mative resource to navigate the complexities associated with taxing digital services in the region. Kenya, for instance, enacted a unilateral measure beginning 1 January 2021 levying a DST at a rate of 1.5% on income derived from digital marketplaces. Similarly, Zimbabwe instituted a DST that was initiated 1 January 2019 taxing gross income from satellite broadcasting at a rate of 5% that is applicable to entities generating revenue exceeding ZWL 500,000.121 Contrastingly, several African countries including Botswana, Namibia, and South Africa have yet to enforce the unilateral DST measures proposed by the OECD.122 Contrary to opting for the implementation of a DST, South Africa recently chose to revise its VAT regulations. It specifi- cally targets digital service and forms a pivotal component of broader adjustments to indirect taxes within the digital ser- vices sector.123 However, noteworthy progress has yet to materialize in the imposition of direct taxes on digital services in South Africa unlike Egypt where the imposition of VAT extends to digital services. Non-resident registrants are obli- gated to declare and remit taxes on e-service supplies at a rate of 14%.124 However, for professional and consultancy services offered by non-resident registrants, the applicable tax rate is reduced to 10% with corresponding declarations and pay- ments required for supplies of this nature.125 For countries such as South Africa and Egypt that have embraced the VAT principle, this is rooted in the prin- ciple that VAT is levied on the subjective value126 of specifically the amount ‘objectively’ paid to the supplier (the actual value received, possibly in kind) but corre- sponding to the ‘subjective’ value agreed upon by the customer for the respective good or service.127 This agreement is founded on the customer’s ‘perceived value’ of the item rather than an assessment based on objective criteria.128 In instances where corrective mea- sures are necessary, the ‘open market value’ may be employed, although it remains unclear if this concept aligns with the arm’s length standard in direct taxation, particularly in transactions involving related entities.129 However, even in such cases, the adjusted amount would only be applied on the ‘perceived value’ attributed to a good or service within a given market.130 It is imperative to note that the location where value is added to a product or service does not, in any way, determine the jurisdiction responsible for the final VAT taxation.131 In principle, only the Member State of final consumption (expenditure) has the entitlement to a net tax.132 There is no allocation among other Member States based on whether value may have been added or subtracted earlier in the transaction chain.133 The Member State of final consumption essentially retains the entirety of the tax. Exceptions arise only when suppliers in the chain lack a full right of deduction due to special circumstances (either because of an exemp- tion or a capped deduction right in national legislation) or are unable to recover it from a foreign administration (e.g., due to a negligible amount at stake or adminis- trative deficiencies).134 In such cases where the VAT system might be considered deficient from a neutrality perspective, other states besides the state of final con- sumption may retain a portion of the VAT.135 However, this does not imply that these states are where most or all of the value has been added.136 Despite introducing VAT on digital services, South Africa is still awaiting a consensus on multilateral mea- sures before introducing any unilateral measures.137 The Notes 121 Deloitte, The income tax (Digital Service Tax) Regulations Walking the Journey with you (2020). 122 Deloitte, supra n. 121. 123 See Loffstadt, Ndlovu & Padia, supra n. 1, at 1–15. 124 See https://www.globalvatcompliance.com/globalvatnews/egypt-vat-digital-services/ (accessed 7 Dec. 2023). 125 See ibid. 126 See Haslehner & Lamensch, supra n. 71: VAT is designed to tax final consumption but is applied across the entire production chain to enhance efficiency. The expectation is that value is generated or enhanced at each stage of the production and distribution process through either improvement or transformation or by commanding a higher price. However, it is essential to note that there is no direct correlation between the effective addition of value and the imposition of the tax. The instigator for a tax payment is solely the objective payment made by a counterparty for a good or service. VAT is applicable whenever a supplier that is recognized as a taxable entity for VAT purposes provides a good or service to a counterparty. This is applicable even in scenarios where the supply results in a loss (e.g., during a sales period) or when there is a diminution in the value of the provided good or service (e.g., with used goods). There is an exception in specific instances when an exemption or a special scheme might be applicable taking into account the absence of value addition. 