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The Tax Lawyer

The Tax Lawyer: Fall 2024

17 Ways to Regulate Big Tech with Tax

Allison Christians and Tarcisio Diniz Magalhaes

Summary

  • Big Tech’s outsize power and influence have prompted policymakers and experts in the United States and around the world to turn to taxation.
  • There are currently at least 17 distinct tax reform ideas circulating across the international community, some unilateral and others multilateral.
  • Applying the Supreme Court’s logic to the cross-border context, this Article concludes that the United States cannot reasonably refuse to cooperate with other nation states when they use the same logic to change the way they tax and regulate BigTech.
17 Ways to Regulate Big Tech with Tax
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Abstract

Big Tech’s outsize power and influence have prompted policymakers and experts in the United States and around the world to turn to taxation, both for the sake of raising revenue and as a regulatory tool. There are currently at least 17 distinct tax reform ideas circulating across the international community, some unilateral and others multilateral, all of which seek to rein in Big Tech in some way. This Article examines these 17 tax reform ideas, analyzes their pros and cons from a regulatory and distributive perspective, and compares their respective rationales and relative viability. In doing so, this Article illustrates how theory has evolved regarding the traditionally conceived boundaries of the regulatory state, with the Supreme Court’s decision in South Dakota v. Wayfair, Inc. paving the way by overturning decades of archaic precedent and conventional wisdom at the U.S. state level. Applying the Supreme Court’s logic to the cross-border context, this Article concludes that the United States cannot reasonably refuse to cooperate with other nation states when they use the same logic to change the way they tax and regulate BigTech.

I. Introduction

Big Tech is famously hard to regulate. This is potentially surprising given that Big Tech firms by no means escape the notice of regulators in the United States or anywhere else. The world’s largest tech-driven businesses are household names virtually everywhere around the world, and most have visible markers of presence including local offices, employees, and consumers in dozens of countries. Yet regular reports by intergovernmental agencies, civil society groups, and the news media provide constant reminders that these businesses somehow manage to escape the most ubiquitous form of regulation, namely taxation. These reports have produced social pressure in multiple countries, compelling political leaders to take action to make Big Tech pay its fair share.

But regulating Big Tech is not a question that can be solved by simply passing a law. The Supreme Court’s decision in South Dakota v. Wayfair, Inc., which involved inter-state tax obligations involving online retailers, provides a vivid example of the basic problem. The controversy arose because South Dakota found it could not tolerate out-of-state companies becoming major local retailers in the state while avoiding the obligation to collect sales taxes as required by their in-state competitors. South Dakota thus sought to regulate the non-residents “as if the seller has a physical presence in the state”, even though all their in-state activity was virtual. But Wayfair Inc., together with other online retailers, refused to comply. Their rationale for noncompliance: well-established judicial precedent limited states from regulating firms that lacked a sufficient “nexus” to the state—namely, by having tangible in-state factors such as buildings and employees. The Supreme Court reversed this precedent because, in its view, the retailers’ economic and virtual contacts with and in South Dakota were enough to create a sufficient nexus in the modern economy. In essence, the Supreme Court found that while advanced technological capacities free Big Tech from the need to have a physical presence in all jurisdictions, Big Tech’s lack of a physical presence cannot free it from the right of states to govern activities that affect their residents.

The legacy of the Wayfair decision was to establish a basic principle for the normatively justifiable reach of a territorially bound state in a technologically unbound world. This principle is that taxation is a legitimate regulatory tool that states must be able to wield when a business avails itself of local laws, rights, and economic prospects. As such, when a business can avail itself of a market without the presence of physical factors, these factors cannot be used as a legal shield against the state’s regulatory reach.

In contradicting the conventional wisdom of physicality that still flows through much of the global regulatory state, this principle explains why the United States and governments around the world are currently examining how much they are willing to disrupt long-standing tax norms in order to regulate Big Tech. To that end, at least 17 distinct tax strategies have emerged over the course of the past several years, each drawing varying levels of scrutiny, buy-in, and resistance from lawmakers, academics, and the private sector. At their core, each of the 17 approaches articulate the same clash of ideas that led to the Wayfair decision. Just as South Dakota could no longer accept Wayfair’s free access to its consumer base merely for lack of physical operations, nation states have come to the same conclusion with respect to tech-driven businesses that access consumers across borders. Yet crossing national borders touches on distinct legal and geo-political factors that legislators need to navigate strategically as they respond to the socio-political pressure to regulate BigTech with taxing provisions.

This Article accordingly examines the 17 tax reform approaches, explains how each push in distinct and sometimes incompatible ways at the boundaries of traditional legal norms in order to regulate Big Tech, and makes the case for following the Supreme Court’s logic in moving forward at the international level. Part I explains what is meant by Big Tech, explores why and how governments in the United States and around the world are searching for ways to regulate Big Tech with taxes, and analyzes the range of legal and geo-political obstacles that stand in the way of change. Part II analyzes the 17 proposed tax reform approaches and their prospects for regulating Big Tech firms. Part III makes the case for following the Supreme Court’s rationale in reconceptualizing taxing powers at the level of the nation state, and explains why the United States should be a vocal advocate for the principles established in Wayfair.

II. Challenges of Big Tech

Big Tech is not a term of art in law or regulatory policy, but its contours are intuitively discernible in a world in which there are now more mobile phones than humans and economies everywhere clearly run on data. This Part examines what policymakers mean when they speak of Big Tech, why and how governments seek to regulate Big Tech with tax, and what legal and geo-political challenges stand in the way of these goals.

A. What Is Big Tech?

The expression “Big Tech” commonly appears in legal literature on antitrust and competition as well as recent economics literature on monopolies and oligopolies in digital markets. This is understandable given the long-standing concern of these disciplines with what Supreme Court Justice Louis Brandeis famously termed in 1914 the “curse of bigness.” As antitrust scholar Tim Wu explains, Brandeis worried that “excessive industrial concentration” would represent “a profound threat to democracy itself,” a fear that is collectively directed today towards “Google, Amazon, and Facebook, and their power over not just commerce, but over politics, the news, and our private information.”

In public and media discourse, the capitalized adjective “Big” has long been used to designate firms that dominate their respective economic segments, as exemplified by Big Pharma, Big Oil, Big Ag (as an abbreviation for “agriculture”), Big Food, Big Tobacco, Big Auto, Big Bank, Big Media, “Big Four” (in reference to the accounting firms Deloitte, Ernst & Young, KPMG, and PwC), and “Big Three” (in reference to the consulting firms McKinsey & Company, Bain & Company, and Boston Consulting Group). Big Tech is an analogously colloquial way to refer to a handful of highly successful and powerful companies—in this case operating in the digital technology sector—whose business models largely involve collecting and manipulating enormous amounts of consumer data to amass unprecedented wealth and market share. Alphabet (formerly Google), Amazon, Meta (formerly Facebook), and Apple are the main household names in the category, but other high-tech firms such as Microsoft, Airbnb, Uber, Instagram (owned by Meta), X (formerly Twitter), LinkedIn, TikTok, and Spotify can also be considered Big Tech.

It is not difficult to guess why lawmakers might choose to focus on Big Tech when considering reform initiatives. Big Tech firms are large and well-recognized, and they significantly impact the daily lives of individuals throughout the world. The sheer size and growth velocity of the tech sector over the past three decades may explain why lawmakers are preoccupied with Big Tech. Some lawmakers and experts worry that Big Tech firms unduly propagate the social and cultural influence of the countries that produce them—primarily the United States and China—over local customs and traditions. Some are focused on how the scale of Big Tech effectively makes it impossible for local businesses to compete and new innovators to enter the market.

Even though Big Tech firms are popularly recognizable for their digital means of doing business that easily transcend territorial boundaries, all existing large-size corporations across any sector are significantly digitalized to some extent. This includes firms that extract, refine, process, and manufacture physical commodities.

Across industries, customer data and intangible assets of all kinds are becoming a predominant source of business income for most companies. If the category is more or less all-inclusive, it might seem strange to specify the desire to regulate Big Tech (with what is sometimes referred to as “ring-fencing” regimes), but policy-based and political reasons explain why lawmakers focus specifically on these recognizably influential market actors.

B. Why and How to Regulate Big Tech with Tax

The various concerns highlighted above have prompted a rise in scholarly proposals as well as governmental attempts to crack down on large technology platforms. From a more radical stance, there have been calls for using targeted regulation in order to break up Big Tech, as articulated by the Biden Administration and members of Congress, most vocally by Elizabeth Warren since her 2020 presidential campaign. Such calls have, however, met with resistance, including from antitrust scholars that are concerned with the overgrown power of Big Tech.

Approaches to regulate Big Tech have also varied across jurisdictions. The United States, for example, has initiated antitrust cases against Facebook, held congressional hearings interrogating its co-founder and CEO Mark Zuckerberg, and instituted public sector bans on the use of foreign-owned platforms including TikTok. The European Union, on the other hand, has opted for more comprehensive legislative packages that subject Big Tech to stringent rules against anticompetitive behavior and data misuse. Given the state of uncertainty with respect to the effectiveness of these measures, an emerging scholarship has turned to the specialized field of regulated industries, infrastructure industries, and public utilities for potential solutions. In this sense, authors across the political spectrum have been considering the possibility of treating social media platforms in the same way as companies in the banking, communications, transportation, and energy sectors.

The challenge with these solutions is that they are constrained by the limited enforcement powers inherent to the territorial nature of statehood, while Big Tech is active in multiple markets without much need for extensive physical operations or even local employment. In broad strokes, this is possible due to a combination of technological advancements that allow businesses to operate globally through virtual means, but it is also attributable to the fact that most countries have historically delimited their regulatory reach to firms that are either locally registered or that establish themselves in the territory, as was the case with South Dakota prior to the reforms that prompted the Wayfair case. Just as U.S. states habitually did, nation states extended their jurisdictional reach by looking to legal registration or, lacking such legal connections, to tangible factors such as local directors, workers, and physical assets.

