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Invisible Assets, Visible Gaps: Redefining the Principles of International Taxation

Published online by Cambridge University Press:  15 August 2025

Rajat Datta*
Affiliation:
Lecturer and Assistant Dean, Jindal Global Law School, https://ror.org/03j2ta742 O.P. Jindal Global University , Delhi NCR, India. Email: rajatdatta212@gmail.com.
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Abstract

The global transformation of the economy towards a digital one has fundamentally restructured business operations, economic models, and tax practices. With digital technologies and electronic communications embedded within industries, the digital economy has fostered innovative business models, transformed user behaviors, and increased operational efficiency. However, such a revolution has come at the price of exposing the limitations of traditional international tax models based on physical presence and tangible properties. The entry of borderless, intangible, and platform-based economic activities necessitates urgent tax redesign, especially amid digital businesses, which increasingly interact across borders yet leave no traditional physical presence.

This research describes the revolutionary influence of the digital economy on cross-border taxation, deconstructs the traditional conceptualization of the permanent establishment (PE), and evaluates the emergent principle of “tax where value is generated” based on recent literature as well as emerging global reform approaches.

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© The Author(s), 2025. Published by International Association of Law Libraries

The Digital Economy and its Disruptive Impacts

The digital economy has revolutionized global trade through the extensive use of digital technologies, and this has introduced core changes to business operations and consumer behavior. Digital commerce, omnichannel retailing, and data-driven personalization are some of the best examples of how traditional business models have evolved to suit the requirements of the digital age. The innovations have gone together with wider changes in society, including more remote working, digital learning, and technological innovation in the healthcare and entertainment sectors.Footnote 1

But these opportunities are accompanied by huge challenges. Digitalization has increased the digital divide, data privacy concerns, and cybersecurity issues, raising questions about the fair distribution of digital dividends.Footnote 2 Importantly, the borderless and fluid nature of digital transactions has rendered conventional models of taxation increasingly obsolete. Classical tax models, which are premised on the physical presence of firms, are no longer able to keep up with the value generated by digital firms through servers, data, and user interaction across jurisdictions.Footnote 3

Disruption of Jurisdiction and Cyberization of the Tax-Free Base

The rise of the digital economy has broken the jurisdictional foundations of international tax law. Tax regimes had long relied on physical nexus requirements—offices, factories, or employees—to determine taxing authority. Digital companies, however, tend to engage in economic activity in States in which they have no physical presence, thereby evading taxation while reaping significant revenue.Footnote 4 Dubbed the “cyberization” of the tax base, this phenomenon inserts enormous holes into profit attribution and damages fiscal sovereignty.Footnote 5

This distance between economic activity and tax jurisdiction is reinforced by the characteristics of digital goods and services. Digital products have high fixed costs of production but roughly zero marginal costs for reproduction and distribution.Footnote 6 As a result, the marginal value produced across borders is largely tax-free, creating disparities between digitally intensive and traditional businesses. Such disparity not only shortens market jurisdictions’ revenues but also warps competitive forces, favoring tax-agile businesses capable of exploiting loopholes in extant frameworks.Footnote 7 Economic presence tests and the extension of consumption-tax base reform have been proposed by scholars and policymakers as solutions to this issue.Footnote 8

Permanent Establishment and the Digital Loophole

At the heart of the challenge of taxing the digital economy is the age-old concept of “permanent establishment” (PE), a cornerstone of international tax agreements. The PE notion, developed during the early 20th century, bases tax accountability on the existence of a permanent establishment. In the digital economy, the requirement becomes irrelevant when most enterprises function through websites, cloud computing, and remote servers, none of which meet the requirement of fixity to qualify as a PE.Footnote 9

Consequently, digital multinational firms can legally avoid taxation in source nations, although they garner valuable economic returns from user groups within them.Footnote 10 As a result of this loophole, researchers and international institutions have called for novel PE definitions, which would embrace a “substantial digital presence.”Footnote 11 It would enable taxing authorities to exert jurisdiction over companies with an established digital presence and revenue generation, regardless of physical presence. Market nations are particularly disadvantaged in the current regime, missing massive tax revenues owing to companies using their user base and digital networks.Footnote 12

Reconsidering Value Creation in the Digital Era

In response to such structural erosion, the concept of “taxation where value is created” has arisen as the central issue in international tax reform. Envisioned in the Organisation for Economic Co-operation and Development/Group of 20 (OECD/G20) Base Erosion and Profit Shifting (BEPS) initiative, the concept has the goal of linking taxing powers with genuine economic activity and value creation as opposed to legal structure or physical location.Footnote 13 The BEPS initiative is a significant step towards limiting aggressive tax planning by multinational enterprises. However, its use in digital environments is still plagued by ambiguity. Critics of dominant accounts of value creation argue that these are undertheorized and do not adequately capture data-driven business dynamics where users, platforms, and algorithms intersect in interesting ways.Footnote 14 Devereux and Vella also ask whether tax systems under dominant frameworks have ever actually linked taxing powers with genuine economic activity and value creation, as the BEPS initiative aspires to, criticizing both its descriptive accuracy and normative attraction.Footnote 15 As Kysar notes, perhaps there is less and less consensus about value creation as a reforming principle, and other measures such as user engagement or data use may therefore be required.Footnote 16