127 Haslehner & Lamensch 2021, supra n. 71. 128 Ibid. 129 Ibid. 130 Ibid. 131 Ibid. 132 Ibid. 133 Ibid. 134 Ibid. 135 Ibid. 136 Ibid. 137 OECD, OECD/G20 Base Erosion and Profit Shifting Project Progress Report on Amount A of Pillar One (2022). Digital Services Tax 307 Davis Tax Committee (DTC) offered recommendations in 2016 on how South Africa could prevent double taxation or double non-taxation in the digital economy. The DTC suggested that South Africa wait for the outcome of the OECD’s BEPS Project before implementing any new measures. Additionally, the DTC proposed expanding the existing South African source rules to stipulate that the source of revenue is located where the customer resides. These recommendations, however, remain unim- plemented by the South African Government. South Africa’s current President, Mr Matamela Cyril Ramaphosa, has proposed introducing the DST on large MNEs such as Amazon.com, Netflix.com, and the Meta platform. However, no such implementations have yet taken place.138 As explored earlier, unilateral measures have emerged as provisional strategies awaiting the implementation of the OECD’s two-pillar solution. However, the protracted delay in the OECD’s execution of this solution may prompt an escalating adoption of unilateral measures by more countries.139 While countries like the United Kingdom and Kenya are prepared to eliminate existing unilateral measures upon the two-pillar solution’s enactment,140 others have indicated their intention to enforce proposed unilateral solutions in the absence of a comprehensive international agreement.141 With contin- ued delays, an expanding cohort of countries is likely to resort to unilateral measures to fortify their tax systems. Yet, this strategy creates a tangible risk of inciting trade wars142 or retaliatory measures among countries, especially when a jurisdiction perceives a significant num- ber of MNEs within its borders as targets. An illustrative case is the authorization of retaliatory tariffs by the US Trade Representative (USTR) authorizing retaliatory tar- iffs against France in 2020 and subsequently extending them to the Austria, India, Italy, Spain, Turkey, and the United Kingdom under the Biden Administration in 2021.143 Although the United States initially opted for such retaliatory tariffs,144 they were later suspended in order to align with the OECD’s proposal for the with- drawal of all DSTs by countries upon reaching an inter- national tax agreement.145 However, in the event that the OECD agreement was to falter146 and the United States was to reinstate retaliatory tariffs against DST-imposing nations, these countries would likely reciprocate with their own tariffs against the United States and potentially spark trade wars.147 This tit-for-tat dynamic could result in an ineffective cycle of taxation and tariffs ultimately Notes 138 T. Karombo, African Governments Now Want to Tax Your Netflix and Chill Quartz. (2022), https://qz.com/africa/2122487/african-governments-now-want-to-tax-your-netflix- and-chill (accessed 7 Dec. 2023). 139 Faulhaber, supra n. 108. 140 E. Asen & D. Bunn, supra n. 100. 141 OECD, OECD Policy Responses to Covid-19. The Territorial Impact of Covid-19: Managing the Crisis Across Level of Government (2021). 142 See Cui, supra n. 102. The OECD conducted an economic impact assessment of its Two Pillar proposal in Nov. 2020, It asserted that the primary rationale for the proposal is to avert an undesirable alternative scenario that envisions trade wars diminishing global GDP by up to 1% in a ‘worst-case’ situation. A prominent OECD official expressed the sentiment that ‘any agreement is better than no agreement’ and suggested that the looming threat of conflict and the prospect of resolution drive countries to engage in cooperative efforts. The perceived threat of ‘trade wars’ materialized as the European Commission (EC) proposed coordinated adoptions of DSTs within the EU in 2018. However, due to the unanimity requirement for tax policy decisions at the EC and the objection of several EU Member States to a European DST, the proposal did not come into effect. Subsequently, several European countries led by France and including Britain independently enacted their own DSTs labelled as ‘unilateral measures’. The United States argued that these DSTs unfairly targeted US tech companies and constitute discriminatory practices. During the Trump Administration, the USTR initiated investigations against countries implementing DSTs under s. 301 of the Trade Act of 1974. 