TaxProf Blog

Paul L. Caron
Dean





Friday, March 15, 2024

Weekly SSRN Tax Article Review And Roundup: Eyal-Cohen Reviews Brauner's Taxing People, Not Residents

This week, Mirit Eyal-Cohen (Alabama; Google Scholar) reviews Yariv Brauner (Florida, Google Scholar), Taxing People, Not Residents:

Eyal-Cohen

The COVID-19 pandemic has really shaken things up in the workplace, causing us to take a closer look at how we handle taxation based on where people live. I discovered that job mobility, both domestic and international, has similar tax ramifications after my family relocated to Atlanta, GA, and I still commute to Tuscaloosa, AL, to teach at the University of Alabama. I also learned that it is not uncommon to hear about people like me who have moved without changing jobs. Indeed, the location of an employee in a state may result in the taxable presence (and taxation) of the employer in that state pursuant to its business tax laws, thus requiring complex reporting adjustments. Nevertheless, such developments in individuals’ mobility at the international level, as this Article demonstrates, may put increased pressure on international tax policy stances as well as the legitimacy of their residence taxations.

This Article timely focuses on the need for reform in international tax rules to accommodate increased individual mobility and the rise of remote work and digital nomadism. It makes a significant contribution to the ongoing debate on how to adapt the international tax system to the realities of a globalized, digital economy. It presents a thought-provoking call for a reevaluation of residence taxation and the shift towards a source-based approach. The global tax regime faces challenges due to increased individual mobility, accelerated by digital nomadism and remote work trends. The traditional tax system taxes worldwide income for residents as well as income sourced within the state for non-residents. This Article points out that this system, however, is becoming less rational as people’s mobility increases, creating disparities and complexities in international taxation. The international tax scholarship has thus far focused primarily on corporate taxation and corporate residence. The Article fittingly argues that it is time to address the taxation of individuals more thoroughly. It is the first to offer a well-reasoned argument for why and how the international community should embrace this major change in international rules to ensure a fair, efficient, and stable tax regime in the face of increasing individual mobility and remote work trends.

The Article begins by outlining the old and new challenges and limitations of the current international tax regime based on residence. The residence regime struggles with old problems and tax implications of increased mobility, such as the brain drain (high-skilled migration from less developed states to the most developed) and transitory workers (refugees or workers who maintain meaningful relationships in their home states work in the host state long enough to become residents). Yet, the 21st century has also seen an increase in the mobility of individuals with new problems such as residence-by-investment (wealthy individuals that change tax residence to minimize taxpaying), digital nomadism (high-skilled immigrants that benefit from workplace and technology changes that make remote work more acceptable), and remote work (that benefits from the fact that the source rule that links service income to service recipient is inapplicable because the service provider and recipient are not in the same place). These challenges undermine the legitimacy and effectiveness of residence-based taxation of individuals based on residence when the direct impact or the fruits of the service provided occur in another jurisdiction.

Thereafter, the Article evaluates the connecting factors used in the origins of the international tax regime and the evaluation of residence as a basis for taxing individuals, such as domicile, nationality, modern personal tax jurisdiction, and other notions of residence. It points out the path dependence of the origins of residence as a basis for taxation of individuals, as it has become over the years the norm and a universal standard. Various rationales support relying on residency as a basis for taxation. The Article analyzes these justifications and assesses their validity and the actual effect of residence taxation as a secondary form of taxation, following the initial taxation at the source, commonly referred to as the “first bite.” The residual taxing right serves two main functions: simplicity and efficiency. The residual taxing right allows the state of residence to tax income that is hard to trace or locate its source and income that is not adequately taxed at its original source. The benefits theory also views it as a societal membership, reflecting the natural connection between the individual and their state of residence. However, the Article challenges these justifications for residual taxing rights, arguing that the normative basis for residence taxation is weak and faces significant functional challenges.

While other tax scholars like Reuven Avi-Yonah have argued here for the need to tax nomads (people without permanent abode) based on their citizenship rather than their residence, the novelty of this Article lies in its justifications and the fact that it investigates a direct abolition of residence taxation, leaving individuals subject to taxation solely based on their income source. The argument posits that if one agrees with the fundamental premises of this Article, specifically that there is a lack of interest in implementing a comprehensive global tax reform to replace income taxation and that there are valid justifications for maintaining the current international tax system, then there are compelling reasons to retain source as the sole foundation for individual income taxation in the twenty-first century. Source taxation plays a crucial role in upholding the stability of the international tax regime and addressing the gap created by the waning influence of residence taxation, all while supporting growth and progress.

