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Leading Change in a Complex Wo ld: T ansdisciplina y Pe spec i es
In e na ional Taxa ion and he Complex Case o Digi alisa ion
CHAPTER 6
In e na ional Taxa ion and he
Complex Case o Digi alisa ion
MARTTI NIEMINEN
Takeaways o Leading Change
When he e is a change so undamen al as digi alisa ion, no pa o socie y
is le una ec ed. The ansi ion om he b ick and mo a economy o he
digi al economy has d ama ically ans o med he se ing o in e na ional
business axa ion and basic p inciples o he in e na ional ax sys em ha e
become ou da ed. This chap e demons a es how digi alisa ion and he
ans o ma ion o he global economy a ec in e na ional axa ion and
discusses how o es o e he in eg i y o he in e na ional ax sys em. I also
a gues ha managing complex and sys emic changes equi es unde s anding
a mul iplici y o ields and leade ship beyond ins i u ional bounda ies. This
kind o leade ship is now mo e necessa y han e e due o he inc eased
complexi y o he global economy and di e gen in e es s o key playe s.
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Leading Change in a Complex Wo ld: T ansdisciplina y Pe spec i es
In e na ional Taxa ion and he Complex Case o Digi alisa ion
T
he Leade ship o Change (LFC) app oach is comp ised o h ee
co e elemen s: a complex wo ld, ela ional leade ship and dynamic
change. Complexi y is he ea u e o he app oach ha bes desc ibes
he phenomenon discussed in his chap e – he e ec s o digi alisa ion
on he in e na ional ax sys em. The in e na ional
ax sys em is a mul idimensional s uc u e which
combines a ious ields o socie y and discipline:
law, business, poli ics and economics. The ongoing
ans o ma ion o he in e na ional ax sys em is
also a p ime example o a change p ocess whe e
leade ship is a om clea . The challenges caused
by digi alisa ion o in e na ional ax egula ion
canno be esol ed by any single ac o bu equi e
wide- anging solu ions and coope a ion. A he
same ime, he ans o ma ion o he in e na ional
ax sys em in he digi al age is nei he linea no
easily p edic able.
F om he pe spec i e o in e na ional axa ion,
he key ea u e o he global mega end o
digi alisa ion is ha economic ac i i y no longe
equi es a physical p esence. This aspec o he
in o ma ion and communica ion echnology (ICT)
d i en mode n economy e odes he undamen al
concep s o in e na ional ax law ha de e mine
which coun y has he ju isdic ion o ax c oss-bo de business income.
The esul has been he widesp ead phenomenon o in e na ional double
non- axa ion o mul ina ional en e p ises. This is a p essing global conce n
in e ms o inancing public expenses, compe i ion neu ali y, incen i es
o economic ac i i y and ai ness.
This chap e demons a es how digi alisa ion and he subsequen
ans o ma ion o he global economy a ec s in e na ional axa ion and
discusses how o es o e he in eg i y o he in e na ional ax sys em.
We begin by looking back o he ea ly 1900s, when ano he ansi ion
in echnology and he economy led o a undamen al e-e alua ion o he
basic p inciples o in e na ional axa ion.
This chap e
demons a es how
digi alisa ion and
he subsequen
ans o ma ion o
he global economy
a ec s in e na ional
axa ion and
discusses how o
es o e he in eg i y
o he in e na ional
ax sys em.
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Leading Change in a Complex Wo ld: T ansdisciplina y Pe spec i es
In e na ional Taxa ion and he Complex Case o Digi alisa ion
Key P inciples o In e na ional Business Taxa ion
In ea ly 1900s indus ialisa ion, powe ed by e olu iona y echnological
inno a ions such as he in e nal combus ion engine, mode n powe g id
and he assembly line, was well unde way. Mo e and mo e capi al, including
an inc easing numbe o labou , was in es ed in indus ial manu ac u ing.