The digital economy has driven revolutionary changes in international trade, productivity, and engagement while simultaneously exposing the weaknesses of a century-old international tax system. Concepts such as permanent establishment, nexus of jurisdiction, and value attribution must be reimagined at their core to keep up with the realities of intangible, networked, and data-based business models. Although efforts such as the OECD BEPS action plan are positive steps in the right direction, more comprehensive frameworks, such as significant digital presence and new value-creation metrics, must be formulated to ensure fair taxation, fiscal justice, and safeguarding of public revenues in the digital economy. Bridging these gaps will necessitate unprecedented global cooperation, technological literacy, and legal innovation.

The globalization of business and the rapid growth of the digital economy have fundamentally changed international taxation. This change is most apparent in intangible assets, which include intellectual property (IP), brand value, software, and data assets that can be independent of a physical location. Taxing intangible assets presents serious legal and practical difficulties, compounded by differences in transfer pricing (TP) rules, aggressive tax planning by multinational enterprises (MNEs), and outdated tax rules based on physical presence.

TP and the valuation of intangibles are inherently challenging, as they are unique and non-rivalrous. Intangibles lack comparable market reference points, and thus arm’s-length pricing is challenging. The OECD TP Guidelines seek to control such transactions, but enforcement is inconsistent across jurisdictions, resulting in higher compliance costs, documentation problems, and possible double taxation.Footnote 17 Implementation issues, such as the subjective allocation of ownership and value, challenge even the most advanced tax administrations, particularly with respect to high-value or new intangibles.Footnote 18

The rise of the intangible economy has also contributed to the erosion of corporate tax bases globally. Ciuriak and Eurallyah observe that intangible-driven business models, especially in digital and pharma industries, allow MNEs to strategically relocate profits to low-tax jurisdictions.Footnote 19 This has been particularly harmful to developing economies with weaker administrative capacities and fewer taxing rights on digital transactions. The COVID-19 pandemic also stretched these jurisdictions’ revenue capabilities, exposing their vulnerability to outdated international tax norms inappropriate for cross-border value creation on digital platforms.Footnote 20

Traditional tax systems, grounded in concepts of permanent establishment (PE) and source-residence principles, are no longer tenable in a world in which important economic activity takes place in cyberspace. As Danescu contends, Europe’s digital tax regimes are in great trouble in terms of applying current rules to cross-border intangible commerce, especially in the case of decentralized digital enterprises that have no physical presence in consumer markets.Footnote 21 Harpaz also maintains that digital multinationals take advantage of the physical presence rule to divert profits from high-tax countries, degrading the integrity and efficiency of international tax law.Footnote 22

Among the most contentious issues, particularly the inadequacy of traditional international tax rules to capture value from digital and intangible-based economic activities, is the failure of existing frameworks to account for the contribution of consumers and users, the so-called “digital laborers,” to value creation in digital business models. Parsons argues that by not accounting for the economic contribution of users, existing tax principles favor capital over laborers and distort profit allocation to producer jurisdictions.Footnote 23 The inability of existing frameworks to account for the contribution of consumers and users also excludes developing countries, whose consumers are a valuable source of data and consumer intelligence but whose governments collect very little tax from these global digital firms.

To address these problems, the OECD’s BEPS Project and Pillar One Proposal offer some hope. Pillar One, especially, aims to reallocate taxing rights to market jurisdictions via new nexus rules and profit allocation rules on user participation and digital engagement.Footnote 24 The proposal, however, involves formidable political and technical challenges, especially with revenue-sharing mechanisms, dispute settlement, and sovereignty issues of low-income countries.Footnote 25 Okocha explains that the implementation of Pillar One will depend on its integration into a transnational legal regime supported by uniform enforcement and mutual administrative assistance.Footnote 26

Meanwhile, the terrain of TP is a front-line battlefield. Strategic tax planning is frequently used by MNEs, taking advantage of the fragmented nature of international tax rules to artificially manipulate profits. Åsa Johansson et al. outline how these practices translate into estimated global revenue losses of between 4% and 10% of corporate tax revenue each year, harming public finance systems disproportionately.Footnote 27 The technology and pharma sectors, where value arises from proprietary software or R&D, are most adept at this, using IP boxes, cost-sharing arrangements, and intra-group licensing to keep their global tax bills as low as possible.Footnote 28

