Value Creation: A Constant Principle in a Changing World of International Taxation

The authors consider the new nomenclature of value creation in terms of its meaning, theoretical basis, and importance in the context of the international taxation of business profits. The authors' central claim is that the principle of value creation is a profound elaboration of the doctrine of economic allegiance, which is the theoretical basis for the current international tax system; and that international tax norms, such as the arm's-length principle, are meant to give effect to the doctrine of economic allegiance (and now to the principle of value creation). As demonstrated by the Organisation for Economic Co-operation and Development/Group of Twenty base erosion and profit shifting project, there is apparently global consensus that the value-creation principle should guide the development of new rules—not only the rules to protect countries' existing tax bases (for example, anti-avoidance rules) but also the rules to allocate new taxation rights in respect of income derived in a digital and intangible economy. The authors evaluate the most recent tax-reform proposals in the light of the value-creation principle, and they recommend a global profit-split rule as a way of accurately reflecting value creation.