TAXATION IN ERA OF GLOBALIZATION AND DIGITALIZATION Issues and Challenges on National Tax Sovereignty

Abstract

For many years globalization and digitalization resulted in the internationalization of the world
economy creating a number of possibilities for taxpayers, mainly legal entities. In such
circumstances, companies have managed to incorporate a network of permanent establishments
worldwide, while countries have benefited from the transfer of goods, services, assets, human
capital, knowledge and technological innovations.
For more than two decades this was perceived as a "win-win" situation, until multinational
companies have become more inventive in finding methods to maximize profits, on one hand,
and minimize taxes, on the other hand. Therefore, globalization and digitalization, differences in
tax systems and territorial limitation of national tax sovereignty, have reshaped the international
tax landscape. As a result, countries have been facing disrupted market fair play rules, the
unreasonable competitive advantage of certain companies, distortion of tax systems and, perhaps
most importantly, significant tax revenue losses.
International organizations, such as OECD, EU and G20, have recognized the necessity for a
systematic approach to efficiently fight tax avoidance, aggressive tax planning, transfer pricing
and thin capitalization, to improve the coherence of international tax rules and ensure a more
transparent tax environment. Currently, more than 135 tax jurisdictions are collaborating, by
implementing the proposed measures and minimum standards in their national tax legislation, to
at least reduce to the lowest possible level all the strategies that represent harmful tax practices,
base erosion, and profit shifting to countries with more favourable tax systems, tax treaty abuse,
and exploiting gaps and mismatches in tax rules to avoid paying taxes in the country where the
economic activity is performed and where the profit is generated.
Implementation and transplantation of such actions into the national legislation require political
will and governmental determination to be a serious partner in the international combat against
tax evasion and tax avoidance. As a consequence, this seriously challenges and affects the
national tax sovereignty and states` rights to tax.