Global Matchmakers: Tax Challenges and Responses in the Digital Economy

Abstract

The world as we know it has been reshaped by giant multinationals that produce and distribute digital products and services through global multisided web platforms (the ‘global matchmakers’). Some of these multinationals are bigger than the economies of most countries. The global matchmakers’ business activities are organised globally, taking advantage of the globally integrated technological and economic environment. At the same time, the global matchmakers pay little (if any) corporate income tax in many of the countries that contributed to the creation of the environment from which the global matchmakers derive a significant proportion of their income. The study of Google’s business model and tax arrangements in this thesis demonstrates how this global matchmaker uses traditional ‘tax avoidance’ techniques and takes advantage of shortcomings of the international tax regime and the tax legislation of many states to avoid or minimise the size of its corporate income tax burden. Tax avoidance and tax minimisation techniques disconnect income from the country that is its economic source, so eroding the corporate income tax bases of many states and resulting in an unfair division of gains related to business profits derived in the globally integrated economy. Shortcomings of the international tax regime and the national tax legislation have the same eroding effect resulting from the impossibility to establish a connection between items of income and the country that is the economic source of this income. Analysis of responses to the problem contained in the OECD and the G20’s BEPS project and the tax reforms of the UK, Australia and New Zealand, shows that the existing forms of tax cooperation have failed, while uncoordinated tax responses have not solved the problem and likely to have multiple negative consequences. The example of global matchmakers provides strong arguments for existing discussions on the necessity to change an approach to international tax cooperation and the model of international tax regime dividing gains related to business profits. The thesis contributes to this discussion by suggesting a basis for a new approach to tax cooperation and some impartial standards and principles that should be the core of the international tax regime. The thesis also provides a theoretical basis for the division of gains related to business profits generated in the globally integrated economy and a model for this division.