Article by: Jan Winterhalter, Andreas Niekler (University of Leipzig), First Published on KluwerTaxBlog
For international tax law, it is of central importance how to locate, value & control the increasingly digital cross-border supply and service relationships within a multinational enterprise (MNE). This counts primarily from a tax authority perspective. Nevertheless, digitalization has not only significant effects for highly digitalized businesses but for the economy itself, as the overall intend is to boost the MNE´s efficiency & transparency and optimate its function´s performance — regardless if it is the production, marketing or research & development function.
Still, particularly in the case of “data” as the tax connecting factor, locating, valuing and controlling those functions which are primarily driven by data is a tricky task. It just seems not to be possible to meet essential criteria like clear localisation, value-added-oriented distribution and proper control simultaneously – a trilemma.
But there might be a solution: digital documentation tools, e.g. process mining (PM), could act as describer of the data-driven functions. With the use of application Programming interfaces (API) as a form of bits & bytes meters, data could be counted. And in the end, PM and API could interact with blockchain approaches (BC) to verify the processes. All together, they might handle the mission impossible of the trilemma.
Part 1: As it is significant for those documentation techniques to define what data is in the context of international taxation, we approach this ground barrier through a proper definition of data in the first step. In the second step, we argue with the trilemma of data-driven taxation approaches and demonstrate their negative effects in form of the conflict, stencil, and abuse effect.
In Part 2 of the article, we want to show you in a third step how it might be possible to integrate a documentation system within the transfer pricing system to solve this trilemma and give an outlook on the one-million-dollar question of how to tax data properly in times of digitalization.