The Article discusses how alternatives to residence-based taxation, including citizenship-based taxation and exclusive source taxation, can achieve the same ends without reliance on residence. It argues that citizenship-based taxation is undesirable due to its complexity and potential unfairness, particularly towards those who are mobile or do not reside in their country of citizenship. On the other hand, exclusive source taxation of individuals is a superior alternative as a feasible and necessary reform. Source taxation, already prevalent in existing tax rules, offers a direct alternative to residence taxation and aligns more closely with the modern, globalized world. This approach could simplify the tax regime, ensure fairness, and adapt to the realities of the 21st century, particularly the increase in remote work and digital nomadism.

The gist of the Article’s proposal is to grant source states exclusive authority to tax the income earned by all individuals. Abolishing property taxes would necessitate some adjustments to the current implementation of source taxation. In order to preserve the legitimacy of the government, it is necessary to attribute each source of income to a specific jurisdiction. Individual taxpayers should have no remaining income that is not derived from a known source. Income would be neither homeless nor stateless, thus the issue of double taxation (or double non-taxation) becomes insignificant, as do all matters pertaining to the alleviation of double taxation. Furthermore, income items have the potential to be subject to partial taxation by multiple states, each with the ability to set its own tax rates and administration based on its individual political process. Ultimately, the implementation of a comprehensive and standardized accounting and income-sourcing system would greatly facilitate the reform process. This reform proposal would most likely necessitate a multilateral agreement, although it could also be carried out (at least initially) bilaterally by individual states or even unilaterally.

The proposed reform of existing source rules is based on several fundamental principles. The first principle of the reform acknowledges that there is no inherent law dictating how income should be sourced. Secondly, it rejects the notion that any particular state has a rightful claim to tax specific types of income. Instead, it argues that a jurisdiction should only have the legitimate right to tax income if there is a factual and geographical connection between that jurisdiction and the income in question. Lastly, while administrative convenience is important, it should not be the primary factor in determining which jurisdiction has the authority to tax. Even with the shortcomings of current (and likely future) income tax-based systems, we can still identify their source.

The Article’s proposal to shift to source-based taxation is a forward-thinking solution with many advantages. It not only simplifies the tax regime, but it is also more aligned with fairness, it is easier to implement in a digital and globalized economy, and it addresses the tax challenges posed by modern mobility. Finally, the Article concludes that while the transition to exclusive source taxation requires careful planning, international cooperation and adjustments to existing tax rules can lead to a more rational, equitable, and effective tax system in the globalized world. Once states recognize that taxing individual income exclusively at the source can address the difficulties posed by the movement of people and maintain stability in the international tax system, they should proceed to negotiate the specific aspects of this reform. This Article provides an excellent in-depth analysis of the various choices, ranging from making minor changes to the current source regulations to implementing formulary taxation, recommending the smoothest course of action for implementing the negotiated reform through the use of a treaty.  

The Article presents a compelling and insightful exploration of the evolving landscape of international taxation, focusing particularly on the challenges and opportunities arising from increased individual mobility and the growing phenomenon of digital nomadism. It makes a strong case for reexamining the traditional basis of taxation—residence-based taxation—and argues for a shift towards source-based taxation as a more viable and equitable approach in today’s globalized world. The discussion on the feasibility of implementing exclusive source taxation is not only theoretical but also provides a practical roadmap for transitioning to this new model. The Article acknowledges the political challenges involved in such a significant overhaul of the international tax system but remains positive about the potential for international cooperation to achieve a more equitable and stable tax regime. A praiseworthy optimism.

Here's the rest of this week's SSRN Tax Roundup:

https://taxprof.typepad.com/taxprof_blog/2024/03/weekly-ssrn-tax-article-review-and-roundup-eyal-cohen-reviews-brauners-taxing-people-not-residents-.html

Scholarship, Tax, Tax Daily, Tax Scholarship, Weekly SSRN Roundup, Weekly Tax Roundup | Permalink