Tax's Digital Labor Dilemma

Abstract

Digitalization has reshaped the relationship between companies and their customers and users. Customers and users increasingly serve a dual role. They are not only consumers but also producers, creating content and data. They are a value-creating workforce, functioning as “digital laborers.” Under the current U.S. international tax system, the presence of digital laborers in a country does not grant that country taxing rights over income stemming directly from those digital laborers’ content and data creation. As a result, what are essentially the same business activities—workforces creating products and performing services for a company—are taxed differently when they are performed by digital laborers rather than a traditional workforce. This inconsistency and the accompanying outcome that countries cannot tax corporate income arising from extensive business activities within their borders has led to cries that the current system is unfair. Recent reforms addressing this outcome, including digital services taxes and proposals granting taxing authority over residual profits to market jurisdictions, most notably the OECD Pillar One Blueprint, share a common weakness. They do not recognize the function of digital laborers as producers in the modern economy. As a result, they overturn the theory of source-based taxation as a taxing right granted to the country of production, not the country of consumption, as well as introduce major structural changes to the international tax system—all to correct an unfairness that can be remedied under the system’s current theoretical framework and structure. This Article rejects the notion that these major theoretical and structural changes are necessary or even an appropriate method to allow digital laborers’ home countries to tax income directly related to their work. Instead, the international tax system should recognize digital laborers’ role as a new type of workforce for companies and, accordingly, allow their home countries to tax income related to their work under the existing application of the source principle and with more incremental structural reforms. In addition to minimizing disruption in international tax law, this approach brings a return of coherence and a sense of fairness by taxing equivalent economic activities equivalently.