Challenges of the Emerging International Tax Consensus for Low- and Middle-Income Countries

Abstract

Abstract This chapter discusses the challenges of the emerging international tax consensus for low- and middle-income countries. It is undeniable that low- and middle-income countries are usually identified as source countries, and their international tax policies and treaties are based on the twentieth-century division of taxing rights between source and residence states. This traditional dichotomy recognized that source countries could obtain their ‘fair share’ in the international business income tax pie by taxing a multinational enterprise’s (MNE) physical presence within their territorial borders. This consensus is still reflected in the treaty and domestic definitions of permanent establishment (PE) in most low- and middle-income countries, which rely on the presence of physical infrastructure or a personal agent in order to trigger PE taxation. As a result of the reduced requirements for physical presence and permanence offered by technology for the significant economic activities that an MNE may perform in any given market, the scope of PE taxation in source countries has shrunk significantly. Given this situation, it is in the interest of low- and middle-income countries to actively devise a solution to the tensions that are threatening to reduce their share in an already precarious consensus on the distribution of taxing rights.