143 Cui, supra n. 102. 144 See Cui, supra n. 102. The imposition of s. 301 tariffs against countries implementing DSTs likely violates US commitments under the World Trade Organization (WTO). This echoes the precedent set by the US imposition of s. 301 tariffs on Chinese imports since 2018 that was determined to be in violation of WTO law. Notably, the US tariffs against the EU in the large civil aircraft disputes are sanctioned by the WTO. Specifically, the USTR does not assert that the investigated DSTs breach existing international agreements, including WTO rules, regional trade pacts, or bilateral tax treaties. Rather, the USTR recognizes that DSTs operate beyond the scope of such agreements. Its stance is rooted in the argument that these taxes ‘discriminate against major US digital companies and are inconsistent with prevailing international tax policy principles’. However, this determination is guided by ambiguous criteria and lacks a clear legal framework. Contrastingly, the US’s announcement of retaliatory tariffs against France and other countries aligns with WTO regulations. Concerns about the WTO compatibility of numerous s. 301 tariffs have been raised not only by the European Union but also by US legal scholars and government agencies. Relying on US s. 301 tariffs as the basis for a new global tax agreement assumes the US’s entitlement to breach WTO regulations and poses a fundamental question about how a nation willing to disregard obligations under an existing cooperative regime can commit to cooperation in a new framework arising directly from such a breach. 145 Cui, supra n. 102. 146 See Cui, supra n. 102. In the OECD’s model illustrating trade wars involving a ‘limited’ set of countries and the United States, over 30 countries either implemented a DST or reportedly contemplated DST adoption by 2020. These are assumed to (1) impose taxes on all digital imports from the United States, (2) confront either a proportionate retaliatory tariff or a tariff equivalent to five times the value of DSTs imposed by the United States, and (3) implement proportionate counter-tariffs against the United States for these retaliatory tariffs. In a ‘worst-case’ scenario, all countries globally, except China and Hong Kong, would adopt DSTs; the United States would levy retaliatory tariffs on all of them (up to five times the value of the DSTs); and all of these countries would retaliate with counter-tariffs against the United States. These hyperbolic scenarios form the foundation for the OECD’s alarming predictions regarding the consequences in the event of a breakdown in the agreement. 147 See Cui, supra n. 102. It is notable that major proponents of international agreements in 2021, such as France, the United Kingdom, and the United States are potential participants in the scenario of potential trade wars. However, these proponents do not posit that preventing trade wars is the primary rationale for international agreements. Instead, they invoke either the evolving modes of global commerce or the imperative to curb tax competition and corporate tax avoidance. This incongruity holds significance. The OECD arguably provides a more forthright depiction of the true nature of the proposed international agreement by consistently emphasizing the rationale of averting trade wars. This arises from the understanding that an international agreement might not materialize if countries do not commit to withdrawing or refraining from imposing DSTs. Stated otherwise, irrespective of the merits of other policy objectives for international cooperation, the OECD’s current proposed agreement fundamentally asserts that DSTs should not be employed to advance these objectives. However, the averting-trade-war rationale for international cooperation is notably superficially unusual as all of the ‘trade wars’ cautioned by the OECD involve a single common belligerent – the United States – with no instances of countries engaging in trade wars against each other. Intertax 308 harming consumers more than addressing the underlying tax issues.148 The consequence of such retaliatory mea- sures could lead jurisdictions to receive less tax revenue than anticipated as these measures essentially cancel each other out and therefore create overlapping and counter- productive outcomes.149 Another challenge lies in the potential for unilateral measures to foster double taxation due to the absence of bilateral agreements. Inconsistencies in defining what constitutes a digital economy across different jurisdictions can exacerbate this problem and potentially result in the same revenue being interpreted differently and taxed mul- tiple times. For instance, an MNE could face taxation in multiple countries due to new nexus rules that would cause income to be taxed based on users in one country, customers in another, and suppliers in yet another. Moreover, unilateral measures could be deemed unlawful or unconstitutional, and there is no multilateral platform to dispute these measures or ensure their equity and legality. 