One route requires sweeping multilateral reforms. Recent OECD proposals, accepted by more than 135 jurisdictions as of October 2021, would create new taxing rights for market countries with respect to “non-routine” profits—a set of complex and controversial changes known as Pillar One. Another route involves unilateral action. Some market countries have imposed digital services taxes (DSTs) on the in-country gross revenue of the very digital economy enterprises that Parsons finds most problematic. For some, DSTs are a monumental (and perhaps justified) thumbing of the nose at the idea of “system” in the international tax system. For others, DSTs give tariff-like leverage. Trade wars are neither good nor easy to win, but the credible threat of DSTs has shaped and motivated the OECD reform process, as well as U.S. law (see the current controversy over Treasury’s final foreign tax regulations).
Parsons proposes a novel and meaningful third option. For some digital economy enterprises, users “serve a similar economic function to a traditional workforce” by generating data and creating content that the enterprise subsequently monetizes. Writers of five-star reviews are like salespeople, content creators are like publishers and television studios, and everyone produces reams of data, whether intentionally or unintentionally. These user-provided services, Parsons argues, yield significant and identifiable revenue to these enterprises, even though the underlying labor is in some sense “free” (or undercompensated, or compensated so indirectly as to vitiate any exchange relationship). By characterizing these users as “digital laborers” (or, collectively, as a digital “workforce”), Parsons establishes a potential legal basis for allowing market countries to tax a portion of these enterprises’ income—and implementing this regime would require mere tweaks to the existing network of bilateral treaties, rather than wholesale changes.
By working within the existing structure of international tax law, Parsons’s approach offers possible advantages over more invasive measures. For Parsons, the relevant axes are how much disruption a proposal causes and how much coordination it requires, each with respect to current law. DSTs are highly disruptive and intentionally uncoordinated—a shot across the bow by restive market countries. Pillar One is moderately disruptive and requires significant coordination; intense multilateral talks over many years are a hallmark of the OECD process. By contrast, Parsons’s conception of a digital workforce disrupts existing international tax rules only mildly—and perhaps also is easy to coordinate with existing tax instruments. To the extent that these three options address similar problems and have similar effects (and there’s plausible equivalence along these margins), Parsons sees justifiable advantages to her proposal.
The devil, of course, is in the details. One could conceptualize the OECD process as lot of high-level hand-grasping, followed (and preceded) by years of toiling in the trenches (still ongoing) to assemble the actual nuts and bolts of reform. Parsons’s proposal is susceptible to similar technical impediments, and much of her (and any) proposal’s normative upside depends on how policymakers resolve those issues. Attribution of income and expense already is difficult, and Parsons’s idea of a distinct digital workforce tends to unsettle the economic and legal connections among members of multinational groups, which otherwise might serve as a reasonable starting point for these types of coordination rules. To some extent, Parsons relies on the transfer pricing rules (and the much-derided arm’s length principle) to police allocations of income and expense across jurisdictions. The practical inadequacy of these guardrails, however, is a major impetus behind the OECD reform movement.
These technical exercises implicate another aspect of Parsons’s digital workforces, one that might free her proposal from the intricacies of international coordination and transfer pricing principles. Digital laborers present a second tax problem for market countries: those laborers themselves may have personal income from the barter transactions in which they use their data and content to, say, pay for Facebook’s social media platform. Realistically, market countries cannot tax this income directly. The political, administrative, and enforcement obstacles simply are too steep. (And, to the extent that data derives from human capital, one could add various conceptual considerations to this list.) Market countries can, however, reach these laborers’ income indirectly by taxing digital economy enterprises—Facebook as a surrogate or substitute taxpayer. From this perspective, digital workforces contribute to the domestic tax base, with tax collected by the multinational enterprise. This strategy, which might sidestep both treaty considerations and the norms against double taxation, looks more like a DST. But the rationale is grounded in income tax principles and leverages Parsons’s insights into the “hybrid relationship” between users and digital economy enterprises.
Overall, Parsons’s article makes an significant contribution to conversations about international tax reform. The current consensus around the OECD proposals has cracks. Lawmakers in the United States have stated their opposition to incorporating the OECD proposals into domestic law. Leaders in Europe, Asia, and Africa have questioned whether Pillar One goes far enough in augmenting the tax base of market countries. An alternative, such as that proposed by Parsons, might galvanize support in the face of collapse—or, more cynically, divide countries in a way that precludes any meaningful change. Parsons’s path is important, and her analysis is compelling and nuanced. Her article should be required reading for scholars, lawyers, and policymakers in international taxation.