Taxation, however, provides a unique means of cross-border regulation due to its propensity to tap into domains beyond the physical territory. It is not common for tax law to view the mere size of a firm to be an intrinsically troublesome factor from a regulatory perspective, as is the case in other fields such as antitrust and competition law. Even so, tax scholars have long recognized that since taxation performs both a revenue-raising and a regulatory function, size can matter as much in tax law as it does in other contexts. At the same time, tax scholars tend to view the application of ring-fencing tax regimes to Big Tech as an incoherent approach in a world in which all business activities are in some way carried out within and through the digital economy.

From a revenue perspective, the key challenge posed by Big Tech firms is their comparatively superior ability to escape taxation because their business model simply does not match the way that long-established tax law conventions have reflected traditional commercial assumptions. There are broad popular clues that many of these firms pay very little in tax anywhere despite making substantial profits. This is a problem worthy of targeted regulatory response because it violates core norms of economic efficiency and basic fairness. Big Tech’s violation of these norms rankle taxpayers and laypersons alike, encouraging lawmakers to respond with political action. The social outcry against Big Tech’s success at avoiding taxation is apparent in both traditional news media coverage and the social media platforms built by Big Tech firms themselves.

Despite growing irritation at Big Tech’s ability to avoid tax, its ability to do so contributes to its ongoing expansion on a global scale, thus continuously enhancing its immunity to effective regulation. It should be no surprise that when Organization for Economic Cooperation and Development (OECD) member states embarked on a multilateral project to strengthen their tax systems following the financial crash of 2008, they soon identified the under-taxation of Big Tech as a priority concern for all countries, even without expressly referring to the regulatory function of taxation.

The primary policy rationale for developing an international tax framework for taxing Big Tech firms is that corporations benefit from society, so they ought to contribute to its maintenance. This rationale expresses the benefit theory of taxation, a long-debated tax policy norm. Benefit theory can be complicated in various ways, but the core idea is typically attributed to classic philosophers such as John Locke, who stated: “It is true governments cannot be supported without great charge, and it is fit everyone who enjoys his share of the protection [of life, liberty, and property] should pay out of his estate his proportion for the maintenance of it.” Though written with the individual in mind, Locke’s expression of benefit is widely understood to be relevant when considering corporate taxpayers.

It is easy to identify how Big Tech firms benefit from their access to global markets. These firms are sprawling multinational conglomerates with global recognition spanning culture, place, and language. In an interconnected world with international financial flows, economic returns are generated by combining economic factors from multiple countries. In the conventional economy, these factors include capital, labor, natural resources, and other tangible things, as well as well-functioning marketing and distribution channels. In the digitalized economy, however, traditional factors such as labor and natural resources are much less necessary to some forms of production but customers continue to be key, whether as direct consumers of digital products and services or as the targeted audience for local advertisers. Relative to what the domestic economy would be expected to produce in the absence of cross-border regulatory cooperation, returns to investment might be realized as additional income to capital owners (as higher shareholder returns), to managers and workers in general (as higher salaries), or to consumers (as cheaper products), or they might be in the nature of knowledge spillovers or increased spending in the local economy.

The return that exceeds what the domestic economy would produce is the product of the combined regulatory efforts of all the states that cooperate to make cross-border investment possible. This profit is cooperative surplus, in the sense that it arises only as a result of national regulators cooperating with each other to further the commercial aims of business beyond that which would be possible by any one state acting alone.

It matters which state gets to capture cooperative surplus through taxation, especially if we assume that little or no surplus can arise except for when multiple nations lower or eliminate barriers to capital and investment flows. Yet the fixed nature of the state, coupled with the expansive nature of regulatory rules such as incorporation and asset registration, creates opportunities for private firms to separate their productive factors from the “location” of profit through legal forms of contract and association. The result is that while nations have rightfully focused on the problem of double or duplicative taxation, the rules and regimes each have created have also combined to produce the opposite (sometimes referred to as double non-taxation).

Before the rise of Big Tech, when the main productive factors for any cross-border venture were labor, natural resources and capital, global leaders of the states with all three factors came together to discuss a workable compromise for allocating taxable multinational profits among themselves. But many states, including colonies and dependencies, were not invited to negotiate on their own terms. Today, the main productive factors engaged by Big Tech include those same regulatory rules accompanied by new and elusive intangibles such as globally dispersed networks of customers and users. Further, all nation states are now (at least nominally) invited to the negotiating table, even if only a few can estimate what they stand to gain or lose in a structural change to international tax rules.

In devising a tax policy it hopes to be palatable to those knowledgeable and powerful few while also appealing to the rest of the international community, the OECD has introduced the notion of splitting Big Tech’s income flows into routine or “normal” and non-routine or “residual” returns. Residual or non-routine profits comprise corporate earnings derived from “significant and unique contributions” of companies that yield quasi- as well as true or pure “economic rent.” The category evokes unique assets, including intangibles like product design, names, symbols, logos, and illustrations. It could include other unique firm-specific factors and characteristics such as skills, tools, experience, knowhow, business processes, market knowledge and marketing concepts, or unique engineering. Finally, it includes any windfalls and abnormal or extraordinary returns from volatile market conditions such as those that are clearly observable in times of crisis including the COVID-19 pandemic and periods of intense resource and consumer goods inflation.

Categorizing income as either normal/routine or residual/non-routine is a theoretical line-drawing exercise, and scholars and practitioners have long objected to the application of these categories to real-world corporate profits as problematic if not impossible. Yet line-drawing is a core function of all law. As such the act of categorizing of profits, even in a seemingly arbitrary manner, is a common and necessary exercise for taxation. The fact that the world’s tax policy leaders are working with these concepts requires their close examination not least because, even if those using these terms do not explicitly acknowledge it, the rhetoric of normality and routine when applied to profits embodies the idea of international cooperative surplus sharing.

When earned by multinationals, the attribute that is common to all forms of residual profits is that their uniqueness may be attributable to the innovation or creativity of individuals, but their effective deployment into profit-making ventures is wholly dependent on the ability to transact across borders. This necessarily requires the cooperation of states in designing workable regulatory regimes to, at a minimum, allow for collaboration while protecting against theft, including the recognition of intellectual property rights. The very possibility of earning income across borders depends on the cooperation of multiple states and the laws they put in place, making it possible to exchange currency and enter into contracts that are respected in courts, recognizing the authorship of ideas and inventions that are banned from copying without fair compensation, allowing for the existence of separate corporate structures and any property rights enjoyed somewhere in the world, and so on. International cooperation mediated by the rule of law is a key source of cooperative surplus.

As such, it should not be surprising if all cooperating states seek to share in the cooperative surplus to which they contributed, by taxing the profits thereby produced. But there is no consensus for deciding how much of the cooperative surplus should be assigned to each contributing country. The language of routine and residual taxation signals an attention to cooperative surplus in a way that seems to differ in substance from the old modes of sharing revenue via tax rules. If there is a normative case for sharing the surplus created by Big Tech with the help of regulatory cooperation among a multitude of states, a general level of public understanding that there is a pressing regulatory problem regarding those firms to be solved, and a broad sense that lawmakers appear to understand the problem to be one with political force, the question is: why are countries not simply taxing Big Tech as they deem appropriate in light of their respective contributions to its profitability? Below, we examine some of the traditional barriers that may interfere with broad policy reforms, whether as a matter of legal or political constraint.

C. Barriers to Change

In the most basic terms, the reason Big Tech might not be paying its fair share of tax—however that may be defined—can be attributed mainly to the way that modern income tax systems emerged and evolved over the course of their 100-year history. In particular, the core concepts upon which national income tax systems were designed at the dawn of the 20th century imagined the corporate taxpayer in a certain way, and that way has stuck despite massive technological innovations that have, time and time again, completely upended our assumptions and disrupted the status quo.

One of these key assumptions has to do with the threshold need, when building an income tax system, to categorize taxpayers as either resident or nonresident before determining what to tax and how to enforce the tax. As shown above in the context of South Dakota’s jurisdictional reach over Wayfair and other online vendors, governments have traditionally taxed the income of foreign companies doing business in their territories only where they have sufficient nexus, which usually requires a lasting physical presence (often called a “permanent establishment”). For situations in which no such presence can be identified or the foreign taxpayer’s assets are out of reach, governments have to look for ways to enforce their claims. In the case of South Dakota, this meant imposing an obligation directly on the foreign entity. Even though there were no local assets or agents in the state against which the state could act in the event of non-compliance, South Dakota’s claim was ultimately made feasible by the U.S. federal judicial system, which acted as an enforcement mechanism.

Internationally, there is no similar enforcement mechanism, so it is more difficult for nations to impose tax obligations on foreign entities. The historical response to this problem is to design a corresponding tax liability that applies to the local payors of income to such foreign residents. In broad strokes, withholding obligations on the local payor are usually imposed only on passive or investment income outflows, and they are usually imposed on a gross basis, with no setoff for expenses that the recipient might have incurred in earning these income flows. These passive payments—broadly, any payment that flows from mere property ownership—are contrasted to active business income which is traditionally assumed to require productive activities involving capital, labor, or a combination of both. Cross-border passive income includes the following classic categories: dividend distributions with respect to shareholding in a company (also called equity interest); royalty and interest payments with respect to ownership of intellectual property rights and debt-claims, respectively; and rental fees charged for the use of one’s immovable property.

The trouble with any exercise in categorizing financial gains for purposes of allocating taxing rights is that it requires contending with the fact that income is a concept rooted in historical context and its meaning differs across countries and changes over time according to commercial, economic, and social realities as well as evolving legal and policy-based understandings. For instance, capital gains are not understood to be income in the classic sense of the term, since “income” is traditionally defined as a flow of return to a corpus of investment that necessarily excludes the corpus itself. Most income tax systems have nevertheless long since embraced the notion that for an income tax to be comprehensive, capital gains must be included. To do otherwise is not only unprincipled from the perspective of designing a comprehensive tax base, but it also invites taxpayers to engage in ever more contrived tax avoidance strategies. Given that the distinction between income and capital can (theoretically) and must (for practical reasons) be reconciled in an income tax system, it should not be surprising that sub-categories of income can emerge in commercial contexts. When this happens, new income categories must also make their way into the income tax and withholding lexicon lest the exceptions undermine the fundamental structure of the tax system.

