Taxing Profit and Consumption in Market Jurisdictions: Equity and Administrability in the Digital Era

Abstract

Against the backdrop of a digitalized economy and a multitude of digital business models, policymakers from around the world are seeking consensus concerning an appropriate allocation of taxing rights. While there is widespread acceptance that consumption taxes should be levied in market jurisdictions, this is not yet the case in corporate income taxation. In an effort to counteract base erosion and profit shifting and more generally, reduce tax avoidance opportunities, the international community is now working to advance the ‘destination principle’ in a broader context. The notion of taxing profit and consumption in market jurisdictions can further equity among states. However, taxation in market jurisdictions can be afflicted with considerable tax compliance and enforcement difficulties, which can lead to inequitable results among taxpayers. To effectively tax digital business models in market jurisdictions, innovative approaches in substantive tax law and tax enforcement are needed. As the authors argue in this paper, proxies can be useful regulatory tools to ensure administrability of a destination-based tax system. In this context, however, policymakers must strike a balance between administrability and equity. The common system of value added tax (VAT) in the European Union (EU) has utilized various proxies and structural enforcement mechanisms to simplify tax compliance and enforcement in the digital context for years. In the authors’ view, they enhance effectiveness of the tax system without renouncing tax equity and have set an example for novel regulatory approaches currently under debate for corporate income taxation.

Keywords: VAT, Digital Platforms, International Taxation, Corporate Income Taxation, Destination Principle, Digital Taxes, Pillar One, Statutory Presumptions and Proxies