7.2.4 Defining jurisdiction to tax (‘where to tax – part 1’)

As a third step, jurisdiction to tax needs to be defined. A worldwide unitary taxation system requires consensus on a rule that gives jurisdiction to tax. As the legal form is no longer leading for tax purposes, the jurisdiction to tax is a very important element of the system. The chosen method should take into account the digitalisation of the economy. Solely adhering to physical presence is not sufficient. A quantitative factor presence test – which aligns nexus and allocation with the inputs and outputs of a firm – would properly reflect the digital economy and would contribute to the neutrality of the tax system. Therefore, a factor presence test would be in line with the objectives of the OECD MTC. Such a test should be used both from a domestic and from a tax treaty perspective. In essence, if there is a sufficient economic nexus in a certain country, also if there is no physical presence, there should be a taxable presence for domestic and tax treaty purposes.