The s uc u e o socie y was beginning o change om ag a ian o
indus ial. Consume p oduc s and indus ial goods we e now beginning
o be mass-p oduced. I became necessa y, and inc easingly possible due
o he ad ances in anspo a ion and communica ion echnologies, o
manu ac u e s o look ab oad o new oppo uni ies o g ow h.
One o he po en ial majo obs acles o he eme ging expansion o c oss-
bo de ade was he awkwa d and ou da ed cons uc ion o he in e na ional
ax sys em. Each coun y had i s own ules on who and wha o ax. This
o en esul ed in o e lapping and simul aneous axing claims o wo o mo e
s a es (Gadžo, 2018, p. 203–209). The basic se ing was as ollows:
The axing claim o S a e A was based on i s unde s anding ha he
whole exis ence and ope a ions o Company X we e ul ima ely made
possible by he public goods (physical and legal in as uc u e, educa ed
and heal hy wo k o ce, e c.) p o ided by S a e A. S a e B based i s axing
claim on a somewha simila idea ha he money used o buying he
p oduc s om Company X was gene a ed by he esou ces p o ided by
S a e B. O , i may be ha bo h s a es simply needed he ax e enue.
F om a legal pe spec i e, he e is li le di e ence why a s a e looks o
ax ce ain income. Unde in e na ional law s a es ha e ull disc e ion o
decide wha hey wan o ax as long as he e is a easonable connec ion
be ween he s a e and he income o be ween he s a e and he income
ecipien (Gadžo, 2018; Ma ha, 1989).
This p oblem o in e na ional double axa ion despe a ely needed o be
esol ed o acili a e he expansion o in e na ional ade. The di icul y
was ha no s a e was unila e ally willing o gi e up i s axing claim in
a ou o o he s a es. In e na ional co-ope a ion was equi ed. The body
o ake up he ask was he League o Na ions – he p edecesso o he
Uni ed Na ions. I s Economic and Financial Commission on 5 Ap il 1923
eleased a pionee ing epo on double axa ion. The epo laid down he
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Leading Change in a Complex Wo ld: T ansdisciplina y Pe spec i es
In e na ional Taxa ion and he Complex Case o Digi alisa ion
basic s uc u e o he in e na ional income ax sys em as i exis s oday,
almos a cen u y la e (League o Na ions, 1923; De e eux & Vella, 2014;
Whi ake , 2016; De Melo Rigoni, 2017).
In he epo , he wo basic p inciples o c oss-bo de business axa ion
we e es ablished: he esidence s a e p inciple and he sou ce s a e p inciple.
These p inciples mean ha bo h he so-called esidence s a e (S a e A in
he abo e example) and he so-called sou ce s a e (S a e B in he abo e
example) ha e, as a ule, he igh o ax income gene a ed by c oss-bo de
business ope a ions. The esidence s a e has wo ldwide o unlimi ed ax
FIGURE 1. Company X made lea he bags (hand bags and sui cases). S a e A was he
“home” s a e o he company whe e i was ounded, egis e ed, managed and whe e he
manu ac u ing o i s p oduc s ook place. Company X also owned he adema k ha
dis inguished i s p oduc s om o he simila p oduc s. S a e B was he “ a ge ” s a e whe e
he company looked o expand o sell i s p oduc s o local consume s. Company X had
in S a e B a e ail s o e whe e i displayed and sold he lea he bags made in S a e A. The
p oblem o Company X was ha he income i ecei ed om selling lea he bags in S a e
B was axable bo h in S a e A and S a e B unde he domes ic ax law ules o hese s a es.
In o he wo ds, he company was axed wice. In s a e B i would ha e paid a 30 pe cen
co po a e income ax (CIT) and in S a e A 35 pe cen CIT. O i s ne p o i he company
would he e o e ha e paid a o al o 65 pe cen income axes. This would ha dly encou age
Company X o expand in e na ionally.
S a e A Company X
Re ail s o e
S a e B
CIT 30%
CIT 35%
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Leading Change in a Complex Wo ld: T ansdisciplina y Pe spec i es
In e na ional Taxa ion and he Complex Case o Digi alisa ion
ju isdic ion, meaning i may ax any income ega dless o whe e i o igina es.