Common additions to the list of income taxes that can be collected through withholding are management fees, social insurance and retirement payouts, and technical services fees, which were specifically included in the United Nations’ model income tax convention beginning in 2021. In a study on cross-border taxation of trade in services, Catherine Brown argues that, from both a theoretical and country practice perspective, there are five possible ways to classify income from nonresident service providers under double tax treaties: as business profits, as independent personal services income, as royalties, as technical service fees, and as “other” income.

Expanding the range of income types that are subject to withholding taxes to include digital services fees is relatively straightforward, at least in terms of drafting operational rules. All that is required to create a new tax and withholding obligation is to define the income stream subject to the tax and draft the new tax to follow the logic and structure of other withholding taxes. For example, if the United States wanted to create a new withholding obligation for a popular type of Big Tech income earned from U.S. sources by nonresident firms, such as advertising fees, Congress could simply add these fees to the list laid out in sections 871, 881, and 1441. These sections currently impose gross-basis taxes and associated withholding obligations on specified U.S.-source income items paid to nonresidents.

Adding to the list of items subject to gross-basis taxes and withholding is not necessarily free of legal barriers, however. Two possible obstacles arise if countries have existing bilateral tax treaty relationships in place with the countries from which most Big Tech firms originate (especially the United States and China), or if countries refuse to accept the newly imposed tax as an income tax for purposes of applying domestic provisions designed to relieve double taxation.

Existing treaties present an obstacle to reform in that most tax treaties strictly distinguish active and passive income, and set relatively high presence thresholds to taxing the former. A country that unilaterally carves a stream of essentially “passive” income out of what would otherwise typically be considered active income would likely prompt the taxpayer to resist what it views as a tax treaty violation. For example, if the United States were to adopt a new domestic rule specifying that U.S.-source advertising fees are a distinct item of taxable income when received by foreign taxpayers, foreign taxpayers and tax treaty partners might object because they view advertising fees as business profits, which the treaty protects against taxation at source in the absence of sufficient nexus (namely through physical presence), and then only on a net basis. The likelihood that such an objection may arise does not invalidate this policy move nor guarantee its failure, but the availability of treaty-based dispute resolution procedures suggests that unilateral reform would be contested and potentially rendered ineffective by existing treaties.

Even if treaties are not an obstacle, however, double taxation could result if other countries simply refuse to accept the new income category when applying tax relief provisions such as foreign tax credits or foreign income exemptions. Thus if, as in the above example, the United States were to adopt a law specifying that U.S.-source advertising fees are a distinct item of taxable income that is subject to gross-basis taxation when received by foreign taxpayers, foreign governments might view the tax as fundamentally an excise tax or a tariff rather than an income tax. This kind of objection would generally materialize in the form of a denial of credit or exemption at residence because the tax is not viewed as an income tax; in the extreme, it might also give rise to investment or trade law conflicts.

A solution to this problem is built into the international income tax system, namely within the “in lieu of” notion, which has long been used to allow income taxes in one country to be offset (typically via credit) by gross-basis withholding taxes imposed by another. If a withholding tax is viewed as a measure in lieu of the traditional net-basis income tax, taxpayers are generally entitled to foreign tax credits provided in the domestic law of the residence state even if the tax in question is imposed on a gross rather than net basis, and even if it is imposed when the taxpayer lacks a physical presence. When there is a treaty regulating the fiscal relationships between two states, it is still possible to overcome this constraint by overriding treaty provisions with domestic law, either expressly or implicitly. An alternative approach would be to renegotiate all existing tax treaties, but this involves a protracted diplomatic process that is probably unworkable for many states in the short or even medium term.

Given these theoretical and practical challenges involved in adopting a more expansive approach to taxing Big Tech’s business profits, countries might consider going in a completely different direction to regulate Big Tech with tax. For example, multiple countries have considered adopting stand-alone excise taxes designed with the express intention of avoiding entanglement with the income tax system and its complex web of treaties and international standards (as discussed in more detail in the next Part). But this approach avoids one legal regime only to encounter another, namely the international trade regime. In brief, any attempt to impose a stand-alone tax on multinationals risks the threat of retaliation as a form of trade restriction that violates existing trade and investment laws and treaties. This kind of risk has only become more palpable as the United States has withdrawn its support for conflict resolution through the World Trade Organization (WTO) system. It is difficult to measure how serious of a challenge the risk of trade retaliation may be going forward as a result.

The broad range of possible legal and geo-political barriers to change across tax, trade, and investment regimes suggests no single approach can readily measure or easily mitigate the risks involved in trying to tax Big Tech more effectively, whether a country seeks to do so for revenue-raising or general regulatory purposes. Where multiple legal risks and diplomatic constraints seem to meet every possible move, the situation presents a stalemate. It is perhaps no surprise that governments, policy observers, academics and other subject matter experts have devised multiple strategies to break the stalemate. Some of the proposed strategies appear to be mutually exclusive, while others appear to be capable of coordination either through routine cooperation using established mechanisms or through negotiated agreement among nations. In the next Part, we identify and examine each of the 17 reform proposals that are currently circulating in international tax discourse.

III. Seventeen Ways to Tax Big Tech

Some of the tax measures examined in this Part have already been adopted by one or more states, while others are being considered or have been proposed in academic scholarship. Others might not be wholly new but are receiving renewed attention in contemporary scholarship. The 17 measures are grouped herein by reference to their multilateral or unilateral nature, with special measures targeting alternative tax bases addressed separately. For each of these measures, we consider their effectiveness and global distributional consequences, with a focus on how each divides resources among countries at different levels of development and wealth.

A. Multilateral Income-Based Tax Approaches

Five of the ongoing ideas for taxing Big Tech can be categorized as multilateral because they require some degree of coordination among various states, either at a regional or global level. The first two would alter the division of profits on an affiliated group basis via formulary or fractional apportionment. The third would keep the current division unchanged but arguably make taxation of datafied business models effective through enhanced transfer pricing approaches. The last two aim to establish extra revenue streams via a global minimum corporate tax enforced through multiple overlapping alternative tax rules and a complementary global excess profits tax built upon the structure of the ongoing reform of the international tax system. Each is discussed in turn.

1. Formulary Apportionment

Formulary apportionment (or, more accurately, combined reporting with formulary apportionment) refers generally to the aggregation of profits earned by affiliated companies, followed by the use of a set formula to allocate a specified (and non-duplicative) tax base to each jurisdiction in which the various affiliates operate. The idea is that the apportionment formula would in some way reflect the contributions of each jurisdiction, even if the precise amount allocated to each is a rough approximation that may under- or over-value one over another.

Examples of formulary apportionment regimes can be seen in federal states including the United States, Canada, and Switzerland, where provinces, cantons, or states have their own income tax regimes. The European Union has considered formulary apportionment in the form of a proposed Common Consolidated Corporate Tax Base (CCCTB) and, more recently, a proposed Business in Europe: Framework for Income Taxation (BEFIT). It has also been recommended in the past for the North American Free Trade Agreement among the United States, Canada, and Mexico. Scholars, civil society members, and tax activists have long promoted formulary apportionment as a comprehensive solution to tax competition among nation states and tax avoidance by large multinationals, as well as a fairer way to distribute multinational profits among nations.

Traditional formulary apportionment relies on three factors to allocate income across jurisdictions, namely assets, sales, and employees (measured by number or by wages). More recently proposed formulas have included “users” as a fourth factor, in order to account for digitalized firms. Whether users or some other factor specifically responsive to tech-heavy business models, an alternative factor would be key to using formulary apportionment in the context of Big Tech since it is precisely the lack of employees and tangible assets that makes Big Tech effectively untaxable in many countries.

If adopted at the global level and aimed at appropriately covering Big Tech, the choice and weighing of the factors would be the central issue, as the design of the formula would have different consequences for the allocation of cooperative surplus among the states involved. For example, recent studies by independent researchers as well as international organizations have highlighted the importance of the employment factor for developing countries, applied as headcount rather than wages. Moreover, the Group of Twenty-Four (G24)—a coalition of developing countries—advocated for an allocation based on a significant economic presence and a four-factor formula. The four factors in the G24 proposal were sales, assets, employees (by number instead of wages), and users, with the weight of each factor varying according to the level of digitalization of the business.

Some scholars, arguing that ending tax competition is a more pressing priority than fairly allocating profits, advocate single-factor formulas that are destination- or sales-based. These kinds of regimes resemble the sales-based fractional apportionment method seen in both the so-called “Amount A” of the OECD’s Pillar 1 plan for the taxation of highly digitized multinationals and the destination-based cash-flow tax (each examined infra). In focusing on the place of consumption as an immovable factor, these single-factor apportionment models would presumably cover many Big Tech firms but would tend to allocate profits mostly to big market economies to the detriment of smaller and less developed ones.

2. Fractional Apportionment

Fractional apportionment is a twist on formulary apportionment in that it would use combined reporting to aggregate the profits of affiliated groups, then bifurcate the aggregated profits in order to allocate some by formula and the rest via transfer pricing. In the context of the digital economy, a first proposal for allocating a fraction of profits by means other than transfer pricing was suggested by the United Kingdom and embraced by the European Union under the name of “user participation.”

In broad strokes, the user participation proposal consisted of isolating a share of profits to be assigned to countries where users are located on the basis of their interactions with digital platforms. The UK view was that the participation of users in social media platforms, internet search engines, and online marketplaces creates extra value for digital firms, thus warranting the state where these users are located to make a taxing claim over a portion of non-routine profits. Some, however, contend that all forms of user participation could substantiate such a claim. As an alternative, Johannes Becker, Joachim Englisch, and Deborah Schanz propose to use the concept of “sustained user relationship” (SURE), in order to restrict the expansion of tax nexus to situations where “the source of local data is a network of users that is characterized by the defining features of permanence and importance.”

