• February 1, 2023

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Within the span of just four weeks last month, Nepalese Finance Minister Janardan Sharma resigned from office but was then reinstated after he was absolved of an alleged corruption scandal.

The upheaval began in early July, when Sharma faced a parliamentary investigation after he was accused of allowing unauthorized, last-minute changes to tax rates in the country’s budget.

Sharma stepped down to allow for an internal investigation, which failed to find wrongdoing, and he was reinstated at the end of the month, according to Reuters.

The saga has attracted a lot of public and media attention while another significant tax development has unfolded largely under the radar: Nepal is the latest country to implement a digital services tax.

Under the new rules, foreign digital services providers with more than NPR 2 million in annual turnover (about $15,911) must register in the country and pay a 2% DST on their Nepalese digital services transactions, which include online streaming services, cloud services, and app downloads. Local media has been reporting that digital giants such as Facebook, Netflix, and Twitter are among the companies that will need to register.

It remains to be seen whether Nepal will face any objections from the United States or other parties over the decision. Nepal is not a member of the OECD inclusive framework, whose members are expected to roll back existing DSTs or refrain from implementing new ones as part of the two-pillar international tax reform deal, which, under pillar 1, will reallocate a portion of large multinationals’ residual profits to market jurisdictions.

Pillar 2 will create a 15% global minimum corporate tax rate. But for economic reasons, Nepal wants “to bring foreign service providers into the country’s tax net” at a time when its international reserves are decreasing and its inflation is rising higher than expected, according to the IMF.

The decision feeds into a trend that we noted in the past: DSTs may be difficult to remove because countries adopted them for diverse reasons far beyond ensuring that Google, Amazon, and other digital giants pay their fair share of tax in the countries where they operate.

As we pointed out, DSTs were being eyed to address IMF loan obligations, promote individual income tax compliance, and support nascent digital economies.

The international tax world has shifted since that article was published in March 2021. At the time, the world viewed the OECD’s two-pillar package with cautious optimism: The inclusive framework was still negotiating a solution, and its members had yet to reach a political agreement.

Now the project is being viewed with cautious cynicism. Although the framework reached a political agreement in October 2021, things are shaky now that it’s unclear whether the United States will ratify the multilateral convention that will implement pillar 1, and whether the rest of the world will participate if it doesn’t.

Meanwhile, some members of the framework are hedging their bets and keeping DSTs on the table. Nonmember countries such as Nepal underscore that DSTs remain attractive options.

Shifting Goal Posts

In the lead-up to the OECD’s two-pillar package, some members of the inclusive framework said they would implement DSTs if the framework’s negotiations fell apart and the group failed to reach an initial political agreement.

Now that an agreement has been made, some countries still say DSTs remain on the table, and some have different trigger points for when that might happen.

In Canada, the government is ready to enact a 3% DST in 2024 if the pillar 1 multilateral convention isn’t operational by then.

New Zealand said in a recent consultation on whether it should adopt pillar 2 that a DST is still an option, since the framework’s political agreement was nonbinding. Arguably, that’s a different message than the one the country’s ruling Labour Party put out almost two years ago, when it said New Zealand would pursue a DST only if the OECD’s negotiations failed.

Meanwhile, in the EU, several countries have indicated that they will implement DSTs if the United States fails to adopt pillar 1, according to European Parliament member Paul Tang. Tang spoke to Tax Notes after a delegation from the EP’s subcommittee on tax matters met with U.S. lawmakers in May.

Tang also told Tax Notes that European countries didn’t prefer pillar 1 and faced pressure to either install or reinstall DSTs if the U.S. Congress fails to enact pillar 1. He noted that Italy, Spain, and Austria, which have DSTs, plan to maintain them if that happens.

In some respects, these shifts aren’t surprising, considering that the OECD has adjusted its own timelines for the two-pillar project and is delaying pillar 1’s implementation by a year, leaving some countries worried about when the package will ultimately be implemented.

But the fact that countries have different trigger points for DSTs — and the fact that those deadlines keep changing — suggests that DSTs likely will never be fully ruled out.


Nigeria, which belongs to the inclusive framework and abstained from the two-pillar deal, is trying to build a coalition of countries, particularly African ones, to consider alternative ways that market jurisdictions can tax the digital economy and expand their revenue.

In May, at an African Tax Administration Forum program, Muhammad Nami, executive chair of Nigeria’s Federal Inland Revenue Service, urged the forum to get involved with discussions at the U.N. Tax Committee and the South Centre, and work with other stakeholders on digital taxation and anti-base-erosion and profit-shifting measures.

Although Nami didn’t explicitly call for any countries to implement unilateral measures, Nigeria has its own such measure — the significant economic presence standard, which imposes a 6% tax on the turnover of nonresident companies that make over NGN 25 million (about $60,000) in annual income from providing several kinds of digital services in the country, including streaming and downloading services, online data transmission, and online intermediation services.


But the significant economic presence standard is just one part of Nigeria’s digital taxation strategy.

In June the country unveiled a new proposed regulation that could bring more digital companies into its tax net. Nigeria’s National Information Technology Development Agency (NITDA) is in charge of monitoring and evaluating the IT sector, and it wants to ensure that large companies have a physical presence in the country.

In June NITDA released a draft updated Code of Practice for Interactive Computer Service Platforms/Internet Intermediaries that would require large service platforms — platforms and intermediaries with over 100,000 users — to incorporate in Nigeria.

It says those companies must also have a physical contact address in Nigeria and make those details available online, and appoint a liaison to serve as an intermediary between the company and the Nigerian government.

The document says that noncompliance will be construed as a breach of Nigeria’s NITDA Act of 2007, and violators could face civil service disciplinary measures, prosecution, and conviction.


