Justifying Source Taxation in the Digital Age

(2021) 53(3) VUWLR

24 Pages Posted: 30 Apr 2021 Last revised: 9 Sep 2021

See all articles by Craig Elliffe

Craig Elliffe

University of Auckland - Faculty of Law

Date Written: April 25, 2021


This article attempts to establish a justification for the taxation of income earned by highly digitalised businesses in the source or market jurisdiction. The article explains why this theoretical question is such an important issue in international tax. The proposition put forward in this article is that the concept of value creation is a further development of the benefit theory, justifying (as in showing the reason for, or fairness of) source taxation but doing no more. In other words, if some value is generated for a non-resident enterprise in a market jurisdiction, it is because that enterprise is utilising some of the benefits provided by that source/market jurisdiction to create that value due to factors of demand rather than factors of supply. The benefits in this market jurisdiction arise because of technology infrastructure, legal systems which sustain contractual obligations and permit enforcement of debts, as well as a variety of other benefits discussed above. What seems clear is that the hard questions relating to attributing profits to activities carried on in a jurisdiction or any of the other questions relating to quantification and apportionment of such income are not answered by such a concept.

In the 1920s the allocation of taxing rights was a negotiated compromise. The 2020s compromise can justifiably settle on the right of the source jurisdiction to impose taxation with its justification based on the benefit principle.

Keywords: justification for tax, international tax, benefit theory, value creation, digital tax, 1920a compromise

JEL Classification: H20, H87, K33, K34

Suggested Citation

Elliffe, Craig Macfarlane, Justifying Source Taxation in the Digital Age (April 25, 2021). (2021) 53(3) VUWLR, Available at SSRN: https://ssrn.com/abstract=3833990

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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