The sou ce s a e has a e i o ial o limi ed ax ju isdic ion unde which i
may ax business income ecei ed om i s e i o y.
Howe e , he sou ce s a e can ax c oss-bo de business income only
when he o eign company has a so-called pe manen es ablishmen (PE) in
i s e i o y and o he ex en he income is gene a ed by he ope a ions
o ha pe manen es ablishmen . Wha is impo an o unde s and
abou his legal concep is ha , in gene al, he e canno be a pe manen
es ablishmen wi hou some le el o physical p esence; o example, a
ac o y, s o e, o ice o wa ehouse. G asping his ea u e o he pe manen
es ablishmen concep is essen ial in unde s anding he cu en challenges
o he in e na ional ax sys em.
F om he pe spec i e o he esidence s a e’s axing powe s he
impo ance o he exis ence o a pe manen es ablishmen is no , in
p inciple, as signi ican as i is o he sou ce s a e. The esidence s a e has
unde i s wo ldwide ax ju isdic ion he igh o ax c oss-bo de income
anyway. Howe e , in p ac ice, whe he he e is a pe manen es ablishmen
o no in he sou ce s a e is also impo an o he esidence s a e. I he e
is a pe manen es ablishmen he esidence s a e is usually able o ax only
“wha is le ” a e he axa ion in he s a e o sou ce due o i s obliga ion
o c edi he axes paid in he sou ce s a e (c edi me hod). Al e na i ely,
he esidence s a e may be obliga ed o exemp o eign sou ced income
al oge he (exemp ion me hod).
Following he p inciples se in he 1923 League o Na ions epo , in
ou example scena io he axing igh s be ween S a e A and S a e B a e
alloca ed as ollows:
By alloca ing he axing igh s o business p o i s be ween he sou ce
s a e and he esidence s a e, o e lapping axing claims o he wo s a es
we e e ec i ely a oided, in e na ional double axa ion was elimina ed
and he mos impo an ax- ela ed obs acle o in e na ional ade was
emo ed. In he ollowing decades, mo e and mo e s a es adop ed he
p inciples laid down by he League o Na ions epo by concluding
bila e al ax ea ies wi h o he s a es. These ax ea ies we e based on
he Model Tax Con en ion o he O ganisa ion o Eu opean Economic
Co-ope a ion (OEEC) ha la e became he O ganisa ion o Economic

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Leading Change in a Complex Wo ld: T ansdisciplina y Pe spec i es
In e na ional Taxa ion and he Complex Case o Digi alisa ion
Co-ope a ion and De elopmen (OECD). By he 1950s he OECD had
a leading ole in managing he de elopmen o he in e na ional ax
sys em (OECD, 1963).
In summa y, he in e na ional business ax sys em wo ked easonably
well h ough he wen ie h cen u y because he expansion o business o
o he s a es usually equi ed some kind o physical p esence. This ensu ed
he axing igh s o he sou ce s a e h ough he concep o pe manen
es ablishmen . A he same ime he key unc ions and he wo ldwide
ax liabili y emained in he company’s esidence s a e. C oss-bo de
business income was axable ei he in he sou ce s a e o in he esidence
FIGURE 2. Because Company X has physical p esence ( e ail s o e) in S a e B, he e is a
pe manen es ablishmen o company X in S a e B. Acco dingly, S a e B has he ju isdic ion
o ax he business p o i s o Company X o he ex en hey a e connec ed o ha pe manen
es ablishmen . S a e A as he esidence s a e also has he igh o ax he business income
Company X ecei es om S a e B. Howe e , S a e A is obliga ed o c edi he axes paid
in S a e B. This e ec i ely means S a e A can only ax 5 pe cen o he income ecei ed by
Company X om S a e B. O i s ne p o i Company X would he e o e ha e o pay a o al
o 35 pe cen income axes. This is much mo e encou aging o Company X compa ed o
he 65 pe cen desc ibed in Figu e 1.