Kenya, which also refused to endorse the inclusive framework’s agreement, unsuccessfully tried to expand its DST this year. The tax went live in January 2021 and was an integral part of the country’s COVID-19 financial recovery. The 1.5% DST was expected to raise about $45.8 million in the first half of 2021.

Kenya’s DST applies to a list of digital content and services, including downloadable e-books, films, and mobile applications; digital content streaming; subscription-based media; electronic ticketing sales; services provided through digital marketplaces; and online distance training. There is no revenue threshold.

At the time, the government said it hoped that the DST would expand Kenya’s tax base and level the playing field between companies that provide digital services and those that provide physical services, among other goals.

Specific revenue figures for the DST have not been released, but the 2021-2022 financial year was a good one for the Kenya Revenue Authority — it expected to collect KES 1.882 trillion in revenue and ultimately collected KES 2.031 trillion. Against that backdrop, the government tried this spring to double the DST rate from 1.5% to 3% in the Finance Bill 2022.

However, Kenya faced pressure to back down from the plan, including from the OECD, which told Bloomberg that Kenya should remove its DST and sign on to the BEPS 2.0 package instead.

Kenya ultimately did scrap the increase, and the DST rate remains at 1.5%. However, its final package — the Finance Act 2022 — now exempts from the tax nonresident persons with a Kenyan permanent establishment.

That change is the latest in a series of gradual changes to the DST. When first enacted, the DST applied to residents and nonresidents alike. That scope has since been winnowed down; six months after the tax took effect, Kenya limited the measure to nonresidents, effective July 1, 2021.


Tanzania, which also does not belong to the OECD inclusive framework, plans to introduce a 2% DST on the turnover of nonresident service providers, according to Finance Minister Mwigulu Nchemba. Nchemba, who announced the measure in his June 14 budget speech for 2022-2023, said the government expects the DST will expand Tanzania’s tax base and “uphold equity principles of taxation.”

The government expects the measure will raise only TZS 4,889.35 million (about $2.1 million). But it could be an important step for raising revenue because the country recently entered a $1 billion extended credit facility loan with the IMF.

Defining DSTs

We don’t know how the OECD plans to define DSTs or what the international tax community thinks the definition should entail.

The OECD is drafting a standstill and rollback provision under pillar 1 that will require all participants to remove existing DSTs and refrain from implementing new ones. International tax stakeholders have made few public suggestions as to what that provision should look like. The Digital Economy Group is one of the few.

In February Baker McKenzie LLP sent a letter on behalf of the Digital Economy Group to Itai Grinberg, U.S. Treasury deputy assistant secretary for multilateral tax, arguing for a four-part hallmarks test.

According to the letter, the group is “an informal coalition of leading U.S. and non-U.S. companies that provide digital goods and services to global customers.”

The group is concerned that the OECD might narrowly define DSTs — and relevant similar measures — based on the characteristics of the DSTs that have already been introduced around the world.

As such, it argues that the OECD should focus on substance over name, and that the standstill and rollback provision should apply much more broadly to unilateral measures that act as discriminatory taxes on digital services, even if they aren’t explicitly labeled as a tax or DST.

The hallmarks test, according to the letter, is based on a previous presentation by the U.S. Treasury to the OECD inclusive framework. Under the proposed test, a DST or relevant similar measure would be defined as any tax that meets one of the four hallmarks and whose ultimate effect is to tax a taxpayer’s gross or net income.

The first hallmark would look at the design or effect of the measure. A measure that exclusively or principally applies to the business sector of digital services suppliers would meet this hallmark.

“Design or effect can be demonstrated by a scope definition, revenue threshold, or other element that focuses the impact of the tax on certain industry sectors or taxpayers identified principally by their business model features,” the letter says.

The second hallmark focuses on whether a measure is outside the scope of most of the jurisdiction’s bilateral tax treaties.

“This hallmark exists if the Party considers the tax to not fall within the definition of ‘Covered Taxes’ as used in Article 2 of the OECD Model Tax Convention on Income and on Capital (2017) or the equivalent provision of the Party’s bilateral tax treaties,” according to the letter. It adds that tax measures enacted through statutes outside the jurisdiction’s income tax law would meet the second hallmark if they tax the gross or net income of the taxpayer.

The third hallmark would consider whether the measure creates an alternative nexus standard that deviates from the nexus standard set forth in article 5 of the OECD model income tax treaty.

“This includes measures that depart from principles of nexus based on personnel, assets, or agent activity located in the taxing state, such as measures that take into account as a significant factor the location of customers, users, or any other similar destination-based criterion,” the letter says.

The final hallmark would evaluate measures based on their definition of source or nexus. Measures that define either of those by referencing income derived from the provision of digital services and apply a tax to the gross receipts of nonresident taxpayers would meet this hallmark.

Notably, the four hallmarks would not be weighted equally, as the evaluation would look at the entirety and effect of a measure.

It is an interesting test that could apply broadly and catch a wide variety of taxes, particularly if measures need to meet only one hallmark to violate pillar 1. For example, cultural contribution levies on streaming service providers such as Netflix have been introduced across Europe under the EU audiovisual and media services directive and would seemingly fall under the first hallmark.

An EU official told Tax Notes that the measures aren’t DSTs because their revenue is not directed into member states’ budgets, but the Digital Economy Group thinks otherwise. The group’s letter urges negotiators to carefully scrutinize the measures, which it calls “disguised forms of taxes.”

“Levies imposed under the [audiovisual media services directive] are imposed on gross revenue, which causes that levy to have the same financial impact as a DST. We believe that such a measure should not be disregarded merely because it is labeled as a ‘cultural levy,’” the letter says.


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