Taxation of the Digital Economy: Adapting a Twentieth-Century Tax System to a Twenty-First-Century Economy

Author

Assaf Harpaz

Date of Award

2022

Document Type

Dissertation - Closed Access

Degree Name

Doctor of Juridical Science (S.J.D.)

Institution

Duke University School of Law

Abstract

Digitalization has transformed everyday life. Routine functions are performed by using assorted digital applications and the online consumer is at the center of modern business models. Many of the world’s largest companies are highly digitalized, including Google, Amazon, Facebook, Apple, and Microsoft. The digital economy offers great benefits to society, yet its unique attributes have produced considerable tax challenges. This is primarily because highly digitalized business models often do not conform with traditional international tax characterizations. Most notably, highly digitalized businesses can earn profits in foreign economies without creating physical permanent establishments that give rise to taxing rights. As a result, significant profits remain untaxed by market jurisdictions despite the sustained involvement of highly digitalized enterprises in those market jurisdictions. International efforts are underway to address the tax challenges arising from digitalization. The OECD is working through an inclusive framework comprised of 137 countries, large and small, to achieve a long-term consensus-based solution on new taxing rights and profit allocation norms. Meanwhile, as of January 2021 approximately 38 jurisdictions have announced, proposed, or already adopted unilateral measures to tax revenues from digital services provided within their jurisdictions.

This Article comprehensively analyzes the tax challenges arising from digitalization and the measures proposed to address them. First, the Article describes the distinct features of the digital economy and the tax challenges they present. These issues are posed by digital-tech giants that take advantage of base erosion and profit shifting mechanisms to transfer profits from high-tax to lowtax jurisdictions. Second, the Article evaluates the leading measures aimed at revising the international tax framework. These include the OECD’s Pillar One, unilateral digital services taxes, and a U.N. proposal. The Article then analyzes some of the most current developments in the digital tax debate. This includes the U.S.-France dispute over France’s Digital Tax Bill, and the future of international tax reform during the COVID-19 pandemic. Finally, the Article argues in favor of a multilateral solution, implemented on an OECD-level. This Article proposes applying the new nexus based on market thresholds and subject to a global de minimis amount, that is not dependent on physical presence. This Article advises against global revenue thresholds that discriminate against U.S.- based companies and which do not reflect economic involvement in market jurisdictions.

Comments

This article is submitted in partial fulfillment of the requirements for the degree of Doctor of Juridical Science (S.J.D.), Duke University School of Law, 2022.

Citation

Assaf Harpaz, Taxation of the Digital Economy: Adapting a Twentieth-Century Tax System to a Twenty-First-Century Economy, 46 The Yale Journal of International Law 57-101 (2021)