6 INTRODUCTION OF DST IN RESPONSE TO DIGITAL ECONOMY CHALLENGES In 2018, the European Council, the UK Government, and the Spanish Government independently championed the implementation of an EU DST that was designed to encompass revenues generated from online advertising, digital intermediary activities, and the sale of user data.150 However, the EU DST proposal encountered a setback in 2019 when the Economic and Financial Affairs (ECOFIN) Council failed to garner unanimous support for the mea- sure despite certain compromises aimed at narrowing its scope.151 Pioneering the DST initiative, the French Republic successfully implemented it in 2019 and speci- fically targeted MNEs with a significant digital presence within the country. This proactive stance emphasizes the global momentum in adapting tax frameworks to grapple with the challenges presented by the digital economy. The DST introduced by the France, Spain, and the United Kingdom aimed to tax the revenue generated by large digital platform companies involved in activities such as advertising, online intermediation, and data transmission.152 These proposals were rooted in the belief that the existing international income tax framework for MNEs inadequately taxed such entities.153 Consequently, the governments of the involved countries called attention to the imperative for urgent reform in the tax regime to allocate greater taxing authority to jurisdictions where users of digital platforms contribute to value creation.154 The DST was presented as a temporary solution to address the under-taxation of digital platforms until a new con- sensus on multilateral tax reform could be achieved within the OECD.155 Two key elements must be demonstrated to justify the DST as a tax on location-specific rents (LSR)156: – digital platforms generate significant rent; and – such rent can be attributed to specific user countries when these platforms operate globally. Concerning the first aspect, the economic literature on platforms strongly indicates the potential for substan- tial economic rent primarily due to both direct and indirect network effects. Furthermore, the presence of monopoly rent aligns with the concept that substantial investments may be necessary to capture it.157 Firms might exhibit low accounting profits or even sustained losses during periods focused on building market share.158 Two intuitions prove valuable for determining if these business models are generating LSR. First, in specific instances, identifying the causal origins of platform rent may be feasible. New producer or consumer surplus may emerge due to changes in the jurisdictions where platform users reside.159 Second, in a broader context, when a technology’s deployment in one country carries no oppor- tunity cost regarding simultaneous deployment in other countries – when the use of that technology is non-rival – it becomes plausible to attribute any rent generated by its Notes 148 Asen & Bunn, supra n. 100. 149 Ibid. 150 Wei Cui & Nigar Hashimzade, The Digital Services Tax as a Tax on Location-Specific Rent (2019). 151 J. M. Vázquez, Digital Services Taxes in the European Union: What Can We Expect? Kluwer International Tax Blog (2023), https://kluwertaxblog.com/2023/02/14/digital- services-taxes-in-the-european-union-what-can-we-expect/ (accessed 7 Dec. 2023). 152 Cui & Hashimzade, supra n. 150. 153 Ibid. 154 Ibid. 155 Ibid. 156 Ibid. 157 Ibid. 158 See Cui & Hashimzade, supra n. 150. Drawing parallels between platform users’ activities and natural resources is straightforward in certain cases, particularly when dealing with data of significant economic value. However, the primary tax base for the DST is anticipated to be revenue derived from advertising and the intermediation of consumption transactions. 