In addition, the application of the separate entity approach, in which every affiliate of an MNE is treated as a standalone taxpayer, facilitates regulatory arbitrage and erodes tax policy coherence.Footnote 29 Picciotto has advocated for unitary taxation for a long time, whereby MNEs are treated as integrated economic entities where profit is allocated by using formulary apportionment. According to him, this will alleviate pressure for profit shifting, as well as promote business-reporting transparency.Footnote 30

Salomov O’g’li et al. favor harmonizing financial reporting and global standards of tax disclosure on intangibles, which are too often insufficiently documented. Inconsistency of financial transparency and regulatory loopholes provide opportunities for base erosion and profit shifting (BEPS) by aggressive TP. Greater international cooperation, they think, is needed to develop tax rules that are harmonized and conform to the economic reality of the 21st century.Footnote 31

Finally, taxing intangibles is a huge challenge for international taxation law. Digital trade has made old conceptions of physical presence, location taxation, and arm’s-length pricing obsolete. With multinational companies exploiting gaps in global taxation, policymakers need to design new, flexible, and equitable tax frameworks. These should be guided by international agreement, considering the interests of developing nations and emphasizing fairness and long-term economic well-being.

In the context of a more globalized and digitalized economy, IP has emerged as a central driver of the value-creation process for MNEs. Yet the territorial and mobile nature of IP inherently poses formidable challenges to international tax systems. As MNEs increase their capacity to strategically manage ownership of IP across borders, national governments face growing challenges to obtaining a fair share of tax revenues. This value-creation, revenue collection mismatch necessitates pressing questions regarding fairness in international taxation, legal coherence, and policy reform.

The internal problem is that the territoriality of IP rights that are granted by national legal regimes is inherently decoupled from the globally conducted economic activity of MNEs. Decoupling provides room for moving IP production, ownership, and earnings to tax-friendly countries, thus eroding the tax bases at the national level. Frankel emphasizes that even when IP’s legal protection remains territorial, the commercial and tax-basis value of IP becomes global, hence inducing a structural contradiction between IP law and tax law on a macro scale.Footnote 32 Graetz and Doud further remark that the increasing centrality of IP to international commerce has amplified the shortcomings of the conventional rules of taxation, especially since mobile intangible assets enable profit shifting and regulatory arbitrage.Footnote 33

To this is also added the ideological conflict between industrialized and developing nations on IP protection. According to Jain, developing nations oppose strict IP protections advocated by industrialized nations because they feel such measures limit access to innovation and economic growth.Footnote 34 This ideological conflict makes it difficult to establish internationally agreed-upon tax models and hinders the efforts of bodies such as the OECD to harmonize standards. The issue is further complicated by legal and accounting differences in IP recognition. According to Moerman and Laan, accounting differences in how jurisdictions treat IP assets make economic decisions and the implementation of tax policy more difficult.Footnote 35 These differences make it challenging to identify the value of IP for taxation and reduce transparency.

One of the very pernicious consequences of this system is the phenomenon of double non-taxation, where income generated by IP goes untaxed. This is largely due to loopholes in domicile legislation and double tax avoidance agreements (DTAs). Pyroha describes how the ambiguity in the definition of residency enables MNEs to avail themselves of several tax jurisdictions, including tax havens.Footnote 36 Blair-Stanek describes how MNEs take advantage of loopholes by selling IP at artificially low values to low-tax jurisdictions, which enables them to engage in mass-scale tax avoidance.Footnote 37 Additionally, Marchgraber criticizes the form of DTAs, which—though intended to avoid double taxation—have the effect of creating double non-taxation due to bilateral inconsistencies.Footnote 38 Avi-Yonah and Slemrod add that the bilateral character of tax treaties necessarily constrains their capacity to address multilateral tax avoidance schemes and suggest multilateral cooperation and the use of subject-to-tax clauses.Footnote 39 The establishment of preferential tax regimes, including European IP box regimes, has further skewed the tax environment. Such regimes provide low effective tax rates on profits from IP, which, as Evers et al. demonstrate, can result in negative effective tax rates and the subsidization of loss-making ventures.Footnote 40 This causes MNEs to relocate R&D and IP registration to low-tax jurisdictions irrespective of economic activity location. Richter denounces such regimes for not linking profits to value creation and suggests a controlled and internationally coordinated profit-splitting model for fairer tax allocation.Footnote 41

In response to growing public pressure, the OECD’s BEPS project represents a significant policy response, trying to align taxation with the value-creation location. Graetz and Doud mention, however, that despite this, the mobility inherent in IP still erodes enforcement, especially as MNEs employ elaborate structures to evade taxation.Footnote 42 Shaviro argues that the advent of mobile IP, especially by US-based MNEs, has realigned tax policy debates from the source of income to taxing location-specific rents. He prefers the apportionment of taxing rights to market jurisdictions, including through vehicles such as digital services taxes.Footnote 43 In short, IP taxation in the global economy points to a deep disconnect between settled legal norms, actual economic circumstances, and existing tax policy. The territorial IP rights regime is, by its nature, in tension with the borderless nature of global commerce, offering the prospect of tax evasion. Substantive change will necessitate a cooperative, multilateral effort that tackles both valuation inconsistencies and the fragmented jurisdictional landscape of taxing rights. Converging legal standards, updating treaty agreements, and applying globally harmonized methods like profit allocation and market-oriented taxation may offer a promising way forward. Only by these measures can the global community properly reconcile the need to stimulate innovation with the requirement of fair and effective taxation.

