Taxation in a Global Digital Economy

1. S. 212Income Characterisation Issues and Digital Economy

1.1. Introduction

There is no doubt that the spread of the digital economy brings about many benefits. At the same time, policy makers are confronted with a rising number of challenges in the context of the digital economy. The issues related to the characterisation of payments for digital goods and services and the inherent ambiguities connected therewith have been recently recognised as one of them by the international community.

The character of income is important for the existing rules of international taxation, and there is at least one reason ‘why to characterise the income for international tax purposes’ as identified by J. Li, one of the authors dealing with the income characterisation issues in the context of the digital economy. The reason is historical. As J. Li points out, the income characterisation was adopted as the backbone of tax treaties by the League of Nations in the 1920s and has been the basis for bilateral allocating of taxing powers since then. As international tax rules have been developed, different tax principles have continued to be fashioned to apply to different categories of income. The existing tax ...