Company XS a e A
PE
S a e B
Sou ce s a e
CIT 30%
Residence s a e
CIT 35% – 30% = 5%
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Leading Change in a Complex Wo ld: T ansdisciplina y Pe spec i es
In e na ional Taxa ion and he Complex Case o Digi alisa ion
s a e o in bo h s a es, in which case ax ea ies ensu ed in e na ional
double axa ion was e ec i ely elimina ed.
Digi alisa ion E oding he Taxable Base
In ecen yea s, he e m digi al economy has eme ged in he language
o in e na ional axa ion. The digi al economy is an o e a ching concep
e e ing o he en i e mode n economic sys em. I desc ibes a wide
ange o ac i i ies, om buying a ain icke online o he wo ldwide
ope a ions o a mul ina ional echnology company (OECD, 2015). F om
he pe spec i e o in e na ional axa ion, he main ea u e o he digi al
economy is ha economic ac i i y no longe equi es physical p esence,
he phenomenon o “scale wi hou mass” (OECD, 2018a). This is impo an
because wi hou physical p esence no pe manen es ablishmen is c ea ed
in he sou ce s a e. This means he sou ce s a e has no axing igh o e he
business income ecei ed by a non- esiden company. Figu e 3 illus a es
he e ec o digi alisa ion.
This example demons a es how he undamen al concep o in e na ional
business axa ion, he pe manen es ablishmen , and by ex ension he en i e
sou ce s a e p inciple, is comp omised in he digi al wo ld. The absence
o axable p esence in he sou ce s a e has become an all-encompassing
issue as mo e and mo e goods and se ices can be deli e ed o cus ome s
(consume s o o he businesses) in o he s a es wi hou a physical p esence.
Sou ce s a es in many cases no longe ha e he ju isdic ion o ax ou bound
business income. This is p oblema ic in wo ways.
Fi s , and mos ob iously, he sou ce s a e loses ax e enue. Fo
example, when a Finnish company buys ad e ising se ices om Google,
he paymen s o hose se ices go un axed in Finland. F om he Finnish
pe spec i e ax e enue “leaks” ab oad. This, o cou se, is a conce n o
he inancing o public expenses in Finland.
Second, no ha ing o pay axes in he sou ce s a e easily esul s in no
being axed a all. The phenomenon e e ed o as in e na ional double non-
axa ion e e s o a case whe e a mul ina ional co po a ion is no axed
o i s p o i s by any s a e o is axed wi h a e y low e ec i e ax a e.
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Leading Change in a Complex Wo ld: T ansdisciplina y Pe spec i es
In e na ional Taxa ion and he Complex Case o Digi alisa ion
This occu s because he esidence s a e p inciple is also being e oded as
will be discussed below.
The main p oblem wi h in e na ional double non- axa ion is ha i
dis o s compe i ion neu ali y be ween global and local o “big” and
“small” businesses. I he e ec i e ax a e is 20 pe cen o one company
and 1 pe cen o ano he , i is clea hei chances o success a e a
om equal. The ac ha mul ina ional en e p ises a e in many cases
subjec o ze o o close o ze o axa ion also c ea es p essu e o s a es o
compensa e ax e enue losses by ax inc eases in o he a eas, pa icula ly
pay oll axes and alue added ax. This educes incen i es o economic
ac i i y in gene al. The e is also he issue o ai ness. I one company does
no pay i s ai sha e o he s will ha e o pay mo e (Bu ge s & Valde ama,
2017; Lambe s, 2017).
Company X
S a e A
S a e B
CIT 30%
CIT 35%
FIGURE 3. In his case Company X sells lea he bags o cus ome s in S a e B jus like
i did in he p e ious examples. The only di e ence is ha Company X no longe has
physical p esence ( e ail s o e) and, hus, no pe manen es ablishmen in S a e B. Ins ead,
consume s esiding in S a e B can pu chase he p oduc s o Company X h ough a websi e
main ained by Company X in S a e A. Company X pays axes, namely a 35 pe cen co po a e
income ax, only in i s esidence s a e (S a e A).
