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Profit-allocation based on value creation in the digital economy

Theunis, Tim LU (2018) HARN60 20181
Department of Business Law
Abstract
With the proposed Directive by the European Commission to tax the digital economy more effective by introducing a digital permanent establishment, the question raises how to effectively tax it. Under the current profit-allocation principles, profits are allocated to the jurisdiction in which the significant people functions are situated. However, since a digital PE can exists without any people or assets, new profit-allocation principles are required to effectively tax it. The new value drivers should be based on active users and user data in order to allocate profits to the user jurisdictions. Given the shortcomings of the arm's length principle, the profit split method should be complemented by formulary apportionment to attribute... (More)
With the proposed Directive by the European Commission to tax the digital economy more effective by introducing a digital permanent establishment, the question raises how to effectively tax it. Under the current profit-allocation principles, profits are allocated to the jurisdiction in which the significant people functions are situated. However, since a digital PE can exists without any people or assets, new profit-allocation principles are required to effectively tax it. The new value drivers should be based on active users and user data in order to allocate profits to the user jurisdictions. Given the shortcomings of the arm's length principle, the profit split method should be complemented by formulary apportionment to attribute profits to the various user jurisdictions. (Less)
Please use this url to cite or link to this publication:
@misc{8943757,
  abstract     = {With the proposed Directive by the European Commission to tax the digital economy more effective by introducing a digital permanent establishment, the question raises how to effectively tax it. Under the current profit-allocation principles, profits are allocated to the jurisdiction in which the significant people functions are situated. However, since a digital PE can exists without any people or assets, new profit-allocation principles are required to effectively tax it. The new value drivers should be based on active users and user data in order to allocate profits to the user jurisdictions. Given the shortcomings of the arm's length principle, the profit split method should be complemented by formulary apportionment to attribute profits to the various user jurisdictions.},
  author       = {Theunis, Tim},
  keyword      = {Digital economy,value creation,tax,taxation,profit-allocation,permanent establishment,digital permanent establishment,virtual permanent establishment,formulary apportionment,arm's length principle,BEPS Action 1,BEPS Action 7,digitalization,digitalisation,European Commission,Directive,attribution of profits,value drivers,user jurisdiction,data,profit split method,transfer pricing},
  language     = {eng},
  note         = {Student Paper},
  title        = {Profit-allocation based on value creation in the digital economy},
  year         = {2018},
}