International Company Taxation in the Era of Information and Communication Technologies

In the last few years, Information and Communication Technologies (ICT) have spread with increasing speed in both private and business sectors. For example, in 2002, 64,9% of private households and 83,9% of businesses in Germany used the Internet.¹ The ICT sector contributed close to 10% of OECD business GDP in 2001 and employed over 6% of business employment.² In 2002, ICT goods represented 14% of total trade.³

The aim of this chapter consists in showing the impact of the increased use of ICT on the organisational structures of the economy. Bearing this objective in mind, the chapter is organised as follows: To begin with, the term “information and communication technologies” is defined in the context of this thesis and the main technological trends caused by an increase in the use of ICT are shown. Next, the relevant organisational theories underlying the organisational structure are outlined in order to identify the most important factors influencing organisational forms of doing business internationally. The influence of ICT on these factors can then be identified. Finally, the resulting impact on the organisation of markets, intra-organisational aspects and the organisational forms existing between different firms are set out in more detail.

The subject under investigation in this thesis is the international tax framework. Thus, the aim of this chapter is to set out the fundamental concepts and principles of international income taxation which are relevant to the following analysis. After outlining the general framework of international income taxation, each field of international taxation is described in more detail.

The aim of this chapter is to analyse the impact of the increase in the use of ICT on international tax planning opportunities under the current tax law. Thus, the relevant tax fields in the age of ICT can be compiled. To achieve this aim, this chapter is organised as follows: To begin with, the basic international tax planning theories are outlined. The company’s fiscal aim to reduce the overall effective tax rate is illustrated here in more detail and the most important means for achieving this objective, such as making use of the international differences in tax rates, are defined. Next, several tax planning instruments are analysed to determine whether there are new opportunities for minimising the effective tax rate and to what extent new risks arise with the use of ICT. The analysis includes instruments such as the location of a company’s residence, the allocation of functions and risks, the implementation of an optimal transfer pricing system, the choice of form and location of investments abroad, and the use of hybrid forms of co-operation. For each instrument, current and non-current tax issues are considered. Based on the identification of the relevant changes in the international tax planning of companies, we then move on to analyse the effects of the changed business patterns of multinational companies on the allocation of tax revenues between different countries.

The theoretical framework underlying the following analysis consists of basic normative criteria for an optimal taxation which are shown in figure 5.1 below.³⁷¹ The normative criteria are used to evaluate the current tax regulations and to recommend possible reforms.

The objective of this chapter is to compile the issues in international company taxation resulting from the ICT-induced economic changes. Thus, each of the tax fields of international company taxation identified in chapter 4 as important in the age of ICT is assessed in light of the aforementioned evaluation criteria. Subsequent to the analysis of defining a company’s residence, the permanent establishment as the main tax attribute for business profits in the source country is examined. Afterwards, the allocation of the tax base between different taxable entities in different jurisdictions is evaluated. The analysis ends with the examination of the suitability of the residence and the source principle in the age of ICT.

The objective of this chapter is to develop suitable reforms for the taxation issues analysed in chapter 6. Again, the tax attributes in the residence and in the source country, the profit allocation and the choice between the residence and the source principle are analysed. The respective reform proposals should be consistent with the evaluation criteria outlined in chapter 5.

The aim of this thesis was to compile the principal effects and issues of international company taxation resulting from the increased use of ICT and to develop suitable reforms if required.