Tax challenges in the digital era

The advent of the digital economy has boosted productivity through greater efficiency in production processes and information exchanges. Despite its promise, digital economy is posing many tax challenges due to the high mobility of capital and taxpayers and the numerous cross-border transactions. Although several international initiatives have been proposed, clear tax regulation is yet to be defined. This uncertainty has encouraged aggressive tax planning mechanisms (e.g., base erosion and profit shifting), generating distorting effects on the market, which have favored multinationals while putting a greater tax burden on small- and medium-sized enterprises. After an overview of the main tax challenges in the digital era, this study discusses some key - yet underexplored - determinants of aggressive tax planning by reviewing selective contributions in the economics literature. This study offers both policy insights for taxation of the digital economy and directions for future, mostly empirical and experimental research.