Globalization has created a widespread discussion on the best distribution of taxing powers in cross-border economic activity. Two dominant frameworks have been constructed by the United Nations (UN) and the OECD. While both models share numerous identical provisions, substantial differences in their strategies for the evasion of double taxation continue to define international tax discourse. This author uses the writings of Alizade, Daurer, Krever, and Loukota to compare the differences and extends the discussion to the taxation of IP and the pitfalls of the rapidly evolving digital economy.

Tax Base Distribution under the UN and OECD Models

The UN Model Tax Convention and the OECD Model Tax Convention serve as the foundations of bilateral tax agreements. But they allocate taxing rights differently. The UN Convention is inclined towards an expansion of taxing rights in favor of source States, a feature that accords developing nations greater taxing power over income earned within their territories. This stance is particularly pertinent in the context of the previous history of developing nations’ failure to access fair tax revenues. The OECD Convention is inclined towards securing residence States’ rights, hence inclining towards developed nations.Footnote 44

Comparative examinations, such as those of Daurer and Krever, have revealed that African nations have found it more challenging than their Asian counterparts to preserve taxing authority in arrangements they have made with OECD countries. Despite this imbalance, there is evidence to suggest that OECD countries offer better terms to African nations than are typically offered in deals between other developing countries.Footnote 45 Furthermore, Loukota contends that both models have played a harmonizing role in international taxation and are likely to continue to play this role in the context of continuing global income inequality.Footnote 46

Legal and Economic Implications of Cross-Border IP Taxation

Cross-border taxation of IP is another area where international tax policy intersects with economic strategy. Patent box regimes, as a vehicle for promoting innovation by offering preferential tax treatment to income from patents, are a key policy tool. Zammit argues that centralized IP business models exploit such regimes, and such structures also create double taxation and profit-shifting complexity.Footnote 47

As globalization deepens, multinational corporations have used IP transfers to low-tax jurisdictions, thus encouraging base erosion and profit shifting. Bilateral tax agreements are crucial to regulating royalty payments and fair taxation. Garbarino’s work highlights that even though royalty payments are a device to limit aggressive tax planning, the resulting consequences on investment are complex.Footnote 48 Concurring with the same, Juranek and others have proved that OECD TP guidelines—namely, the Transactional Profit Split Method—can drive investment decisions by altering incentives and impacting the total tax base of digital business models.Footnote 49 Santacreu’s work also highlights the fine line between inducing cross-border technology licensing and imposing adherence to tax guidelines.Footnote 50

Tackling the Digital Economy: New Business Models and Tax Issues

The digital economy has also introduced a plethora of new challenges to traditional tax regimes. ICT has transformed business models and economic transactions in such a way that it is increasingly challenging to determine tax nexus, data apportionment, and the definition of income. L. Swamy’s research recognizes a need to rethink how digital business models intersect with traditional economic arrangements, which necessitate reforms to recognize the value generated by digital businesses.Footnote 51

At the same time, Usman and Saha point out that any successful tax reform in the digital age will have to meet the twin challenges of fragmentation of data and the global nature of digital platforms and challenge policymakers to rethink traditional tax architectures.Footnote 52 To meet competition in this new world, Schwanen recommends calibrating competition policy to recognize the growing market power of “Big Tech” firms and further recommends that more monitoring and private redress may be viable substitutes for special tax rules.Footnote 53 Zimmermann also offers an elaborate analysis of how digital economies challenge traditional business models and advocates an integrated approach that considers both taxation and competitive dynamics.Footnote 54

The interactive dynamics between the UN and OECD Model Tax Conventions, IP taxation, and the emerging digital economy constitute a synopsis of the changing complexity of international tax policy. Whereas the UN Model caters to the interests of developing countries and the OECD Model caters to the interests of more advanced countries, both models continue to develop as leading forces in tax treaty harmonization. Concurrently, the digital business model and IP practice challenge demand sophisticated, comprehensive taxation that not only maintains investment incentives but also global fiscal fairness. Future policy reform and study must tackle these interrelated challenges to prevent aggressive tax planning and promote sustainable economic growth.