This user participation proposal was countered by a different approach suggested by the United States under the name “marketing intangibles.” The U.S. position was that the country in which intangibles related to marketing activities are situated (that is, the local market) contributes more value to the enterprise, and is therefore entitled to a larger share of the cooperative surplus. Both the EU and the U.S. approaches imply a normative argument about what location-specific factors contribute the most to the success of Big Tech (users of each market or each market’s features for the development of intangible assets). As a consequence, both also imply a certain division of global resources. The ideas of user participation and marketing intangibles formed the basis of what the OECD Secretariat took into account in developing its so-called “Unified Approach.” The word “unified” in the plan’s name symbolizes a compromise between the EU and U.S. proposals.

The OECD proposal excludes an alternative model as suggested by the Group of Twenty-Four (G24) under the name “significant economic presence” that more resembles a comprehensive formulaic model such as the ones analyzed previously. The G24’s proposal was to allocate the profit of any multinational based on a four-factor formula balancing supply- and demand-side factors (assets, employees, sales, and users). As such, the OECD Secretariat’s recommended reform replicates the views of OECD member states on how multinationals’ profits should be divided globally (namely, in accordance with the relevance of the market), which is a metric that tends to allocate profit to large consumer markets such as those found in OECD member states.

The Unified Approach formed the basis of the current Pillar 1, which has been approved by Inclusive Framework members. Pillar 1 consists of a partial reallocation of the global profits of Big Tech and other large-size multinationals based on two sets of rules: a new nexus conceptualized in a similar way to the idea of a virtual permanent establishment by relying on minimum local revenue thresholds, combined with a single-factor formula based on either sales or users for apportioning a fraction of residual profits to market jurisdictions. The envisioned process involves establishing a sustained and significant economic presence and then calculating a new income category, referred to in the proposal as the Amount A base. This follows a sequence of steps that, in broad strokes, deems two subcategories, namely routine and non-routine profits, then isolates a part of the residual to be subsequently split between all market jurisdictions by formula.

3. Data-Based Transfer Pricing

A number of proposals aim to adjust existing transfer pricing rules to the data economy, thus potentially making more comprehensive reforms such as the OECD’s tax work on digitalization superfluous. Dirk A. Zetzsche and Linn Anker-Sørensen, for example, argue that taxation of datafied business models is doomed to fail without some method to value and price data pools collected by Big Tech. They review proposals for a transaction tax, traditional transfer pricing, the OECD’s two-pillar approach, digital services taxes, and virtual or digital permanent establishments. Zetzsche and Anker-Sørensen then propose an alternative transfer pricing model called “data point pricing.” Treating data as a raw material (in line with the idea that “data is the new oil”), the goal is to assign a financial value to “each discrete unit of information.”

In developing this proposal, Zetzsche and Anker-Sørensen notice that “[c]lients of datafied services apparently receive certain services “for free” when in fact they contribute their data, or give consent to data gathering by sensors, in lieu of a payment for the services they use.” When users consent to firms collecting their personal data in exchange for access to a digital platform, those users in effect create valuable intangibles that are traded as a currency. By assigning a financial value to the data users exchange for platform services, traditional accounting methods in accordance with transfer pricing could be made effective in allocating the right to tax and taxable amounts across jurisdictions.

Zetzsche and Anker-Sørensen justify their model as capable of bringing transparency to the idea of value creation in international income taxation, but they also claim data point pricing could benefit other regulatory regimes such as antitrust law, financial regulation, data protection, anti-money laundering, and criminal enforcement. Despite these potential benefits, Zetzsche and Anker-Sørensen acknowledge that their model is no panacea for the most pressing problems plaguing the international tax system. In particular, their proposal would not alter the current allocation of taxing rights among states. Instead, it would ensure that data-based income can be measured and taxed according to existing transfer pricing approaches. Since such approaches are known to favor high-income states, low-income and developing states would likely stand to gain the least from this proposal.

4. Global Minimum Tax

A key component of the ongoing OECD-led reform of the international tax system to address the challenges of digitalization consists of a coordinated global minimum tax of at least 15% to be applied to large-size multinational groups, regardless of where their constituent entities are located. The OECD has now released hundreds of pages of rules, guidance, and commentary describing this “Global Anti-Base Erosion” or “Globe” regime, and it has been the subject of countless scholarly articles as well as commentary by practitioners and other observers. The basic elements of the regime consist of an interconnecting set of rules designed to ensure that income above a certain threshold is subject to a minimum tax in the jurisdiction in which the income arose, the jurisdiction of the ultimate headquarters company, or that of an affiliated intermediary (in that order). The interconnected rules are meant to function together to reduce the value of tax minimization strategies.

When it first proposed Globe, the OECD described it as the best chance for developing countries to benefit from its efforts to modernize the international tax system in response to technology and digitalization. Commentators and developing country representatives, however, have continuously expressed concerns that Globe might eliminate the possibility of tax incentives to attract foreign investment for development, and that the rule design prioritizes the revenue needs of the major capital-exporting countries (in which Big Tech is mostly headquartered). The OECD ultimately acknowledged that another pillar might be required to ensure that developing countries fully benefit from the reform initiative, but then never pursued the matter further. A possible third pillar in the form of a global excess profits tax to benefit less developed countries, as previously developed by the authors, is explained below.

5. Global Excess Profits Tax

Drawing on the OECD’s two-pillar approach to the taxation of the digital economy, the authors recommended that nations consider imposing a global excess profits (GEP) tax. This technical proposal does not diverge from current corporate income taxes but rather tries to make the international income taxation system more progressive and more efficient by recommending a global surtax on super-profits.

Using existing structures and concepts already familiar to the taxation of multinational enterprises, aided by modern international cooperative governance tools, the idea is to apply a higher tax rate to the margin of profitability that is considered excessive or extraordinary, either as a result of windfalls (such as those created by the pandemic) or monopolistic/oligopolistic rents (such as those derived from what economists now call “platform market power”). Because the GEP tax is built on the foundation of the OECD’s prior work on information exchange as well as its current work on reallocating digital profits, the GEP tax is a viable response to both the issues of under-taxation of highly lucrative digitalized business models (namely, Big Tech firms) and the allocation of their surplus profits among all countries involved, most especially developing ones (which under the current system are apportioned few if any of such profits).

B. Unilateral Income-Based Tax Approaches

In addition to the multilaterally coordinated approaches discussed above, six approaches have emerged for reforms that were or could be introduced on a unilateral basis, namely diverted profits tax, equalization levy, digital (or virtual) permanent establishment, expanded withholding tax categories, alternative minimum corporate tax, and progressive corporate tax. Because they are unilateral, these approaches raise various risks for unrelieved double taxation and they may also trigger disputes under tax, trade, or investment agreements. Each is discussed in turn.

1. Diverted Profits Tax

A diverted profits tax is in essence a tax on digital services but using net measurements instead of gross receipts. The first diverted profits tax was adopted by the United Kingdom in 2015, followed by Australia in its multinational anti-avoidance law. Because it was aimed specifically at Big Tech, the diverted profits tax has been colloquially referred to as a “Google Tax.” The UK diverted profits tax applies a higher than usual corporate tax rate on digital businesses that divert profits out of the source jurisdiction by way of avoiding a permanent establishment status therein. As such, it has been criticized for potentially violating international law, including double tax and human rights agreements signed by the United Kingdom, and even the Treaty on the Functioning of the European Union at the time the United Kingdom was still an EU member.

Although it is imposed on net income, diverted profits taxes seek to achieve the same results as gross-basis taxes, such as withholding on technical services or, more recently, equalization levies, which are analyzed further below. These similar measures aim to overcome physical presence requirements in international agreements, in order to allow the source country to share in the cooperative surplus that countries make possible for Big Tech by facilitating access to local consumers and advertisers. Even though the OECD’s plans for taxing highly digitalized businesses also include approaches that bypass traditional permanent establishment thresholds, commentators note that the OECD has discouraged developing countries from adopting unilateral measures like the diverted profits tax in favor of awaiting global consensus on a multilateral solution (namely, the global minimum tax discussed above). The long delay in reaching this solution has meant that while these countries wait, others, including the United Kingdom and Australia, have now been raising taxes on digitalized businesses for almost a decade.

2. Equalization Levy

An equalization levy is a tax meant to achieve tax parity between resident and nonresident tech companies. Like the diverted profits tax, equalization levies are colloquially referred to as “Google Taxes” because they target Big Tech firms. The basic idea is to eliminate disparities in the tax treatment of digital and brick-and-mortar firms. The motivation is similar to that which prompted virtual or digital permanent establishment proposals at the level of the European Union, as examined in more detail below. But since equalization levies are gross-basis measures, they are typically viewed as digital services taxes by another name.

The introduction of a separate equalization levy was considered as a possible way to tax the digital economy in the OECD’s 2015 Action 1 Final Report. But due to its unilateral nature, the OECD dismissed this policy option along with proposals to impose a withholding tax on certain types of digital transactions and to expand the definition of nexus on the basis of a significant economic presence concept. India nevertheless implemented a 6%-rated equalization levy in 2016, which it applied to online advertising payments made to non-residents without an Indian permanent establishment. The scope of this levy was expanded in 2020 to encompass all e-commerce transactions involving the sale of goods or provision of services but at a lower rate of 2% of gross revenues.

3. Digital Permanent Establishment

A digital (or virtual) permanent establishment simply means a unilateral expansion of the concept of permanent establishment to include situations in which the only presence in the jurisdiction is by intangible means, mainly via online platforms. Across jurisdictions, a broad range of different approaches to virtual or digital permanent establishments (including through a significant digital or economic presence) have been proposed, with distinct revenue requirements and other conditions to meet the taxable income threshold. The goal of these rules is to draw more non-resident businesses into the domestic income tax net.

