This paper examines how the rapid expansion of the digital economy is reshaping the tax landscape of low- and lower-middle-income countries. Combining new firm-level data from 23 developing countries with case studies of platform taxation, cross-border cloud services, and crypto-asset adoption, we show that digitalisation is eroding traditional tax bases faster than it is creating traceable new ones.

Key findings:

While global digital giants now capture a growing share of consumer surplus, the taxable profits formally booked in poor countries remain below 3% of their sales. At the same time, domestic micro- and small enterprises are migrating to online marketplaces where information trails are fragmented and tax morale is low. We estimate that the net revenue loss from these shifts already equals 0.4–0.7% of GDP in the median low-income country—two to three times the annual budget of their health ministries.

Three-pillar reform agenda:

To reverse this trajectory, the paper proposes a three-pillar reform agenda tailored to administrative realities in poor countries:

(i) Low-cost digital withholding regimes that leverage mobile-money rails and platform remittance obligations;

(ii) Regionally coordinated minimum taxes on outbound digital services, designed to be compatible with both the OECD Pillar One blueprint and the African Tax Administration Forum (ATAF) Model Legislation; and

(iii) Rapid-deployment e-invoicing and third-party reporting protocols that exploit the near-universal penetration of smartphones and national IDs.

Simulations:

Simulations suggest that these measures could raise additional revenues of 0.8% of GDP within five years without increasing statutory tax rates on labour or traditional capital.

Governance compact:

The paper concludes by outlining a governance compact in which donor agencies, regional tax organisations, and global platforms share the fixed costs of these new systems, while local tax authorities retain control over audit selection and dispute resolution. By embedding simplicity, interoperability, and political legitimacy at the design stage, poor countries can convert the digital transition from a fiscal threat into a durable source of inclusive tax capacity.