Towards an expanded version of the benefit principle in international taxation

Vasiliki Koukoulioti is a researcher in the Cloud Legal Project, a PhD candidate at Queen Mary University of London (QMUL), for which she has been awarded a Microsoft-funded Cloud Legal Project stipend, and a Greek qualified attorney-at-law. She has more than 7 years of experience as a tax lawyer at law and accounting firms. She has taught seminars in tax and e-commerce law at QMUL and the National and Kapodistrian University of Athens. Her PhD focuses on tax jurisdiction and the tax law implications of the digital economy.

Abstract: The benefit principle, even though largely abandoned and replaced by the ability-to-pay in domestic taxation, constitutes one of the main justifications for states to exercise their tax jurisdiction at the international level. Nevertheless, despite it being a robust part of both residence and source jurisdictional entitlements, as well as of the recently introduced value creation concept, the benefit principle is a construct that presents conceptual and normative deficiencies. First, its role both as a criterion to connect economic activities with territorially defined jurisdictions and as an income allocation tool that takes into account costs incurred by the host state have been significantly questioned in the current globalized and digitalized economy. Second, its application produces specific distributional outcomes, namely the protection of capital exporting countries’ tax base and the allocation of income according to the existing allocation of public goods (vicious cycle). In addition, under the tax competition constraints, it is selectively applicable by states depending on the level of taxpayers’ mobility and states’ development characteristics. This a la carte application further intensifies the commodification of tax law and leads states to inequitable domestic tax policy decisions. In the context of these deficiencies, in this paper I argue for an expanded understanding of the benefit concept that goes beyond a limited cost-benefit analysis. This expanded version includes non-pecuniary, imputed benefits that are associated with the opportunity cost of the use of capital varying on the basis of investment opportunities. It could also be perceived as benefits incorporated into potential income, especially in the case of corporations that take advantage of economies of scale. Finally, it relates to the benefits that corporations enjoy by virtue of their inherent mobility, which enables them to reach multiple markets and renders them “residents” of an inter-connected global economy. Approaching the benefit concept in this expanded way could provide alternative tax base definitions and income allocation formulas.

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