Expanding nexus to encompass a non-physical permanent establishment, such as by using a “significant economic presence” rule, was first mentioned in the OECD Base Erosion and Profit Shifting (BEPS) Action 1 Report. This report mentions the concept by way of dismissing it as an option for multilateral adoption, together with withholding taxes on digital transactions and equalization levies (such as India then adopted the following year). The Action 1 Report noted that these options for taxing the digital economy were not recommended because “among other reasons, it is expected that the measures developed in the BEPS Project will . . . mitigate some aspects of the broader tax challenges, and that consumption taxes will be levied effectively in the market country.” Even so, the OECD Action 1 Report noted, countries could adopt any of these measures “as additional safeguards against BEPS, provided they respect existing treaty obligations or [adopt changes] in their bilateral tax treaties.”

According to the OECD Action 1 Report, the definition of a digital permanent establishment could be drafted to capture any business with a digital or automated platform that has a “purposeful and sustained interaction” with the local economy. Several pertinent factors may be relevant in determining whether the threshold is met, including the amount of revenues generated through a digital platform; the level of sustained local user interaction; the use of local marketing and promotion; the integration of local forms of payment into purchasing platforms (that is, prices reflecting local currency); the number of monthly active users that visit the digital platform; and the amount of digital data collected by the business. Industries that are likely subject to a significant economic presence threshold include those providing streaming services, search engines, transportation services and accommodation services that operate on a digital platform.

4. Withholding Taxes

Withholding simply refers to the collection mechanism for a tax that is ultimately meant to be borne by another. As shown above, withholding taxes play a distinct role in income tax systems, first because they permit gross-basis taxation within the framework of a taxable base that would typically be computed on a net basis, and second because, in the international context, they are traditionally imposed on passive rather than active income flows.

Withholding taxes of all sorts have always been a common feature of national and international tax regimes. Yet some new withholding taxes have recently been adopted specifically as a form of cross-border taxation in the context of the digital economy, particularly in Latin America. Because withholding secures taxation at source at the expense of the country where investors typically reside, it is perhaps unsurprising that capital-exporting (developed) states have long sought to negotiate tax treaties with developing countries that constrain their domestic regimes. Much of developing countries’ interest in imposing withholding taxes on cross-border services is justified by the high risk of base erosion from intercompany payments. Nonetheless, the topic of services was not recognized by the OECD in its BEPS Action Plans as deserving of greater attention.

Specifically, developing states have been increasingly concerned with the possibility of outbound payments for management, consulting and technical services eroding their domestic tax bases. In response, many of these countries started to classify technical service fees as passive income in order to include such payments under their withholding tax regimes. They did so either by adopting a stand-alone treaty provision or by treating such fees as covered by existing treaty articles that permit withholding at source, including those addressing royalties as well as the residual category of “other income.” This trend ultimately led the United Nations to add a specific provision for the taxation of technical services to its model convention between developed and developing countries. The UN Model’s Article 12A grants shared taxing rights to residence and source states, thus allowing for withholding by the latter at a negotiated rate.

To ensure more taxation by the source country of profits associated with locally provided cross-border services, the addition of Article 12A must be drafted to coordinate with the provisions of Article 7. Otherwise, services that constitute business profits to the recipient would be effectively subject to the permanent establishment threshold as explored above. The need for careful drafting is a theme that continues to other forms of withholding, and we will return to this topic below.

Given the myriad of measures that have been proposed for the taxation of the digital economy without any foreseeable consensus, the United Nations recently came up with its own proposal, which consisted of introducing a new Article 12B to its model tax convention. The idea follows the same logic that motivated Article 12A on technical services, that is, to use established and easier-to-administer withholding mechanisms to target automated digital services.

By framing the solution this way, this move by the United Nations affirms that digital services taxes are conceptually analogous to other gross-basis withholding taxes imposed at source. Given that both the UN proposal and most digital services taxes target advertising revenues, platform fees and data sales, they appear to be broadly similar mechanisms even though they seem to provoke very different political responses. Each applies a low-rate, gross-basis withholding obligation that stands in lieu of higher-rate, net-basis income assessments, such as those that normally apply to resident firms.

If this comparison is sound, then existing digital services taxes (which are discussed in more detail below) are justified on the same grounds as traditional gross-basis taxes that simply require the resident payor in a transaction to withhold on payments of interests, dividends, royalties, rents, or capital gains it makes to a taxpayer located abroad. In terms of applicable rate, most of the proposed or adopted digital services taxes are in the 2-5% range, which is much lower than traditional withholding tax rates. The release of the new provision in the UN Model, expressly providing for digital services tax withholding, signals that this position is defensible.

5. Domestic Minimum Taxes

Alternative minimum taxes are an old idea but their application in the contemporary digital context reflects the ongoing problem posed by profit shifting. This problem is in large part attributable to the kind of tax competition that arose when major capital-exporting states moved away from so-called worldwide to territorial tax systems. In brief, the difference between a worldwide and a territorial income tax regime is that a worldwide system seeks to tax all income in the same manner regardless of source, while a territorial system seeks to exempt foreign income. No income tax system is purely worldwide or purely territorial; all income tax systems feature a mix of these approaches (at minimum to safeguard the tax base against excessive erosion).

Generally, taxpayers in more territorial systems will look for opportunities to conduct business and invest in foreign jurisdictions with tax rates that are lower than the home jurisdiction, while a worldwide system would generally neutralize the advantage of going abroad. A global race to the bottom in corporate tax rates began in the mid-twentieth century as capital-importing jurisdictions altered their tax at the source to attract capital that was seeking to escape high taxation in their home jurisdictions. While the OECD BEPS initiative represents a coordinated effort of mainly capital-exporting states to reverse this trend, domestic minimum taxes seek to achieve the same result.

An illustrative example may be seen in the U.S. Tax Cuts and Jobs Act of 2017, which introduced a “participation exemption system” aimed at bringing the U.S. tax system closer to that of its European trade partners, with the goal of enhancing the competitiveness of U.S. multinationals operating abroad.

At the same time, switching to territoriality meant that, instead of having a tax system that fuels the erosion of other countries’ tax bases, the United States would now be exposed to the same issues of income shifting that it had long helped create. As such, the 2017 U.S. tax reform included two safeguard mechanisms: the Global Intangible Low Taxed Income (GILTI) rules and the Base Erosion and Anti-Abuse Tax (BEAT). Each of these are minimum taxes designed to protect against revenue loss arising from the possibility that U.S.-parented multinationals would respond to the newly territorial income tax by transferring ever more income-generating intangible assets to other countries, or to make deductible payments to foreign-held subsidiaries that effectively shift profits outside the United States. Combined, GILTI and BEAT establish a minimum level of taxation on U.S. multinationals, preserving a portion of profits that the United States, as the headquarter jurisdiction, considers part of its tax base.

Although some commentators have raised various legal issues in relation to the BEAT (in particular incompatibilities with U.S. tax treaties and international trade agreements under the WTO), others have praised the 2017 Tax Act for its potential to stimulate other nations to follow suit and cooperate. Indeed, the U.S. unilateral minimum taxes were received with enthusiasm by other key states, namely France and Germany. Equally worried with protecting the share of multinational profits that they believe belongs to them, those two countries pushed for a similar agenda at the level of the OECD, which then developed the global minimum tax proposal discussed above.

More recently, the U.S. Inflation Reduction Act of 2022 reintroduced a corporate alternative minimum tax (CAMT) based on financial accounting income. This measuring methodology was adopted in the past in the United States, for a brief three-year period ending in 1989. The new CAMT applies a 15% rate to book income in an attempt to emulate the qualified minimum domestic top-up tax of the OECD’s global minimum tax (Pillar 2), in order to “shield US companies (and foreign companies operating in the US) from the [undertaxed profits rules] of other countries while retaining US domestic tax credits as much as possible.” However, questions remain as to whether the CAMT implements a Globe-compliant, U.S. version of its counterpart in the global minimum tax regime.

6. Progressive Corporate Tax

In light of various anticompetitive practices employed by Big Tech including so-called “killer acquisitions” whereby established tech firms acquire and retire potential competitors, Reuven Avi-Yonah has recently recommended repurposing the U.S. corporate tax as a complement to antitrust enforcement measures against monopolies and quasi-monopolies. In brief, Avi-Yonah argues that the corporate tax should retrieve the regulatory function of controlling corporate power as when the tax was first introduced in the United States in 1909. But, to respond to contemporary economic reality, Avi-Yonah proposes the application of a zero rate to normal returns (by way of allowing expensing of physical capital) and a 80% rate to supernormal returns (“monopolistic rents”), meaning income above $10 billion.

Such a sharply progressive bracket would ensure the tax reaches mostly Big Tech (Amazon, Apple, Facebook, Google, Microsoft) plus some other major tech companies (Intel, Micro), Big Bank (Chase, Bank of America, Wells Fargo, Citi, Goldman Sachs, Visa), Big Pharma (Pfizer), Big Oil (Exxon, Chevron), Big Telecom (AT&T, Verizon, Broadcom), major consumer brands (Johnson & Johnson, Home Depot, Disney, Pepsi), as well as United Health and Boing.

The base of the tax would be built on mandated consolidated returns for both U.S.-based and foreign corporations with a threshold of 50% of vote or value. While interest and dividends would be non-deductible, R&D expenses would be amortized over a 15-year term, and stock options (including restricted stock and other forms of stock-based compensation) would be “valued and deducted as wages when granted, as is done for book purposes.” Avi-Yonah recommends safeguarding against profit shifting by using anti-avoidance provisions already present in the Internal Revenue Code (e.g., sections 367 and 877A), complemented by anti-inversion measures (as proposed by the Obama administration) or “exit taxes” (as adopted in Europe). Additionally, Avi-Yonah suggests a mark-to-market 50%-rated regime for shareholders in public corporations that includes past unrealized appreciation, accrual taxation for non-publicly traded property adding an interest charge upon the sale of property, non-taxation of capital gains to domestic U.S. shareholders, and withholding taxation of stock buybacks and dividends.