The OECD’s BEPS initiative is a sea change in international taxation, perhaps most notably in its approach to taxing intangibles. Conceding that conventional rules were unable to capture economic value in a digitized IP economy, the OECD developed notions of value creation and the DEMPE approach (Development, Enhancement, Maintenance, Protection, and Exploitation) in BEPS Actions 8–10 in an effort to link taxation to economic substance.Footnote 55 But Screpante contends that the reforms, symbolically powerful as they are, may paradoxically consolidate existing structures. MNEs can continue to arrange intangible ownership in tax-preferred jurisdictions, with DEMPE functions internalized within group entities, allowing for the strategic reporting of functions while retaining control over intangibles in low-tax jurisdictions.Footnote 56 So, while the value-creation rhetoric is commendable, the operational imprecision of DEMPE can facilitate regulatory arbitrage, particularly where tax administrations in developing nations are unable to make detailed functional analyses.

Substantial TP reform under BEPS has been limited. Brauner contends that BEPS Actions 8–10, in practice, have perpetuated the status quo ante in the guise of reform.Footnote 57 By retaining the arm’s length principle (ALP) as the cornerstone, the OECD has arguably worked in the interests of corporations. The ALP’s reliance on comparables is especially ill-suited to one-of-a-kind intangible transactions where no suitable benchmarks exist. This places tax authorities, especially in emerging economies, at a disadvantage in IP transactions and high-risk audits, as they are likely to be denied access to appropriate data and tools of comparability. To this extent, BEPS has coupled documentation and procedural conformity (e.g., country-by-country reporting) but without challenging the inherent limits of the ALP in the context of globalization and intangibles.

Empirical evidence highlights the potency of intangibles as instruments for profit shifting. Dudar, Spengel, and Voget show a statistically significant negative correlation between tax rates and bilateral royalty flows, which attests that tax rate differentials cause firms to channel royalties through treaty-friendly tax havens or low effective-rate nations.Footnote 58 Their empirical work, based on a large dataset, confirms the theoretical prediction that intangibles, owing to their mobility and value evasiveness, are especially vulnerable to manipulation. This adds weight to the criticism that the OECD indicators, although directionally accurate, might not be adequate to tackle the drivers of base erosion.Footnote 59 The research also shows that anti-avoidance measures, such as withholding taxes, curb such flows at the expense of possible double taxation or controversy under bilateral tax treaties.

To this, the OECD has added the likes of the Nexus Approach in preferential IP regimes, more stringent Controlled Foreign Corporation (CFC) rules,Footnote 60 and updated TP guidance. The Nexus Approach links tax benefits to significant R&D activity in a jurisdiction with the aim of preventing “paper” IP arrangements.Footnote 61 Conceptually sound, the approach has resulted in domestic implementation inconsistencies, with some jurisdictions using broad definitions of “substantial activity.” Moreover, enforcement is still problematic, where multinationals can disentangle ownership and functional performance across borders, particularly in developing nations, with administrative limitations. The reforms also foresee a reduction in international royalty flows, but their long-term deterrent impact is doubtful due to ongoing tax competition.

The OECD’s Pillar One and Pillar Two suggestions aim to address these problems more comprehensively. Pillar One attempts to reallocate taxing rights to market jurisdictions, thus acknowledging value created through user interaction and digital engagement—a concession to the weakness of the physical presence rule.Footnote 62 Elliffe considers this a needed development of tax nexus rules, especially for digital businesses with business models extending beyond supply chains.Footnote 63 Pillar Two establishes a global minimum tax of 15% (at the most recent consensus), aiming to outcompete the competition to the bottom in corporate taxation. Avi-Yonah et al. contend that this approach is groundbreaking in setting a floor to tax competition and aiming at Stateless income.Footnote 64 Nevertheless, the complexity of the blueprint—particularly in determining effective tax rates, substance-based income carve-outs, and interaction with domestic rules in place—would necessarily compromise its real-world effectiveness.Footnote 65

Even while the revolutionary potential of such reforms is considerable, they face robust implementation hurdles. Harpaz contends that multilateral tax coordination at this scale entails a sacrifice of a degree of fiscal sovereignty, a politically unpalatable consideration even in OECD countries.Footnote 66 For developing nations and non-OECD economies, the danger is even worse: the proposed uniform rules risk eroding the ability to shape tax policies in line with local priorities, such as the attraction of foreign investment.Footnote 67 Navarro argues that the elimination of tax-sparing agreements and jurisdictional preferences in the new OECD regulations deprives developing nations of useful tools utilized to offset their infrastructure and capital limitations.Footnote 68 This has the perverse effect of reinforcing global inequality by applying uniform rules without sufficient developmental cover or administrative support.