159 Cui & Hashimzade, supra n. 150. Digital Services Tax 309 deployment in a given country to that country.160 This holds true even when the technology can be deployed remotely or originates elsewhere. These insights are further clarified with illustrative examples. Conventional tax policy frameworks become applicable for analysing the DST once platform rent is acknowledged as location-specific.161 For example, the consideration between a revenue-based tax and one that is defined on a rent base is a familiar aspect in the context of taxing natural resources.162 Existing literature on this recognizes that revenue-based taxes are more straightforward to implement, resistant to tax planning and profit shifting, and provide revenue to governments earlier than rent- based taxes.163 The latter are less distortionary, however, their practical and political implementation is more chal- lenging. In practice, both (revenue-based) royalties and rent taxes are often adopted alongside corporate income tax with the latter exhibiting a combination of the advan- tages and drawbacks of the former two tax instruments.164 The simultaneous imposition of various taxes in the digital domain should be no more contentious than in the natural resource sector.165 Moreover, the taxation of the LSR is already of significance in the current interna- tional distribution of taxing rights. Describing the rela- tionship of a DST designed as a tax on LSR with existing income tax treaties is straightforward. Although the multi-sided market business models of digital platforms differ from natural resource extraction in several aspects, the economic incidence and welfare effects of a DST imposed on digital service revenue depend on a complex array of factors of which some are elucidated in a simple model.166 When the marginal cost of providing services to adver- tisers/producers is not zero, a tax on platform revenue impacts both them and the platform with the effect on consumers being ambiguous.167 Nonetheless, conven- tional tax policy considerations may lead countries to discount any cost pass-through to foreigners and view granting it to domestic users as an acceptable trade-off for capturing some platform rent. Additionally, uncer- tainty about the impact of a DST should not be solely construed as a deterrent to DST proposals.168 Numerous business models become potential candidates for taxes on LSR upon recognizing platform rent as location specific.169 Examining the actual implementation of the DST in a narrow range of sectors could offer valuable insights. Indeed, DST-like taxes might play a distinctive role in fostering international equity in a future global economy characterized by AI and labour-replacing technology.170 This is attributed to their capacity to allow a country to capture profits from foreign businesses even in situations when the local resources utilized by them (1) lack a market or have minimal opportunity cost and (2) result in no payments to or from the country. In such contexts, profit taxes relying on jurisdictional claims tied to payment streams are susceptible to erosion while DST-like taxes retain the ability to facilitate inter-nation redistribution.171 The DSTs instituted by several African and European nations has a primary function as a direct levy on revenue derived from a spectrum of digital services including online advertising and streaming services.172 Additionally, the DST aims to guarantee that source countries gain expanded taxation rights over the profits of technology-based MNEs that sell and collect data and also target advertisements towards local consumers within these countries regardless of their physical location, as depicted in Figure 3. Specifically, DST targets MNEs such as Amazon.com, Apple Inc, Google LLC, and others that deliver goods and services digitally. They must meet this standard to fall within the scope of DST taxation. A minimum threshold is enforced to ensure that countries apply it to the most significant enterprises. For nations that have levied VAT on domestic digital goods and services, the DST serves as an additional tax policy designed to create equality and seal the loophole of non-tax collection on digital services.173 Hence, the DSTs Notes 160 Ibid. 161 Ibid. 162 Ibid. 163 Ibid. 164 Ibid. 165 Ibid. 166 Ibid. 167 Ibid. 168 Ibid. 169 See Cui & Hashimzade, supra n. 150. It is noteworthy that the DSTs currently proposed by the European Commission, Spain, and the United Kingdom target only a limited subset of these models. 170 Cui & Hashimzade, supra n. 150. 171 Ibid. 172 S. Lowry, Digital Services Taxes (DSTs): Policy and Economic Analysis Congressional Research Service Report 45532 (2019). 