Value Creation and Income Taxation: A Coherent Framework for Reform?

Digitalization of the global economy has forced a rethink of the allocation of taxing rights along the lines of “value creation”. The current international tax system relies on a vast network of double taxation conventions (DTCs) intended to allocate taxing rights between states and avoid double taxation. However, the system’s logic is rooted in the early 20th century and not fit- ting the modern global economy – particularly in so far as it presupposes a threshold physical presence in form of a “permanent establishment” (PE) to permit taxation in the state of source. Today, the traditional thresholds for giving taxing rights to “states of source” hardly reflect the reality of business activity that strongly relies on intangible assets and the provision of remote services, which are not easy to pin down at any particular place. Calls for fundamental changes crystalized in the OECD and G20 initiated BEPS Project launched in 2013 to reform the international tax system with one overall objective: To “ensure that profits are taxed where economic activities take place and value is created.” Yet despite virtual unanimity on that objective, and great number of measures already taken purportedly contributing to it, there is no clarity on its actual meaning. This contribution seeks to shed light on a potential meaning of "value creation" as it relates to (international) income taxation, employing a cross-disciplinary perspective.