C. Special Taxes

The last set of approaches to taxing Big Tech involves six special measures that have been recommended or adopted as innovative ways to regulate Big Tech, namely: a stand-alone digital services tax, a destination-based cash-flow tax, a digital consumption tax, data taxes of various kinds, a tax on robots, and a corporate wealth tax. In contrast to the multilateral and unilateral tax approaches examined before, these special taxes are designed to reach bases other than income, even though, as introduced above, some of these taxes functionally mirror established income tax mechanisms.

1. Digital Services Tax

Digital services taxes are gross-basis taxes imposed on receipts associated with the provision of digital services. The term is often used informally to describe a broad variety of taxes but it is perhaps best reserved to describe those meant to reach the income earned by highly digitalized non-resident firms—namely, Big Tech—which, under a conventional analysis, would escape source taxation by avoiding conventional permanent establishment thresholds. Nations devised digital services taxes specifically to reach Big Tech precisely because its intangible presence is viable and impactful even when its physical presence is minimal.

Digital services taxes have become prominent in international tax circles, especially following the economic upheaval created by COVID-19. Hungary, India, and France adopted digital services taxes in the years preceding the pandemic and a number of countries thereafter announced their intention to do the same. More may follow should the OECD not reach consensus on a multilateral solution. Some, such as Belgium and Brazil, submitted legislative proposals pending further action, while four countries—Austria, Italy, Spain, and the United Kingdom—all adopted some form of digital services tax in 2020 and continue to collect it. Having rejected a digital services tax proposal in 2017, the European Commission recently announced its plans to reopen the discussion.

Since advertising revenue constitutes the majority of cash flows involving Big Tech, it is no surprise that this is also the revenue flow targeted by most digital service taxes. An illustrative example is Austria’s digital advertising tax, which applies to revenue from online advertisements aimed at local users. Other digital services taxes additionally target membership fees, streaming service subscription fees, and other digital platform-related fees. A few target the sale of data that is extracted from local users. France, Italy, and Spain are illustrative in this regard, as each chose a comparatively broader tax base of revenue from online services, defined to include online advertising, sale of a user database, and digital interface services that provide e-commerce services to users. The UK base is gross revenues from online services such as search engines, online marketplace, and social media platforms. In all cases, the new threshold to taxation is not a permanent establishment but the overall revenues of the firm, in some cases together with a threshold of local sales revenues.

The decision to adopt stand-alone digital services taxes requires some explanation, since, as explained above, it is entirely feasible to make either unilateral or multilateral reforms to the income tax that would get at the same base of corporate profit. In particular, a government could define a targeted type of income, such as advertising fees, to be taxed at source on a gross basis and collected through a withholding tax when paid to a foreign taxpayer. The reason some nations chose to avoid this comparatively simpler policy option was to avoid existing tax treaties, which some expected would prevent states from collecting such a tax at the source.

Unfortunately, avoiding tax treaty risk had the presumably unintended effect of attracting a different kind of legal barrier, namely a set of U.S. domestic trade rules that pre-date the WTO system. These rules are colloquially referred to as the “section 301” regime by reference to their statutory placement in a 1974 trade law that authorized the United States to carry out internal investigations of foreign measures it suspects of impeding U.S. commercial interests, and to apply “countervailing” tariffs where it unilaterally deems retaliation to be merited. Despite later agreeing not to invoke the section 301 process where the WTO agreements would apply, the United States is increasingly using this process to resist foreign taxes on U.S.-based multinationals, especially in the case of Big Tech.

Accordingly, when other nations chose to adopt digital services taxes, the immediate U.S. response was to launch internal section 301 investigations and threaten retaliatory tariffs. After some diplomatic negotiating, the United States agreed to a moratorium that would defer retaliatory action in the case of several countries pending a multilateral agreement on the OECD’s Pillar 1 proposal, but it continues to pursue investigations and potential retaliatory actions against countries that were not in the initial group of those targeted by its section 301 process. The viability of digital services taxes is accordingly uncertain. Some countries, such as Austria, have engaged in successful collection over the course of several years (subject to potential future clawback in the event of multilateral consensus on Pillar 1), while others, such as Canada, are hesitantly rolling out their own versions under the threat of U.S. retaliation.

2. Destination-Based Cash-Flow Tax

For decades, a number of economists have been strong advocates of replacing the corporate income tax with a destination-based cash-flow tax (DBCFT). Being destination-based, the DBCFT is similar to a value-added consumption tax, but it also resembles a traditional corporate income tax in that its base is net rather than gross receipts. Even so, the DBCFT base is distinct from that of either of those two taxes. As a tax on cash flows rather than income or added value, the DBCFT base usually includes interest expenses and import purchases but allows deductions for capital expenses and export sales.

A report by the Tax Policy Center Urban Institute & Brookings Institution describes a DBCFT proposal introduced by then-House Speaker Paul Ryan in 2017 as a “subtraction-method value-added tax with a deduction for compensation of employees.” The excessive use of jargon makes the tax appear impermeable to public understanding and may explain why this brief moment of political enthusiasm did not lead to enacted legislation. Further, since a DBCFT is not usually proposed as an additional or complementary way to tax corporations but instead would replace existing corporate tax systems, its adoption at an international or global level would likely lead to a massive revenue shift among states.

This distributive issue is briefly discussed in a book co-authored by a group of five scholars. The book considers the fairness implications in the DBCFT proposal but does not delve into what an equitable allocation of taxing rights among nation states would comprise. Alternatively, the proponents of the DBCFT largely rely on efficiency as the primary normative justification for the tax. According to the authors, there are three viable options to tax corporate income, namely : (1) the current (flawed) competition-based international corporate taxation system which allows multinationals to avoid paying taxes; (2) the DBFCT, which they argue is comparatively fairer; or (3) what they call a “residual profit allocation by income” (RPA-I). This third option maintains the existing (origin-based) corporate income tax, albeit with a slight shift to the country of destination. In regard to the RPA-I, the authors’ view is that “[i]t is difficult to say whether [the] effects are more or less fair compared to the existing system.” As the DBCFT would result in a more drastic reallocation exercise, the chances of successful implementation at a global level appear slimmer to the extent that national lawmakers are concerned with relative gains.

3. Digital Consumption Tax

An alternative way to tax Big Tech is to use consumption-based levies, such as a value-added tax (sometimes called a goods-and-services tax). Consumption taxes are, like any excise tax, generally computed on the retail price of the good or service and collected from the buyer by the seller. In broad strokes, a value-added tax is simply a consumption tax that is collected at more stages along the supply chain, whereupon each of the vendors along the chain collects the tax from the next buyer until the ultimate purchaser bears the tax. National consumption taxes are common around the world. The United States is a notable outlier as it lacks (aside from excise taxes) a federal consumption tax, but many U.S. states have retail sales taxes on goods and services used within the state. Since services can ostensibly include any intangible service, imposing consumption taxes on digital services would appear to be a ready policy choice for any government that already has a consumption tax in place.

Accordingly, Reuven Avi-Yonah and Nir Fishbien have proposed a digital consumption tax to be collected in the country where digital services are provided and where users reside. The authors explain that when a user gains free-of-charge access to a digital platform such as Meta, there is an underlying transaction between the two parties that constitutes a barter exchange. In effect, they argue, the user obtains the right to use the platform while the platform obtains the right to use the user’s personal data for profit-making purposes, including to show targeted ads to the user. Accordingly, the tax law ought to deem the occurrence of two correlated payments: a deemed monthly subscription fee on the side of the user and a corresponding royalty-like payment on the side of the platform. Doing so would require a method to value how much a digital platform would charge monthly from each user as a subscription fee.

Under existing value-added taxes or sales taxes, the deemed subscription fee received by the platform would become a taxable transaction just like any other remunerated form of supply, whether paid in cash or in kind. For this reason, Avi-Yonah and Fishbien claim the proposed digital consumption tax solution would not require a new tax. Instead, it would simply extend well-accepted consumption tax principles to a deemed payment in respect of a seemingly free transaction. Since the application would be uniform as part of existing consumption taxes that are generally considered nondiscriminatory under WTO law and trade agreements, Avi-Yonah and Fishbien further claim their proposal would avoid the charge of a disguised tariff (thus avoiding the threat of a section 301 investigation, as discussed above in the case of other digital services taxes). At the same time, general consumption taxes are not covered by tax treaties, so a digital consumption tax would not be subject to the same treaty limitations as income-based taxes, including the requirement of a physical presence in the form of a permanent establishment in the taxing jurisdiction.

4. Data Taxes

Data taxes are as old as the expansion of the internet. In the 1990s, governments began to fear that e-commerce would lead to significant revenue shortfalls, especially in respect to direct forms of taxation such as value-added tax and sales taxes. A regulatory response widely discussed in Europe and the United States was to levy a “turnover tax on digital traffic[,]” following an original proposal by Arthur J. Cordell and Thomas Ran Ide. Called a “bit tax,” Cordell defended the policy when he became a special advisor to the Information Technology Policy Branch of the Canadian Department of Industry in Ottawa and thereby sparked the interest of a group of researchers at Maastricht University. According to Cordell, “[t]he new wealth of nations is to be found in the trillions of digital bits of information pulsing through global networks” which require the establishment of a “new fiscal framework” for distribution of income when jobless growth becomes the rule. His bit tax proposal was considered by the European Commission and the governments of Belgium and Italy, recommended by the United Nations Development Program (UNDP), and even included in the U.S. Internet Tax Freedom Act of 1998. But after the OECD, the European Economic and Social Committee, the WTO, and the U.S. government each raised concerns regarding neutrality and discrimination, the bit tax was abandoned.

