The tax system is based on the principle of the source

Abstract

The free movement of capital, goods, services and workers between countries creates new challenges for national tax systems. The problem is complicated by the growing importance of intra-firm cross-border trade and complex production chains, the growing contribution to added value of hard-to-assess and easily mobile intangible assets, as well as the growing digitalization of the economy. The interaction of national legislation, international norms and bilateral treaties has formed a very complex international tax architecture. This makes it necessary to distinguish between the countries of origin, residence and destination. The paper analyzes the problems of building a tax system based on the source principle, defines the criteria for identifying the source of income, which is equated with added value, which is determined by the sum of factor incomes – wages and profits. The transition to the application of the balance sheet method of calculating added value automatically identifies the source of income by the place of payment of wages and receipt of profit. The country in which the added value is created clearly determines the place where this value should be taxed. The place of taxation of added value and its components does not depend on the composition and origin of capital, the use of intangible assets, the ownership of shares and any components. All these features of capital must be used in the distribution of the remaining profit after paying all taxes, contributions and fees provided by the law of the source country. Due to the uncertainty of the concept of “resident” and the possibility of residence in many jurisdictions at the same time, the principle of taxation of distributed profits (dividends) based on residence should be replaced by the principle of citizenship. The application of the proposed changes to the Tax Code of Ukraine makes it impossible to transfer profits.