173 Mullins, P. (2022), Taxing Developing Asia’s Digital Economy. Asian Development Outlook, at 1-43. Intertax 310 are distinct from income tax, online sales tax, or VAT. In comparison, they typically impose a levy on gross revenue collected outside any treaty obligations. Consider an example where an MNE headquartered in Country A sells digital services to consumers in Countries B, C, D, and E as depicted in Figure 3. As a resident of Country A, the MNE is taxed on its global income thereby making it liable for tax in Country A. Typically, a resident entity would establish a taxable presence in another country where it has income attributed to a PE. However, as shown in Figure 3, the MNE lacks a PE in Countries B, C, D, and E. Here, the DST serves as an alternative mechanism for establishing taxable presence. As shown in Figure 3, Countries C, D, and E have implemented DSTs thereby potentially subjecting the MNE to taxation in these jurisdictions. Country B lacks DST measures and incurs a loss in potential tax revenue. However, the mere implementation of a DST in Countries C, D, and E does not automatically establish a taxable presence; certain thresholds must be met. Figure 3 demon- strates that, while revenues in Countries D and E exceed the domestic threshold, Country C’s revenue is insufficient. Moreover, while Country D’s revenue surpasses the domes- tic revenue threshold, it fails to meet the global revenue level thereby excluding both Country C and Country D from taxing the MNE. Ultimately, the MNE will pay tax in its resident country and in Country E, but it will remain tax-free in Countries B, C, and D due to the specific threshold parameters and the absence of a DST. 7 PRINCIPAL CONCERNS SURROUNDING DSTS This section delves into the comprehensive examination of the principal concerns surrounding the implementation of DSTs. Initially introduced as temporary strategies while awaiting the OECD’s two-pillar solution, unilateral mea- sures may see increased adoption if the OECD continues to delay implementation.175 While countries like the United Kingdom and Kenya are poised to eliminate exist- ing unilateral measures upon the two-pillar solution’s enactment, others have indicated their intent to imple- ment proposed unilateral solutions in the absence of an international agreement.176 Consequently, further delays could lead to more countries adopting these to protect their tax systems. The main controversy surrounding DSTs is their per- ceived discriminatory nature with critics arguing that they unjustly target US-based technology companies.177 Figure 3 How Does DST Work?174 (Source: Own) Notes 174 Kgomotso Mponwana & Jane Ndlovu, 2023. 175 Faulhaber, supra n. 108. 176 OECD, supra n. 141. 177 Sarfo, N.A. (2023), supra n. 23. Digital Services Tax 311 The USTR has completed a report suggesting that cer- tain DSTs such as those implemented in Australia, Spain, and the United Kingdom are discriminatory and contravene international laws.178 According to Hunter (2021),179 these DSTs impose burdens or restrictions on US commerce thereby leading to perceptions of them as being unfair and discriminatory measures. Another concern is that DSTs are formulated outside of existing tax treaties which can destabilize the interna- tional tax system.180 Given that they are unilateral mea- sures enacted without bilateral agreements between jurisdictions, they amplify the risk of double taxation which further complicates matters. The introduction of Pillar One is intended to resolve DST-related issues by offering a coordinated set of rules applicable to large MNEs.181 Concerns have arisen over the definition of DSTs, but most jurisdictions support Pillar One’s implementation. That definition encompasses levies on the total revenue generated through various digital services.182 It also represents a combination of gross receipts taxes and transaction taxes applicable to earnings from activities such as advertising space sales, provision of digital intermediary services, and the sale of user-collected data.183 DSTs maintain a distinct character separate from income taxes and online sales taxes, and they do not fall under the category of the VAT/Goods and Services Tax (GST).184 Currently, the OECD has outlined the definition of DSTs based on three cumulative conditions185: – the application of taxation grounded in market-based criteria; – the confinement of such taxes to foreign and foreign- owned businesses; and – the positioning of these taxes outside the income tax system thereby exempting them from treaty obligations. The Digital Economy Group (DEG) voiced worries that the DST definition is too narrow and potentially fails to fully address the challenges of the digital economy and thus contribute to continued instability in the interna- tional tax regime.186 Similarly, BMR Legal Advocates, a specialist corporate international tax and transfer pricing law firm in the Republic of India, has expressed concern that the language used in Amount A remains ambiguous. This could lead to