Submission on the Proposed 'Unified Approach' to Pillar One

16 Pages Posted: 24 Jan 2020

See all articles by Craig Elliffe

Craig Elliffe

University of Auckland - Faculty of Law

Date Written: November 12, 2019


As a matter of policy, there is a sound theoretical basis (namely the benefits theory) which justifies source taxation when non-residents conduct business with consumers in the market jurisdiction.

This justification has long been recognised from the earliest days of tax theories but more recently in the 1923 Report, the early work from the League of Nations and more recent work in the OECD (paragraphs 3-6 of the submission).

This policy-based conclusion can be extended logically to the digital age with equal force and evidence of this is found in a recent decision of the US Supreme Court (paragraph 7-14 of the submission).

The current international tax settings were an historical compromise (the 1920s compromise). There is no reason, apart from certainty and history, not to revisit these original settings if certain assumptions (for example, that there will be sufficient a quantity of properly rewarded intermediate entities located in the source jurisdiction) no longer exist (paragraphs 15-18).

The current international tax settings did not largely allocate profits to the market, but only to factors of production located in the residence jurisdiction. This can be viewed as part of the historical 1920s compromise and whilst pragmatic and convenient it is difficult to justify this from a theoretical perspective. Accordingly, a new compromise could sensibly allocate profits to the market and, with appropriate safeguards to ensure genuine economic activity, not require a physical presence in the marketplace to establish a taxing right (paragraphs 19-24).

The increasing ability, efficiency, competitive advantage, and profitability of digitalised businesses result in substantial consumer-orientated businesses being able to trade remotely. As a result of the current international tax settings, the consequence of this dis-intermediation (the removal of a tax-paying intermediary) means a substantial erosion to sourced base corporate income tax (paragraphs 25-26).

From a policy perspective, the conclusions reached above support the approach (or something along similar lines) taken by the OECD Secretariat in their Proposal.

Keywords: OECD, Pillar 1, justification for tax, international tax, benefits theory, source taxation

JEL Classification: K33, K34

Suggested Citation

Elliffe, Craig Macfarlane, Submission on the Proposed 'Unified Approach' to Pillar One (November 12, 2019). Available at SSRN: or

Craig Macfarlane Elliffe (Contact Author)

University of Auckland - Faculty of Law ( email )

Private Bag 92019
Auckland Mail Centre
Auckland, 1142
New Zealand

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