Re-Allocation of Taxing Rights for Big Data Business Models

Abstract

The ongoing digitalisation of the economy challenges the international tax system. Specifically, the current rules of source taxation do not fully reflect the paradigm of taxing where value is created. In digital business models, firms often do not need a physical presence to be economically active in a given jurisdiction and, thus, avoid being taxable in this jurisdiction. In this paper, we make three distinct contributions. First, we review all major digital trends and business models for their scope to create value in a given jurisdiction without a physical presence there. Second, we present a concept that integrates non-physical value creation into the current system. The concept is based on sustained user relationships (SURE) that may be operated from abroad and exploited for data collection, advertising and platform services. Third, we discuss the operational aspects of implementing the concept, both in economic and legal terms: nexus rules and profit allocation rules. We conclude that that SURE concept may have important advantages over its main alternatives: Other than proposals based on digital user contributions, it does not require ring-fencing of a small segment of the digital economy. And in contrast to the concept of “marketing intangibles” (and more radical concepts like DBCFT or CCCTB), it does not advocate a general shift towards taxation in the market jurisdiction, which is difficult to justify under the logic of the current system of source taxation.