Implementation challenges are particularly pertinent for countries like Indonesia. As demonstrated by Tambunan, the implementation of the BEPS Inclusive Framework not only demands legislative reform but, even more significantly, institution-building.Footnote 69 Nations need to invest in capacity building, improve inter-agency coordination, and develop clear principles for issues that are very technical, such as the digital nexus thresholds and sourcing revenue.Footnote 70 The OECD-led, fast-tracked path of reforms gives scant time for nations to make policy changes and take national effects into consideration, especially where reforms overlap in trade, investment, and local revenue needs.Footnote 71 In total, the OECD reform agenda is an ambitious attempt to make cross-border tax norms relevant to the intangible and digital-driven economy. Yet, without bringing in capacity building, simplifying compliance measures, and equitable enforcement arrangements, the reforms threaten to overtax emerging economies while stopping just short of the complete elimination of the scope for tax avoidance by MNEs. The time has come to move away from high-level consensus-building and towards ground-level fairness and workability.

One of the most widespread practices among MNEs is the shifting of valuable IP rights to subsidiaries in low- or no-tax-rate countries. Ireland, Luxembourg, and even certain US states such as Delaware are some of the preferred jurisdictions to host IP holding companies due to tax-friendly policies. These IP companies remit royalties and licensing fees to the operating subsidiaries in high-tax nations, effectively taking substantial profits offshore. Maine and Nguyen illustrate how companies like Apple have utilized these arrangements, with breathtaking tax savings and little material activity in the IP holding nation.Footnote 72 Manipulation of transfer prices is part of this model. Firms underprice IP when it is transferred to low-tax subsidiaries, with the result of reduced taxation of future income streams such as royalties and licensing fees. Blair-Stanek estimates the cost to the US Treasury is almost $90 billion annually.Footnote 73 One of the most notorious of these models is the “Double Irish with a Dutch Sandwich,” in which income flows through Irish and Dutch entities before reaching a Bermuda-based firm with a no-tax home paying no corporate tax whatsoever.Footnote 74 Sendyona characterizes these models as regulatory arbitrage schemes between national tax systems, offering a legal but morally dubious means of reducing tax bills substantially.Footnote 75

To address these issues, the OECD initiated the aforementioned BEPS project. The project, specifically Actions 8–10, aims to ensure that TP outcomes reflect true value creation and economic substance, not fictional legal ownership. Gupta further contributes that BEPS specifically targets exactly the kind of tax evasion through IP valuation mismatch and artificial intercompany structures.Footnote 76 Aside from international regulation, Blair-Stanek proposes domestic legal reform in the form of modifying IP valuation principles in litigation and licensing cases to remove incentives for initial undervaluation.Footnote 77 Sendyona also talks of the establishment of Stateless subsidiary structures that are meant to avoid tax residency in any country whose sole result is to further worsen the regulatory issue.Footnote 78

These policy and theoretical concerns are exemplified in a series of high-profile case studies. Apple’s Irish tax arrangement was the target of withering criticism by the European Commission (EC), which concluded that the firm paid an effective tax rate of just 0.005% on European profits. The EC ruled in 2016 that Apple owed Ireland €13 billion in unpaid taxes. That decision was upheld by the Court of Justice of the European Union (CJEU) in 2024, a regulatory sea change in the way MNE tax avoidance is addressed.Footnote 79 Google also had to drop its employment of the “Double Irish” technique in the face of increasing regulatory pressure. In 2021, the company agreed to pay €218 million in back taxes to the Irish government.Footnote 80

Microsoft is another instructive example. In 2020, its Irish subsidiary, Microsoft Round Island One, recorded a profit of $315 billion without paying a single corporate income tax. This was because the subsidiary was Irish-domiciled but a tax resident in Bermuda, illustrating how jurisdictional arbitrage enables profits to go untaxed entirely.Footnote 81 As Stewart points out, such abusive tax planning distorts not only the economic incidence of tax revenues but also the perception of global tax system fairness.Footnote 82 These schemes lead to tax base erosion in high-tax nations, decreasing finances for public goods and harming domestic businesses.

Briefly, IP as a vehicle for tax avoidance by MNEs is a serious legal and policy issue of equity, economic substance, and regulatory coherence. Although efforts such as the BEPS initiative are a start, the success of such efforts depends on global coordination and implementation. Tax policy in the future needs to take into account that intangible assets are now at the heart of business models and tax planning. Legal creativity, institutional change, and normative power will all be required to ensure that MNEs pay tax in accordance with their actual economic activities.

The taxing of intangibles, particularly in cross-border environments, has become one of the most contentious and complex areas of international tax law. The growth of digital economies, coupled with the heightened mobility of capital and IP, has taxed the adequacy of traditional tax systems originally designed for physical enterprises. Developed and developing countries have adopted different approaches to addressing these issues, reflective of underlying differences in economic structure, institutional capacity, and concepts of tax justice.