Two decades later, Italy introduced a bill for a “web tax,” which came into effect in 2019. The tax arose in response to disputes between the Italian tax authority and Big Tech firms including Google (Alphabet) and Apple, followed by a series of failed proposals for the introduction of new taxes on those firms. The web tax was designed to apply to digital transactions that met three conditions: (1) “a supply of services via electronic means, namely the internet or other networks”; (2) “involvement of Italian residents or Italian [permanent establishments] of non-residents with business income (destination principle)”; and (3) “volume in excess of 3,000 transactions for a specific service provider/taxpayer within a given calendar year.” However, due to pending decrees that were necessary to give effect to the legislation, the tax was never implemented. In 2020, a new law was passed replacing the web tax with a digital services tax, in a unilateral move by the Italian government in the wake of the European Commission’s proposal for a similar tax.

Alternative models for data taxation have been put forward by scholars such as Omri Ben-Shahar, Ana Paula Dourado, and Omri Marian, each with their own rationale, design, and targeted tax base. Ben-Shahar’s proposal is an indirect Pigouvian-like tax to address harms created by the data economy, which he describes as “data pollution.” Taxation should be levied, according to Ben-Shahar, “at the time of data collection,” reflecting “both the quantity and the quality of the information collected,” and even “the varying sensitivity of information.” As a tax imposed on the economic value of data transactions and consequently incorporated into final prices, Ben-Shahar’s proposal is indifferent as to whom the ultimate taxpayer is, whether the data taker or the data giver. By the same token, the proposal does not consider the international dimension of the tax, notably which countries should be the primary collectors and how to coordinate possible conflicts.

Dourado also recommends a special type of Pigouvian tax, but her proposal differently takes into account the need for some level of international coordination. Dourado proposes a regional tax to be levied by market states on consumer-facing businesses. She describes her tax as a form of “regulatory currency for the free collection, mining and sale of personal data[,]” including connected activities such as knowledge discovery. The tax would resemble a royalty charged on the exploitation of natural resources, but revenues would be earmarked in order to serve as “a public utility measure contributing to regulating the stateless power of digital giants acting as monopolies and oligopolies by gaining back sovereignty so that liberal states would be able to protect privacy and their democracies.”

Finally, Marian’s proposal is more ambitious as it aims to wholly replace (or at least supplement) traditional income taxes. For over a century, income was considered the best metric to measure wealth and ability to pay, but Marian argues this is no longer the case in the data economy where information has become the “new oil” or “new money.” In addition, cornerstone concepts for the application of income taxes in a globalized economy, such as ownership, source, and value, are meaningless for data-based businesses. Marian’s solution is to abandon income as a tax base and focus instead on the collection and use of raw data as a taxable event in itself. Since valuing data is a highly contestable exercise, Marian proposes that data taxation should be imposed on the volume of data a taxpayer uses, regardless of attributing any monetary valu. Though theoretically interesting, this idea seems immensely challenging to reconcile with existing practices among most of the world’s countries, whose tax systems are largely built on income-based forms of taxation. Because implementation would require a complete overhaul of world tax systems, Marian’s model would encounter similar practical problems to those faced by the DBCFT, as discussed above.

5. Robot Tax

Because Big Tech firms extensively rely on various types of artificial intelligence, computing, and robotics, many fear that such automated business models will profoundly disrupt economies by making certain (if not many) forms of human labor obsolete. Further, a switch from an economy that employs capital and labor in the production process to one that substitutes labor for robots (arguably, replacing salaries for capital income) could bring negative consequences not only for employment and the workforce itself, but also especially for the collection of payroll taxes and social contributions.

A solution currently discussed in the literature, and supported by influential figures such as Bill Gates and Bernie Sanders, is to impose tax on the robots themselves as if these were autonomous income earners, much like the employees they replace. In 2017, the European Parliament considered but ultimately rejected a recommendation by the Committee on Legal Affairs to the Commission on Civil Law Rules on Robotics on “levying tax on the work performed by a robot or a fee for using and maintaining a robot.” Nevertheless, the robot tax has generated a thriving scholarship among legal scholars and economists, both in favor and against the tax. A leading proponent of the robot tax is Professor Xavier Oberson, who argues that attributing tax personality under the law to robots is justifiable, leading to the recognition of an electronic ability to pay taxes (or electronic tax capacity). Oberson observes, however, that since robots “can be easily displaced and act in various places at the same time,” an effective robot tax would ultimately require a global coordinated approach.

This international dimension, coupled with the unprecedented nature of the tax, creates obvious challenges for implementation, as well as uncertainties about the potential economic impacts. As highlighted in a study by economists Emanuel Gasteiger and Klaus Prettner, “the implementation of a robot tax would require a coordinated move across countries because otherwise capital might move to jurisdictions without a robot tax.” While Gasteiger and Klaus claim a robot tax could steadily raise per capita capital, per capita output, wages, and welfare, they also note that incentives to invest in new technologies could reduce those benefits “to the extent that technological progress and economic growth slow down.”

6. Corporate Wealth Tax

In response to observed levels of business concentration among Big Tech firms and the upsurge of inequality in respect to their owners, especially since the COVID-19 lockdowns of 2020, economists Emmanuel Saez and Gabriel Zucman have suggested a wealth tax on the market capitalization of corporations. This stand-alone tax is meant to complement existing income and profit-based taxes. As envisioned by its proponents, a 0.2% rate would be applied to the annual value of the stock shares of publicly-listed and large private firms headquartered in Group of Twenty (G20) jurisdictions. To avoid liquidity and valuation issues that are inherent to any form of tax imposed on accumulated wealth rather than net inflows, Saez and Zucman consider the possibility of in-kind payments through the issuing of new stock; taxpayers could pay the tax with shares instead of cash.

Saez and Zucman justify their proposal as addressing “broader trends that pre-date the pandemic,” notably the under-taxation of multinationals that, at least since the 1980s globalization wave, have been increasingly lowering their tax burdens by shifting profits to low-tax locations. Despite the recent agreement on the global minimum tax analyzed previously, Saez and Zucman argue that the 15% rate is too low compared to what the working and middle classes in high-income countries currently pay. In addition, a global minimum tax imposed on income would leave some key Big Tech companies such as Amazon and Tesla largely unaffected, given their comparatively low-level of profitability relative to their enormous market value and market power. A specially designed corporate wealth tax on Big Tech, Saez and Zucman claim, would “generate substantial revenue while gathering strong public support and it would tax companies that are highly valuable even if they manage to report little taxable income.”

Given the concentration of stock ownership among the wealthy, Saez and Zucman further argue that their tax would be highly progressive. However, progressivity is only considered from an inter-individual perspective within the state, with a specific focus on G20 members. The authors recognize the need for international cooperation in order to effectively implement the tax they propose. Even so, the envisioned agreement would have its greatest impact among the high-income countries that host the largest multinationals, whereby some economically strong countries such as Germany could act as first movers incentivizing others to do the same. No specific redistributive mechanism for low-income and developing countries is considered within this proposal.

IV. The Case for Cooperating with Change

If there is a general consensus that Big Tech must be regulated, and, as we have shown, taxation is a key instrument to accomplish this goal, then any one of the 17 tax approaches discussed above is theoretically a contender for a dominant policy position, even if some appear more politically viable than others. At minimum, all 17 tax approaches inform policy discussions as states formulate ways to tax Big Tech. To date, the United States has consistently opposed any reforms that would subject its homegrown Big Tech firms to taxation by other nation states. This opposition has included slowing the progress and narrowing the scope for tax base reallocation being developed through multilateral talks as well as launching internal investigations and retaliatory measures against countries that introduce change unilaterally. Yet the Supreme Court’s rationale in the Wayfair case stands as a clear point of departure in forging a paradigmatic shift. This Part demonstrates that, following this jurisprudence, the United States cannot reasonably refuse to to cooperate with the expansion of tax nexus by other states when exercised on the same grounds as that exercised by South Dakota. To do so, it revisits the Wayfair decision in light of the 17 tax reform approaches discussed above, shows how the Supreme Court’s logic also explains many of these approaches, and makes the case for full U.S. cooperation with foreign and international reforms that adhere to the Wayfair principles going forward.

A. The Wayfair Principle

As introduced above, the Wayfair case prompted the Supreme Court to expressly confront the concept of nexus and its line-drawing function in the state-level regulation of non-resident firms. As a threshold matter, taxation of non-residents’ personal and corporate income generated within the state is understood to be constitutionally authorized with few express jurisdictional constraints. In the case of retail sales and use taxes, however, Courts had for many years interpreted constitutional principles respecting due process and inter-state commerce to restrict state taxation of out-of-state companies, including the imposition of tax collection obligations on such companies with respect to in-state consumers.

When South Dakota nevertheless sought to impose such obligations, Wayfair Inc. and other remote sellers resisted, leading to legal proceedings in state court. Given the settled jurisprudence that previously established the physical presence requirement, taxpayers unsurprisingly prevailed at the state level. But South Dakota appealed successfully to the Supreme Court, which reversed course and held that states are not constitutionally prohibited from forcing remote sellers to collect tax on goods and services sold to local customers, despite the lack of a physical presence. Even the four dissenting justices (John Roberts, Stephen Breyer, Sonia Sotomayor, and Elena Kagan) agreed that past decisions were mistaken and that physical presence requirements are irrational in the context of the contemporary economy. The disagreement in Wayfair fundamentally rested on whether past precedent, even if archaic and misaligned, should be upheld as a matter of stare decisis.

In making its decision, the Court relied on its reasoning in a 2009 case, Polar Tankers, Inc. v. City of Valdez, which involved a city ordinance that imposed a tax on certain shipping activities. The Court declared nexus to be established when the taxpayer availed itself of the “substantial privilege of carrying on business in the jurisdiction.” In Wayfair, the Court reviewed the taxpayer’s economic and virtual contacts with (and in) South Dakota, and concluded that the state was justified in asserting that nexus had been established on the same grounds. The Court noted that South Dakota had taken reasonable steps to prevent unconstitutionally discriminatory treatment of non-residents relative to residents by, inter alia, establishing a threshold to taxation of $100,000 in sales or 200 users in the state.

Whether by causation or correlation, the decision had a significant impact on states’ tax policies. In the years that followed, multiple U.S. states expanded the reach of their tax jurisdiction by adopting use taxes, taxes on internet sales and internet advertising, and income taxes targeting multi-state taxpayers.

