Global Tax Compliance Challenges in the Digital Economy: Legal and Regulatory Perspectives

Digital Economy Taxation, BEPS, OECD Two-Pillar Solution, Digital Services Tax, Economic Nexus, Global Minimum Tax, Permanent Establishment, International Tax Law.

The digitalization of economic activity has fundamentally destabilized the century-old international tax framework built on the concepts of physical presence and permanent establishment, enabling multinational digital enterprises to generate substantial revenue within a jurisdiction while maintaining little or no taxable nexus there under traditional rules. This paper examines the legal and regulatory response to this challenge, tracing its evolution from the OECD's 2015 Base Erosion and Profit Shifting (BEPS) Action 1 report through the 2021 Two-Pillar Solution negotiated within the OECD/G20 Inclusive Framework, comprising Pillar One's reallocation of taxing rights over a portion of large multinationals' profits to market jurisdictions and Pillar Two's 15% global minimum corporate tax implemented through the Global Anti-Base Erosion (GloBE) Model Rules. The review further examines the European Union's unilateral Digital Services Tax proposals, the fragmented landscape of unilateral digital services taxes subsequently adopted by individual states, and the parallel domestic doctrinal shift illustrated by the United States Supreme Court's 2018 decision in South Dakota v. Wayfair, Inc., which replaced the physical-presence nexus standard with an economic-nexus standard for state sales tax purposes. A comparative legal methodology is employed, analyzing primary regulatory instruments, judicial doctrine, and comparative national implementation alongside compliance-cost and revenue-impact evidence reported by international bodies and professional services literature. Reported findings indicate that while the Two-Pillar framework has achieved unprecedented multilateral consensus, with over 135 jurisdictions party to the 2021 agreement and Pillar Two rules now in force in more than 50 jurisdictions as of early 2025, its implementation remains materially destabilized by the United States' January 2025 withdrawal from the Pillar One negotiations and the EU's consequent consideration of reviving its unilateral Digital Services Tax, illustrating that the underlying jurisdictional conflict BEPS Action 1 first identified in 2015 remains legally and politically unresolved a decade later. The paper concludes by discussing compliance-cost implications for multinational enterprises, unresolved double-taxation risk from overlapping unilateral and multilateral regimes, and the prospects for durable international tax coordination in the digital economy.