Reclaiming tax sovereignty: a critical analysis of the OECD marginalization of developing countries and justifying unilateral tax measures amid retaliatory trade risks

Abstract

The rapid growth of the digital economy has caused serious gaps in international tax frameworks, with digital multinational corporations (MNCs) who are based in developed countries deriving colossal profits in market jurisdictions without a physical presence. The Organization for Economic Cooperation and Development (OECD) has been in the front line to offer guidelines for the taxation of the digital economy. However, these guidelines have been criticized for their developed-country bias and inadequate consideration of developing countries’ needs. To assert their tax sovereignty, developing countries are slowly employing independent unilateral tax measures such as the digital service tax (DST) and significant economic presence (SEP) to secure revenues from the digital economy. However, this has been confronted with concerns over possible trade retaliation measures by developed countries that might perceive such measures as discriminatory to their MNCs. Consequently, the trade retaliatory measures are seen as a ploy to force countries into making trade-offs for their tax sovereignty in return for favorable trade relations, eroding their tax autonomy to create tax policies that reflect their needs. This study critically examines how each update of the OECD initiatives falls short for developing countries and goes ahead to examine the influence of corporate lobbying in shaping the OECD’s initiatives with a specific focus on the inconsistent application of the OECD’s lobbying recommendations, the concept of revolving doors and the OECD’s role as a market-liberal think tank. Furthermore, the study explores the intersection of tax sovereignty and trade obligations by examining Kenya’s DST and proposed SEP to draw out inequities and practical barriers such as retaliatory actions from the current framework. The study employs both primary and secondary sources to analyze the OECD framework. As a way forward, the study recommends reforms to ensure an inclusive and equitable global tax framework.

Keywords: Digital Economy, Lobbying, Multinational Companies, Tax Sovereignty, Unilateral Tax Measures, Trade Retaliatory Measures, Kenya, Taxation Framework, Developing Countries, Developed Countries.