Jurisdiction to Tax and the Case for Threshold Reform

The principles currently contained in the international tax regime require recognition of the type of structure adopted by multinational entities. These structural forms, recognised through the principles of residency and permanent establishment, are inextricably tied to the current source and transfer pricing rules. In this context, residency and permanent establishment operate as threshold tests to determine the right of a jurisdiction to tax the income of a multinational entity. This paper argues that these threshold tests of residency and permanent establishment are legal tests which have no place in a tax regime designed to allocate income based on economic activity. For the purposes of taxing multinational entities, the type of structure adopted is irrelevant if the entity is to be taxed according to economic activity. However, the structural distinctions are an integral part of the current source and transfer pricing regime, rendering it a necessary but flawed step in determining the taxing rights of the relevant jurisdictions. In this paper, the concepts of residency and permanent establishment are considered, arguing that they are artificial criterion merely existing to determine the threshold test of whether a jurisdiction has any taxing rights over the taxpayer in question, and potentially leading to a flawed result.