Unveiling the Secrets of Homeless Income: How Multinationals Exploit Global Tax Treaties

This is an AI generated podcast of a 2014 paper written by Professor Bret Wells and Cym Lowell titled: “Income Tax Treaty Policy in the 21st Century: Residence vs. Source”

Why this is important:

The Trump administration recently proposed (as part of the “OBBB”) a provision that would impose tax penalties on residents of countries that had DSTs (“Digital Services Taxes”). The U.S. objection to DSTs is largely based on the provisions in tax treaties which give the “source country” (where the profits are generated) the right to tax those profits only if the corporation as a PE (“Permanent Establishment”) in that country. Of course, Google, Microsoft, et al do NOT have a “permanent establishment” in Canada, UK, India, etc. As a result many countries (because they cannot tax the income of U.S. multitionals) have enacted DSTs which are a tax NOT income but rather on revenue.

Yes, the standard tax treaties (which are 100 years old) deny the source country taxing rights (absent a PE). But, why is this? Does it make sense in 2025 to deny the source country taxing rights over income?

I came across a FANTASTIC article written by Professor Brett Wells and Cym Lowell which provides some historical perspective on this issue:

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2380241

I then ran it through AI and here is the summary. The AI description is:

Income Tax Treaty Policy: Residence vs. Source

1 source

The provided text explores the historical evolution of international income tax treaty policy, focusing on the shift from source-based taxation to residence-based taxation following World War I. It highlights how the League of Nations' model, which favored residence countries (often capital-exporting nations) and introduced the concept of Permanent Establishment (PE), largely superseded an earlier International Chamber of Commerce (ICC) proposal for profit-split methodologies. The text argues that this historical policy choice, coupled with the later rise of "interim holding companies," inadvertently led to the creation of "homeless income"—profits that escape taxation in both source and residence countries. Ultimately, it suggests that a re-examination of these foundational principles is necessary to address current global tensions surrounding multinational corporations' tax planning strategies and to foster more balanced and equitable international tax policies for the 21st century.

 

 

 

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AI description of PODBEAN podcast:

 

"In this episode, we explore the intriguing world of international tax treaties and uncover why some of the world's largest multinational corporations seem to pay surprisingly low tax rates. Delve into the history and evolution of these tax agreements, tracing back to post-World War I Europe, and understand the critical decisions that continue to shape modern global tax systems. Learn about the concept of "homeless income"—profits not taxed effectively in any country—and the controversial mechanisms allowing companies to shift profits to low or no-tax jurisdictions.

We reveal the stark contradictions and outdated policies that have left governments and corporations dissatisfied with the status quo. Discover how historical economic theories and deliberate policy choices have led to today's contentious base erosion and profit shifting (BEPS), a practice under scrutiny by international bodies like the OECD.

Join us as we discuss the changing economic power dynamics between traditional "imperial" countries and emerging economic giants. Explore the future challenges in international tax reform and consider the complex interplay between national interests, corporate strategies, and global economic fairness. This deep dive provides valuable insights into the mechanics and potential reform of a tax system nearly a century in the making."