jurisdictions not implementing the legislation as intended. Additionally, the requirement for all three elements of the definition to be met has been identified as a concern as it could result in only a few measures meeting the definition thereby curtailing the reform’s effectiveness.187 The DST definition additionally presents significant concerns and limitations for countries that impose it on both domestic and foreign digital companies. It is recom- mended that clarity should be offered on which MNEs will be subject to Amount A. Additionally, the OECD should distinctly identify the removal of existing DST measures to provide certainty to jurisdictions that will be affected by their elimination.188 The current Article 37 Model of Convention imposes limitations on the applicable juristic persons by referring only to companies. To resolve this issue, it is recommended that the section be revised to include all types of entities regardless of their legal status. This will ensure that all entities satisfy- ing the criteria for a DST are governed by the same rules and regulations.189 Addressing these concerns is crucial for ensuring the effective implementation of Pillar One in effectively addressing DST-related issues. Both the DEG and the BMR Legal Advocates have raised pertinent concerns about the DST definition and addressing them is vital for avoiding confusion or ambiguity. It will also help minimize the risk of double taxation and ensure consistent application of rules across countries. To address DST destabilization issues and the narrow- ness of definition, the DEG has proposed additional mea- sures. It suggests that the OECD should review all existing DSTs that have led to instability in international tax laws and take these into account when designing the DST definition. Additionally, the DEG proposes adopting Notes 178 A. Hunter, Indian, Italian and Turkish Digital Service Tax Discriminatory: US Trade Representative, International Tax News, Transfer Pricing News – TP News, https:// transferpricingnews.com/indian-italian-and-turkish-digital-service-tax-discriminatory-us-trade-representative/ (accessed 7 Dec. 2023). 179 Hunter, supra n. 178. 180 Sarfo, N.A. (2023), supra n. 178. 181 OECD, OECD/G20 Base Erosion and Profit Shifting Project Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalization of the Economy (2021). 182 Vázquez, supra n. 151. 183 Vázquez, supra n. 151. 184 Ibid. 185 Ibid. 186 OECD, Public Consultation Document Pillar One – Amount A: Draft Multilateral Convention Provisions on Digital Services Taxes and other Relevant Similar Measures (2023). 187 Ibid. 188 Deloitte Group, OECD Pillar One: Amount A. Removal of Digital Services Taxes and Relevant Similar Measures (2023), https://taxscape.deloitte.com/article/oecd-pillar-one— amount-a—removal-of-digital-services-taxes-and-relevant-similar-measures.aspx (accessed 7 Dec. 2023). 189 Ibid. Intertax 312 a disjunctive approach and considering a hallmark analysis that takes into account destabilizing features of unilateral measures aiming to create a more effective definition.190 The DEG also suggests that the Amount A rules should be modified to accommodate countries that tax both domestic and foreign digital companies. It recommends that the definition clarify which MNEs will be liable for Amount A. Additionally, the DEG recommends that the OECD stipulates a list of measures that constitute DSTs to provide certainty to jurisdictions subject to the removal of existing DST measures.191 Another significant challenge is that unilateral measures may result in double taxation due to the absence of bilateral agreements. Inconsistencies in understanding what consti- tutes a digital economy across different jurisdictions can exacerbate this problem and potentially lead to the same revenue being interpreted differently and taxed multiple times. For instance, an MNE could be subject to tax in several countries due to new nexus rules that would cause income to be taxed based on users in one country, custo- mers in another, and suppliers in yet another. Moreover, unilateral measures could be perceived as unlawful or unconstitutional, and there is no multilateral platform to dispute these measures or ensure their equity and legality. The adoption of DSTs by some countries specifically targeting US-based conglomerates has spurred concerns around fairness and the potential for aggressive tax planning tactics aimed at MNEs. Critics argue that a DST operates like a tariff and could be discriminatory in terms of scale as it solely targets specific MNEs. This approach may contravene the objective of international tax laws which is to promote fairness and eliminate double