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Leading Change in a Complex Wo ld: T ansdisciplina y Pe spec i es
In e na ional Taxa ion and he Complex Case o Digi alisa ion
In e na ional double non- axa ion does no occu simply h ough he lack
o axable p esence in he sou ce s a e. I also equi es income o go un axed
in he esidence s a e. Fo a g owing numbe o mul ina ional companies
his has become eali y. Technological de elopmen s no only e ode he
sou ce p inciple bu a e also comp omising he unc ioning o he esidence
p inciple. Due o he abundan possibili ies p o ided by mode n ICT and
logis ics, key unc ions o a mul ina ional en e p ise can be alloca ed o
any ju isdic ion depending, among o he hings, on ax conside a ions. Fo
example, he cen al managemen (boa d mee ings), ad e ising, inancing,
manu ac u ing and esea ch and de elopmen ope a ions can, and ypically
a e, si ua ed in di e en ju isdic ions. Mos impo an ly, he possession o
in angibles, such as, adema ks o b ands, copy igh s, pa en s, knowhow
and goodwill can be alloca ed almos anywhe e.
The loca ion o in angibles has become essen ial. Thei impo ance
in he global alue chain has signi ican ly inc eased due o he expanded
scope o digi al se ices (OECD, 2013). Manu ac u ing goods is now easie
and cheape hanks o, among o he hings, he echnological p ocess o
au oma ion (p oduc ion wi hou human assis ance). Au oma ion is e ol ing
as and goes hand in hand wi h digi alisa ion. Indeed, echnological
inno a ions such as 3D p in ing may make manu ac u ing o e e yday
goods so simple ha li e ally anyone can do i . This means he eal alue
is less whe e he manu ac u ing akes place and mo e whe e he in angibles
a e loca ed. And his b ings us back o ax conside a ions.
In he p e ious examples, Company X, esiden in S a e A, owned he
adema k ha dis inguished i s p oduc s om simila p oduc s o o he
manu ac u e s. The example below demons a es wha happens om
a ax pe spec i e i he owne ship o a adema k is ans e ed om
Company X o ano he g oup company, Company XX, which is loca ed in
a low ax ju isdic ion.
As demons a ed abo e, he issue o in e na ional double non- axa ion is
no some hing conce ning only mode n ICT companies. I is also ele an
in he case o mo e adi ional businesses ha sell, unde a global b and,
angible goods (e.g. u ni u e o clo hes) o se ices (e.g. co ee shops and
as ood es au an s). I is also wo h poin ing ou he e a e a ious o he
ax planning echniques besides he one desc ibed abo e ha may esul
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Leading Change in a Complex Wo ld: T ansdisciplina y Pe spec i es
In e na ional Taxa ion and he Complex Case o Digi alisa ion
UK Go e nmen . (2015, No embe 30). Di e ed p o i s ax: guidance.
Re ie ed om h ps://www.go .uk/go e nmen /publica ions/
di e ed-p o i s- ax-guidance
Uni ed Na ions. (2013). Global alue chains and de elopmen : In es men
and alue added ade in he global economy (UNCTAD/DIAE/2013/1).
Whi ake , D. R. (2016). An examina ion o he OECD and UN model
ax ea ies: His o y, p o isions and applica ion o US. Fo eign
Policy. No h Ca olina Jou nal o In e na ional Law and Comme cial
Regula ion, 8(1), a icle 4.
Leading Change in a Complex Wo ld: T ansdisciplina y Pe spec i es
Copy igh © 2019 Tampe e Uni e si y P ess and he au ho s
Edi ed by Anni Kangas, Johanna Kujala, Anna Heikkinen,
An i Lönnq is , Ha i Laihonen and Julia Be hwai e
Tampe e: Tampe e Uni e si y P ess