Profit-allocation based on value creation in the digital economy

Sammanfattning: With the proposed Directive by the European Commission to tax the digital economy more effective by introducing a digital permanent establishment, the question raises how to effectively tax it. Under the current profit-allocation principles, profits are allocated to the jurisdiction in which the significant people functions are situated. However, since a digital PE can exists without any people or assets, new profit-allocation principles are required to effectively tax it. The new value drivers should be based on active users and user data in order to allocate profits to the user jurisdictions. Given the shortcomings of the arm's length principle, the profit split method should be complemented by formulary apportionment to attribute profits to the various user jurisdictions.