Developing countries are especially vulnerable to tax base erosion due to structural vulnerabilities. The race to the bottom through foreign investor tax avoidance, home country tax avoidance by nationals, and tax competition more often than not results in suboptimal revenue mobilization. Developing countries are also struggling to implement complex IP requirements under preferential trade agreements (PTAs) that go beyond the minimum requirements of the WTO TRIPS Agreement. These requirements not only restrict domestic policy space but also go on to perpetuate foreign IP-owner dependence unjustifiably in the interest of large multinationals driven by the innovation of developed economies.Footnote 83

A central issue is the idea of equity among international tax systems. Industrial economies, particularly high cross-border flow countries, favor easing capital export and residence taxation, while developing countries, largely capital receivers, are keen on upholding source-side taxing authority. These premises underlie the asymmetry of the OECD’s BEPS recommendations and implementation, as most developing economies wonder if the design reflects the interests of such countries.Footnote 84 Institutions shaping global tax policy, including the OECD and the Inclusive Framework, are likely to be seen as disproportionately serving the interests of wealthier countries in restricting developing States’ ability to tax foreign owners.Footnote 85

To bridge these institutional bottlenecks, economists for a long time have prescribed a trinity of base widening, rate rationalization, and capacity building. Effective implementation of such reforms, though, requires technical skills and sound political will. It also demands greater fiscal literacy among the players, transparent politics, and political savvy to stand up to pressures from multinationals.Footnote 86 Most developing countries, though, remain beset with a “capacity conundrum” of the lack of resources preventing exactly those reforms that can make the tax collection process more efficient.

The global economy’s digitalization has further muddied the waters of taxing intangible assets. With companies earning huge revenues in countries where they have no physical presence, old nexus rules have become outdated. In reaction, more than one hundred nations have introduced unilateral measures to claim taxing rights over digital transactions.Footnote 87 India was the first to introduce such a measure in the form of its Equalization Levy in 2016, targeting foreign digital companies’ ad revenues.Footnote 88 Likewise, Nigeria modified its corporate tax law in 2019 and 2020 to tax non-resident digital businesses in the nation, even at the cost of creating diplomatic tensions with key trade partners.Footnote 89

These unilateral actions are part of a general assertion of fiscal sovereignty by developing countries. But they have also been faulted for the risk of double taxation, economic inefficiencies, and trade tensions. To mitigate such risks, the OECD has proposed a multilateral “Two-Pillar Solution.” While Pillar One would reallocate a share of taxing rights to market jurisdictions, its scope is narrow, and its complexity is daunting to many low-capacity tax administrations. Pillar Two, in the guise of a global minimum corporate tax, has also been faulted on equity grounds, as it would disproportionately benefit residence jurisdictions in developed economies.Footnote 90 Critics have thus questioned whether such proposals actually enhance distributive justice or simply reinforce existing asymmetries and the intangible dominant sectors.Footnote 91

TP regulations, in particular, have become the centerpiece of anti-avoidance measures. Through a requirement that transactions between related parties be priced at arm’s length, TP regimes seek to get income reported in the jurisdictions where value is created. Sound enforcement of TP provisions, however, involves a high degree of technical expertise, good comparability data, and extensive administrative coordination, all of which are usually lacking in developing economies.Footnote 92 Moreover, neighboring countries’ TP regimes have a significant impact on a country’s tax base, which calls for regional coordination and policy coherence.Footnote 93

General and specific anti-avoidance rules (GAAR and SAAR) offer additional protection against tax base erosion, but their interaction with international tax treaties can give rise to interpretative and procedural tensions. In this context, certain authors suggest the inclusion of specific treaty provisions explicitly permitting the application of anti-avoidance rules in cross-border transactions.Footnote 94 Thin capitalization rules against abusive avoidance of interest deductions on intercompany debt are also generally widespread. However, their effectiveness is not uniform, and in most cases, they have been found to be insufficient to counteract sophisticated tax planning devices.Footnote 95 The OECD Fixed Ratio Rule in BEPS Action 4 has also been found to be an even more standard and potentially even more effective method of limiting base erosion through the deductibility of interest. Nevertheless, it has some drawbacks, most notably in countries’ unstable earnings or underdeveloped capital markets. A superior option, and even more inclusive, is coordinating the tax treatment of intercompany financing—that is, by decreasing distortions among debt and equity instruments that underly cross-border debt bias.Footnote 96

In sum, while the taxability of intangibles and digital business models is a global issue, their impact is more politically charged and urgent in developing nations. The global tax architecture must shift in a way that takes into consideration asymmetries in administrative capacity, economic dependence, and negotiating leverage. A fair and inclusive global tax system will require technical options as well as the political will to reshape norms that have long favored capital-exporting States. Developing nations must continue to assert their sovereignty in taxation while pushing for reforms that will ensure equity, sustainability, and mutual prosperity.

