Nuances of the International Taxation Framework

The international tax framework involves the interaction of domestic laws and international tax treaty obligations. The major concern faced by this framework is the distribution of the right to tax a particular country. Multi-national enterprises use different tax planning techniques to take unfair advantage of the existing tax framework and distribute taxing rights to avoid or minimise their tax liabilities. Therefore, it is also the duty of the international tax framework to enforce rules in a manner that limits such tax aggressive tax planning strategies. In the prevailing system of international taxation framework, the profits of a particular company can either be taxed by the country where the company is situated (residence country) or by the country where the business activities are taking place (source country). The resident country has the authority to tax the company because of the nexus between the company earning the income and the country itself (irrespective of the fact that products or services are sold in the jurisdiction or not). On the other hand, the source country derives the right to taxation by the nexus between the income-generating activities of the company and the country where such income is generated. However, according to the prevailing rules of international taxation, just having sales in the source country is not enough to establish the nexus. A concept of permanent establishment (PE) exists, according to which a business that is not legally a resident of that country, but has an enduring presence in that country due to its business activities. A PE can be established in the source country either through a fixed place of business, or an agent of the company helping the company situated outside to make sales or through a service carried out in the source jurisdiction. However, with the increasing digitalization of the economy, it is now possible for a business entity to carry on activities in a source country without having a PE in that particular country. Therefore, does the source country have the right to tax such profits accruing out of a customer base in their jurisdiction? If yes, how do they tax such profits? Such questions keep on arising with further digitalization of the economy. Therefore, this paper seeks to address such prevailing problems in the international taxation framework in part III of the paper. It further talks about the initiatives taken by the international and national regulatory bodies in finding solutions to such problems in Part IV of the paper. Thereafter, it goes on to discuss the problems with these upcoming solutions provided by such regulatory bodies in Part V of the paper. It finally recommends certain solutions of its own that should be inculcated in the upcoming international taxation rules and concludes its analysis in Part VI of the paper