Several commentators have commended the Wayfair decision for, among other reasons, preserving a core value for intergovernmental relations in that it accommodated the regulatory power of states to regulate and tax firms operating in their territories, even if only through virtual means. At the same time, international tax scholars have pointed out that Wayfair, albeit a country-specific decision, has relevant implications for the ongoing global debate on the taxation of the digital economy. Avi-Yonah, for example, argues that even though Wayfair was about sales tax and not income tax, the Supreme Court’s logic makes even more sense when applied to international corporate profit taxation, not least because the distinction between direct and indirect taxes is meaningless in much contemporary discourse. Stephen Shay likewise notes that “the reasoning of the US Supreme Court’s recent Wayfair decision … articulates why host countries, including the United States, also must reconfigure their income tax regimes to systemically tax remote sellers—digital and non-digital.” Ruth Mason, in turn, writes that “proponents of digital taxation have even more support from the US jurisprudence than they realize: the only question in Wayfair was whether sales taxes would remain an exception to the general rule that physical presence was needed to establish tax nexus.” In a similar vein, Ana Paula Dourado posits that “the rationale of [Wayfair] should be transposed to income taxes in the digital economy, based on production and sales of goods and services on a global scale.” Other commentators conclude that “[t]he fundamental message of Wayfair . . . is that tax rules for the digital economy, whether involving allocating taxing rights or enforcing tax obligations arising from those rights, should reflect contemporary economic reality while avoiding the imposition of undue burdens on those tasked with collection obligations.”

Nation states are not formally subject to a global constitution or world tax authority in any way that resembles how U.S. states must comply with the U.S. Constitution and federal legislation, so the possibility of expanding tax nexus at the international level seems relatively straightforward. The taxing powers of sovereign states are legally restricted only by whatever international conventions they choose to enter, the interpretation of which lies with each of their competent authorities and ultimately their own national courts.

Despite the lack of clear legal boundaries on nation states’ tax jurisdiction, U.S. lawmakers have continuously expressed the view that foreign taxes on U.S.-parented Big Tech firms amount to extraterritorial taxation. Companies like Apple, Alphabet, and Amazon are all resident in the United States (having their headquarters in U.S. states), but some of their unnamed competitors are resident in China (such as Tencent) while a few relatively much smaller competitors are scattered in other mostly highly developed, high-income countries (such as Shopify in Canada and Spotify in Sweden). All other factors being equal, it seems clear that the United States would generally prefer to reduce taxation at the source to ensure that more profits stay with the United States, regardless of any normative principle surrounding the core jurisdictional issues at stake.

B. Extension to the International Context

One of the most effective and straightforward ways a state can regulate a foreign-based firm doing business in its territory is by imposing source-based taxation. Even at low rates, source taxes ensure that non-residents provide relevant information to tax authorities that is useful for governmental oversight. From another angle, states sometimes use lower levels of taxation in combination with legal regimes that facilitate domestic ownership of assets to attract foreign capital and economic activity, thus switching the source of income for tax purposes. Source-switching is a method of using taxation with a regulatory goal in mind, but the outcome in global welfare terms is often regarded as undesirable because source-switching leads to a race-to-the-bottom tax competition.

Whatever the rate or design chosen, taxation at source is key to regulate cross-border economic activity because it allows states to keep control of foreigners operating in their markets while raising revenue that can finance governmental action. However, source taxes tend to keep more of the economic gain to the source state at the expense of the residence state, so we might expect residence states to cede to source taxation only if and to the extent they also expect to be in the position of a source state. In their ground-breaking work on the allocative function of taxation in the international context, economists Peggy Musgrave and Richard Musgrave established that a tax at source works as a form of wealth-claiming mechanism. A source state, they argued, can only realize its entitlement to a cross-border stream of income by taxing it, whereas a residence state benefits by including in its national endowment any dollar that makes its way to a beneficiary in its state, whether it is then taxed or not. Peggy Musgrave and Richard Musgrave showed that, when in the role of residence state, whether or not a jurisdiction imposes a tax is irrelevant because a tax at residence involves only an internal transfer of some of the residence country’s national gain from the taxpayer to the public fisc. Taxation at source, on the other hand, determines the distribution of profits among states, with higher source tax keeping more economic gain in the source state.

Even without taxation, source states might expect to gain from cross-border investment through increased employment, sales of local products, and other spillovers. But states do not necessarily get these positive spillovers from Big Tech. These firms effectively extract value from cross-border investment without necessarily employing anyone locally, without contributing positive spillovers, and even creating negative ones in terms of distorted competition, issues related to free speech, privacy and data use, as well as unchecked influence over the public sphere and local politics. The surge of political will to tax Big Tech can therefore be read as an indication that the positive spillovers have become insufficient to warrant cooperation with cross-border capital flows.

Relative to the source state, Big Tech firms may be resident in any country with an entity upstream of the ultimate users or consumers, ultimately to the original capital-exporting state (for example, the United States in respect to Amazon, Alphabet, Apple, Meta, and so on). The gain to these upstream entities consists of the increased returns to their investment in digital assets. States that are mostly residence states for high-value digital services firms accordingly must assess the extent to which they will accept the redistribution of some of their national investment gain to other states through taxation at source. Since the United States is the world’s primary exporter of highly digitalized services, a self-interested position is to oppose greater taxation at the source, even if doing so directly conflicts with the central logic adopted by the Supreme Court in Wayfair, as seen above.

If the novel and innovative business model of Wayfair Inc. and similar firms led to the recognition that the traditional distinction between state of establishment and state of consumption can no longer matter for sales taxation, a coherent and principled position at the international level could only be to similarly recognize that the traditional source versus residence distinction has lost its meaning for cross-border corporate taxation. Big Tech simply does not access source states in the traditional manner in respect of which traditional tax norms were developed. Instead, they access the population as providers of monetizable data and as consumers of online services and online advertising. Without an increase in employment or profitability potential in local firms, the traditional source state becomes the state of access to customers. In this role, the source state is a “market” state. A market state might see some increased spending in the advertising sector, but it may also be that local advertisers simply switch from paying domestic broadcast and print media for platform space, to paying foreign firms for web-based platform space instead.

The term “market state” might be new in the international tax context, but the normative justification for source taxation remains a fundamental jurisdictional entitlement “to tax all income arising within its geographical borders.” As Peggy Musgrave rightly noted, source-based taxation on a net- or gross-basis (in the latter case through withholding obligations) “permits a country to share in the gains of foreign-owned factors of production operating within its borders; gains which are generated in cooperation with its own factors, whether they be natural resources, an educated and/or low-cost work force, or the proximity of a market.” This is the principle reflected in the Wayfair decision.

The current U.S. position toward other nation states seeking to do the same thing over national borders as South Dakota did over state borders must be contextualized within the rapid expansion Big Tech enjoyed even as fiscal crises unfolded around the globe. In seeking to protect some of the world’s biggest, most recognizable, and most influential firms against foreign taxation, the United States has generated instability in the international regulatory order. In light of the growing urgency to forge workable solutions in the immediate term, it is no surprise that other nation states have explored various ways to tax Big Tech for the sake of both regulating its behavior and stabilizing public finances. It is also no surprise that upending conventional assumptions about the proper boundaries of regulatory power is a common theme across the range of approaches. Lawmakers and political leaders around the world seeking a paradigmatic shift in the way they tax tech-heavy businesses will naturally look to any coherent precedent that appears to state the principle underlying their policy.

Since the Wayfair case undeniably provides this precedent, the United States should uphold it not only internally but also internationally, both for reasons of integrity and consistency and in order to fulfill the duty to act in good faith toward other nations. Extending the Wayfair logic to the cross-border context would ensure a coherent U.S. approach towards other nations, permitting them to exercise their regulatory powers in the same manner as U.S. states. In practical terms this means that the United States should accept new modes of taxation where possible, but it has an enhanced duty to do so when the new mode involves the same logic as that expressed by the Supreme Court with respect to the economic connections evidenced by virtual access to a territory. To do otherwise is to sustain an unjustifiably inconsistent position between the judicial response to companies that cross state borders and that of the executive in response to foreign claims on Big Tech operations abroad.

V. Conclusion

The rise of Big Tech has brought the world to a critical moment in cross-border policymaking. The expressed collective desire to regulate Big Tech firms, coupled with states’ urgent needs for revenues, favors a strategy that pursues the most expedient solutions available, even if these solutions face opposition from taxpayers or other states. Taxation has long been both a regulatory and revenue-raising tool, and it is currently a key component in the quest to address the challenges brought on by the digitalization of the economy. Today, many states want to change the status quo, while others wish to prevent change. Some have already begun to adopt creative strategies to claim more for themselves, while others resist all such efforts. From the analysis of the 17 policy options identified in this Article, what surfaces is a general understanding that states are justified in relying on taxation both as a means of regulating Big Tech and sharing in the immense wealth they helped create.

As a matter of law, there should be little doubt that any country currently considering various strategies to regulate Big Tech could reasonably reform their tax rules in line with what any of the U.S. states have done, both up to and after the Wayfair case. The policy options range from expanded presence norms to revised withholding taxes to a complete reconfiguration of the tax system. The advantage of using taxation as opposed to other measures (such as antitrust and public utilities regulation) is that tax law’s reach is practically limited only by the specific terms of bilateral tax treaties and other international agreements, most of which arguably leave room for the kind of changes that are being proposed. While some reforms could potentially raise conflicts, the scope of possible violation depends on a combination of specific domestic law factors (such as how a particular provision of law is structured), treaty terms (such as the technical wording in the relevant provisions of a bilateral tax treaty), and broad principles that require interpretive scrutiny before they can be fully resolved. In addition to its other contributions to the evolution of the doctrine surrounding nexus, the Wayfair case sends a strong message to lawmakers that neither conventional wisdom nor long-standing precedent should deter them from making well-reasoned policy changes when the circumstances demand it.

 

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