taxation.192 The DST thresh- old is set high specifically aiming at certain MNEs. While this arrangement may benefit small businesses, it also affords opportunities for enterprises to modify their business models to generate revenue below the threshold.193 Additionally, discrepancies in DST laws among coun- tries could result in administrative burdens and compli- ance challenges for non-resident taxpayers liable for tax in those jurisdictions.194 Addressing these issues is essential to ensure that any implemented tax measures are fair and consistently applied across all affected parties. There are also challenges in implementing DSTs. Addressing these as a unilateral measure involves identify- ing two primary concerns.195 The first issue arises when the DST targets the LSR and necessitates coordination based on existing tax treaties governing income tax.196 The second problem emerges when countries introduce unilateral measures for purposes other than taxing rent, such as an ‘equalization’ tax to create a fair and balanced situation between digital platform corporations and tradi- tional companies. In such cases, it becomes imperative to reconcile these unilateral measures with the DST.197 Concerning the first challenge, countries where the LSR is generated are not deemed source countries under tradi- tional tax rules, and they are not residence countries either. Consequently, even if they tax such corporations, they often fail to implement measures to eliminate double taxation, such as providing foreign tax credits.198 This raises questions about the significance of the DST not being eligible for a foreign tax credit. If this is the case, most residence countries typically grant a deduction for foreign taxes paid.199 Despite being designed as a tax on economic rent, deducting the DST from the income tax base would still allow for the imposition of income tax without causing distortions.200 This approach aligns with the historical practice of standard corporate tax systems that have accommodated additional taxation on unusual returns, such as those with excess profits, alongside ordin- ary corporate tax.201 Notably, many taxes on rent have traditionally been excluded from treaty-based coordina- tion and treated as taxes covered by the treaties.202 The second issue involves coordinating DSTs specifically designed to tax the LSR with unilateral measures implemen- ted for different objectives, such as achieving equal treatment.203 For example, India’s Equalization Levy and Italy’s Levy on Digital Transactions are applied within the tax jurisdiction of advertisers. In a hypothetical scenario where Notes 190 Ibid. 191 Ibid. 192 Vázquez, supra n. 151. 193 Asen & Bunn, supra n. 100. 194 Ibid. 195 Ibid. 196 Ibid. 197 Ibid. 198 Ibid. 199 Ibid. 200 Watanabe, supra n. 51. The rationale for presuming that the DST should be eligible for a credit against income taxes rather than being deductible from taxable income remains unclear. Absent such a presumption, the lack of coordination between the DST and regular corporate income taxation does not create any specific concerns. 201 Watanabe, supra n. 51. 202 Ibid. 203 Ibid. Digital Services Tax 313 Facebook sells advertising slots targeting French consumers to Italian or Indian manufacturers, the advertising profits received by Facebook might be subject to revenue-based taxation in India or Italy in addition to the DST in France.204 Given the implementation of unilateral measures by certain countries for digital services, conflicting perspec- tives on the attribution of profits from such services exist and leads to the potential for double taxation.205 Resolving these issues through existing treaties is challen- ging as the elimination of double taxation in income taxes is constrained by treaty provisions.206 Coordination becomes even more intricate when addressing matters beyond income tax. The 2018 EU proposal suggested allocating revenue among EU Member States based on the number of users within each state. However, this proposal was not enacted, and its scope would have been limited to the EU.207 In the scenario mentioned pre- viously, the likelihood of India as a non-EU country having a tax treaty with France and coordinating unilat- eral measures between the two nations seems improbable. Even if the second problem is viewed as a challenge in allocating new taxation rights related to corporate profits, achieving coordination among countries remains a formid- able task.208 A perspective of suggesting that coordination among countries regarding DSTs could be achieved by acknowl- edging that these taxes do not conflict with existing international obligations. This is similar to the impositio