Conclusion and Recommendations

The global economy has been digitized, and intangible assets—IP, algorithms, software, brand value, and user-generated content—have spread far and wide, rendering the traditional international tax models outdated. Built on the physical nexus and PE concepts, the current tax framework struggles to adequately address cross-border digital business activities. The borderless nature of the digital platform allows MNEs to generate huge revenues in foreign countries without incurring tax liability, thereby rendering global tax systems less equitable and less efficient.

The structural mismatch, at its core, is the ongoing dependence on traditional notions like physical presence for taxing rights. With business models being digitally driven by interactions, cloud computing, and platform relationships, the traditional definition of PE is no longer where value is being created. This mismatch has resulted in massive tax avoidance through carefully managed IP ownership shifts and abusive TP structures, particularly in intangibles-driven industries like pharma and technology. The arm’s length principle, though established and respected, does not work here because of the uniqueness of the intangibles and the absence of market comparables, facilitating profit shifting and double non-taxation.

Adding to these problems is the lack of consistency of international intangible valuation and reporting standards. Multinational companies use such asymmetries to arbitrage tax regimes, with developing countries losing disproportionately due to poor administrative capacity, lower bargaining leverage, and an absence of voice in the setting of international tax standards. The resultant imbalance not only denies countries their rightful revenues but also distorts competition in the marketplace by benefiting tax-elastic digital enterprises at the expense of traditional enterprises.

At this point, urgent and thorough reform is required. Below are the main suggestions to fill in the identified legal, economic, and administrative loopholes:

Redefine Nexus Rules and Digital PE

Tax regimes should drop strict physical presence requirements for a “significant digital presence” approach. Jurisdictions should use revenue-based, number-of-users-based, or digital activity-based thresholds. This would bring taxing rights back to market jurisdictions where digital companies are taking real economic value from user interactions, data extraction, and network effects.

Adopt Unitary Taxation with a Formulary Apportionment

The international tax framework must move towards the inclusion of MNEs. A formulary apportionment system—in which global profit is divided among jurisdictions in proportion to objective factors such as sales, assets, and jobs—would discourage artificial profit allocation and ensure fairer tax sharing. The formulary apportionment approach minimizes dependence on subjective valuations of intangible assets and addresses the fundamental shortcomings of the arm’s length principle.

Enhance Global IP Reporting Standards

There must be aligned standards for the recognition, valuation, and disclosure of intangible assets. Tools like the OECD’s DEMPE framework must be enhanced and implemented uniformly so that tax benefits remain in line with important economic activity. Country-by-country reporting, compulsory disclosure of IP ownership, and pricing of transactions would enhance transparency and deter abuse.

Assist Developing Nations Through Capacity Development

Global institutions must invest in developing the audit and administrative capacities of emerging economies. Without the technical ability to conduct good-quality TP audits or apply treaty obligations, these countries remain exposed to base erosion. An equitable system must incorporate customized support, streamlined compliance measures, and effective participation in global tax making.

Regulate Preferential IP Regimes and Restrict Tax Competition

Patent boxes and similar regimes must be reformed so that benefits are tied to actual R&D and value added within the taxing jurisdiction. The Nexus Approach must be strictly applied and enforced around the world to avoid “paper” arrangements. Meanwhile, OECD’s Pillar Two global minimum tax must be enforced internationally to avoid the race to the bottom of corporate tax rates.

Adopt a Multilateral Framework and Dispute Settlement Mechanism

The collapse of bilateral arrangements must give way to a coordinated multilateral tax regime. There must be a global institution—possibly under the UN or a reformed OECD—with a mandate to resolve disputes, foster cooperation, and ensure uniform interpretation of digital tax legislation. The Inclusive Framework must be restructured to give equal voice to developing countries and non-OECD members.

Acknowledge User Contribution and Adopt Digital Dividend Models

The value added by the user via data, content, and usage must be acknowledged during profit attribution. An economic digital-dividend model might redistribute some worldwide digital revenues to market jurisdictions in which consumer data and user involvement generate value. This would counter the undertaxation of market jurisdictions and enhance distributive justice.

Enact Laws Against Stateless Income and Shell Arrangements

Residency loopholes must be prevented from being exploited by entities through reforms in domestic laws. There must be mandatory substance requirements, CFC provisions, and anti-abuse measures in tax treaties to close loopholes exploited by tax avoidance structures such as the “Double Irish with a Dutch Sandwich.”

Integrate Equity into Tax Reform Processes

Equity must be the guiding principle of any tax reform. Reforms must not look after the interests of capital-exporting developed economies alone. Correcting decades of asymmetry in taxing rights in favor of source and market economies is required to attain inclusive global growth.

Footnotes

The author wishes to extend his gratitude to Mr. Sameer Venkatesh, a student at Jindal Global Law School and the General Secretary at India Policy Forum, O.P. Jindal Global University, for all the contributions towards the research support of this work. All views and any errors remain the author’s own.

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