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31 Intertax 214 (2003)
ICT and International Corporate Taxation: Tax Attributes and Scope of Taxation

handle is hein.kluwer/intrtax0031 and id is 214 raw text is: ARTICLES ICT and International Corporate Taxation: Tax Attributes and Scope of Taxation, Professor Dr. H.C. Mult. Otto H. Jacobs, Dr. Christoph Spengel and Anne Schafer, University-of Mannheim and Centre for European Economic Research (ZEW) 1. Introduction In the last few years, information and communication technologies (ICT) have spread with increasing speed in both private and business sectors. The implementa- tion of ICT is leading to noticeable changes in the organizational structures of the economy. A 'virtuali- zation' can be observed in the internal organization of enterprises as well as in the market organization. Market transactions carried out by enterprises are processed either completely or in part by ICT, thus creating digital markets. It is possible to participate in these markets from locations all over the world and the participants may remain anonymous. With respect to the internal organization of a company, the imple- mentation of ICT leads to regional decentralization since the process of producing goods and services makes use of production factors situated in various locations. Also, an organizational decentralization can be observed within the enterprise as a modularization of the value added chain is taking place. In addition, the application of ICT entails the creation of hybrid forms of enterprise cooperation, such as virtual organizations. Thus, the companies' boundaries are blurring. Furthermore, the contribution of each partner to the creation of value is difficult to identify. To summarize, due to the utilization of ICT, economic activities are becoming more mobile and international. In contrast to the locally independent and interna- tional activities of the enterprises, the current system of international corporate taxation is intended to be applied to traditional economic activities: physical and legal aspects serve as taxable entities and tax attributes, such as the legal form of the company or the definitions of the place of effective management and the permanent establishment. Based on the organizational changes as outlined above, this article highlights the principal problems in corporate taxation resulting from the use of ICT.2 The main focus lies on the systematic compilation of the resulting consequences for the tax attributes and the scope of international corporate taxation. Accordingly, the emphasis is placed on the definition of the tax attributes, the stipulation of the source and residence principle as well as on the choice of methods to avoid international double taxation. In this regard, particu- larly the definition of the place of effective manage- ment and the definition of a permanent establishment raise problems. The previous discussion concerning taxation issues raised by ICT as well as the resulting consequences mainly concentrated on the enlargement of taxation at the source. It is often presumed that the tax revenues in the source country are declining and that, consequently, an enlargement of the tax attri- butes in the source country as well as a taxation according to the source principle is necessary in order to guarantee inter-nation equity. In contrast, it is shown that the focus should lie on the residence principle due to economic as well as practical reasons. The basis for the evaluation of the current tax regulations are the generally accepted tax principles which underlie the system of international taxation. The main criteria are neutrality and equity, which require equal treatment among different taxpayers. In addition, inter-nation equity as well as administrative feasibility of the international tax system are required. Using the outcome of this analysis, the question whether or not the currently valid international taxation regulations can be upheld and to what extent several amendments need to be made will be investi- gated. Based on these findings the additional objective of this article is to discuss possible approaches to reform the tax attributes as well as the scope of international corporate taxation. The reform concepts should be based on the stipulated international tax principles and, moreover, should include considera- tions developed in other countries or by supranational institutions, especially by the OECD. INTERTAX. Volume 31. issue 6/7 ( Kluwer Law International 2003 Financial support by the Landessriftung Baden-Wurttemberg foundation is gratefully acknowledged. We would like to thank Christiane Malke for proofreading the article. In order to assess possible solutions, one first has to be aware of the underlying problems. See J.J.B. Hickey, 'Permanent Establishments: The OECD Draft Position on Web Sites and Computer Equipment', British Tax Review 2000, p. 91. 2 14

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