International Taxation of Global Value Networks

Among the main challenges of the digitalized and globalized economy that have made the current international tax architecture for taxation of business profits obsolete is the ability of multinationals to achieve cross-jurisdictional scale without physical mass in the host state. The recent OECD and UN responses to this challenge, the OECD’s Pillar One proposal and article 12B of the UN Model, aimed at “fixing” the system. Yet, so far, neither of these solutions has gained sufficient support to be enforced globally.

One of the reasons for this is that, currently, tax policy discussions are dominated by narrow-scope topics like the inadequacy of the physical permanent establishment concept or the role of the consumer market in profit generation for multinationals. Constructive changes in the forms of global business governance of today’s most successful multinationals are not in scope. These changes include novel modes of internationalization, the ability to employ labour in source countries non-conventionally, such as using platform labour and controlling its performance through algorithms and using intellectual property as a market entry barrier and a monopolization strategy.

In this contribution, the author seeks to understand the business configurations and modes of governance of scale-without-mass businesses. How can multinationals achieve scale without mass, and so economically control resources, people and assets, without legally employing or owning them?

Multinationals can achieve cross-jurisdictional scale without mass by relying on new ways of expanding business abroad through non-equity forms of internationalization, mainly facilitated by intellectual property and technology solutions. Non-equity modes are a newly predominant form of the global organization of multinational enterprises which do not demand that businesses maintain a physical presence in the source state. Yet the lack of a physical presence does not mean that a multinational requires no substance in the host state to carry on business there. A multinational’s economic boundaries are much broader than its legal boundaries: they are defined by the substance of the business assets that are under its control.

This book questions how international tax law can address non-equity modes of internationalization, including the rationale of allocating business profit of scale-without-mass multinational enterprises to the host country, as well as the effectiveness of the arm’s length principle-based profit allocation rules, the OECD’s Pillar One, article 12B of the UN Model and cash flow taxes to deal with the relevant challenges.

This book received an honourable mention for the Mitchell B. Carroll Prize 2022

https://www.ifa.nl/research-awards/mitchell-b-carroll-prize

This contribution questions how international tax law can address the allocation of the business profits of scale-without-mass multinational enterprises to the host country and includes analyses of the effectiveness of the arm’s length principle-based system, the OECD’s Pillar One, article 12B of the UN Model and cash flow taxes.