International Taxation of Global Value Networks Market Power, Firm Boundaries and Excess Profits

Among the main challenges of the digitalised and globalised economy that made the current international tax architecture for taxation of business profits obsolete is the ability of multinationals to achieve cross-jurisdictional scale without physical mass in the host state. The recent OECD and UN responses to this challenge, the OECD Pillar One proposal and Article 12B of UN MTC, aimed at ‘fixing’ the system. Yet, so far none of the solutions gained sufficient support to be enforced globally.

One of the reasons is that, currently, tax policy discussions are dominated by narrow-scope topics like the inadequacy of a physical PE concept or the role of the consumer market in profit generation for multinationals. Instead, constructive changes in the forms of global business governance of today’s most successful multinationals are not in-scope. These changes include novel modes of internationalisation, the ability to employ labour in source countries non-conventionally, such as platform labour and to control its performance through algorithms, the use of IP as a market entry barrier and a monopolisation strategy.

In this contribution, the author seeks to understand the business configuration and modes of governance of scale without mass business. How can multinationals achieve scale without mass, and so economically control resources, people and assets, without legally employing or owning them?

Multinationals can achieve cross-jurisdictional scale without mass by relying on new ways of expanding business abroad through non-equity forms of internationalisation (NEMs), mainly facilitated by IP and technology solutions. NEMs is a new predominant form of global MNE organisations which do not demand that businesses maintain a physical presence in the source state. Yet, no physical presence does not mean that a multinational requires no substance in the host state to carry on business there. A multinational’s economic boundaries are much broader than their legal boundaries: they are defined by the substance of business assets that are under control of the multinational.

This contribution questions how international tax law can address non-equity modes of internationalisation, including the rationale of allocating business profit of scale-without-mass MNEs to the host country, as well as the effectiveness of the ALP-based profit allocation rules, the OECD Pillar One, Article 12B of UN MTC, or cash flow taxes to deal with the relevant challenges.