Document Type

Article

Publication Date

2015

Abstract

In 1997, I wrote an article on the international tax challenges posed by the then-nascent electronic commerce, in which I suggested that the international tax regime is based on two principles: the benefits principle and the single tax principle. The benefits principle states that active (business) income should be taxed primarily by the country of source, and passive (investment) income should be taxed primarily by the country of residence. This is the famous compromise reached by the four economists at the foundation of the regime in 1923 and is not particularly controversial. It is embodied in every one of the over 3,000 tax treaties that reduce taxation at the source of passive income while allowing source countries to tax active income if there is a permanent establishment. The single tax principle states that cross-border income should be taxed once at the rate determined by the benefits principle. In other words, cross-border income should be taxed only once at the source-country rate for active income and at the residence-country rate for passive income. But if the preferred country (i.e., source for active, and residence for passive) does not tax, it is incumbent upon the other country to do so because otherwise, I argued in my article, double non-taxation would result, which is just as damaging as double taxation. This argument remains hugely controversial. While there are indications that the single tax principle was the idea underlying the adoption of the foreign tax credit by the United States in 1918, as far as tax treaties are concerned, the United States did not accept the single tax principle until more recent times.


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