Rights of Sourcing Country to Levy Taxes on Intangible Property

1. Introduction

In the era of globalization and technology overtaking traditional business form, companies and individuals are spending more on obtaining intangible property in order to protect their unique identity by way of marks or patents or logos. With companies and businesses operating across the globe, the question arises as to which country has gained the right to levy taxes on profits arising out of intangible assets or property.

The International tax structure is not led by common legislation, rather it relies on domestic rules and the principles developed by organizations such as the Organisation for Economic Co-operation and Development. The fundamental principles under the international tax regime to levy tax are based on source principle (place where income was generated) and resident principle (permanent establishment of a person).

There can be high chances for double taxation and there can be far-reaching implications for the direction and magnitude of flows of capital and goods in the world economy[1]. A key feature of double tax management is the agreement to share the right to levy taxes when there is more than one country that is eligible to levy tax on any transactions or store of wealth[2].

Simultaneously, one also needs to ensure that there is lack of profit shifting and the companies pay the relevant tax. The organizations have the best legal and accounting resources which help them in devising tax efficient practices where profits are shifted to low-income countries. The domestic law and international forums have tried to address it over the years, however, there are still certain gray areas in the same. The article attempts to offer insights on how the policies can be enacted to tackle profit shifting. At present the international tax system is in need of a dire reform so as to ensure that digital corporation pays taxes in countries where they operate.