The international corporate tax system still rests on ideas developed in the early twentieth century, even though business has changed beyond recognition. Capital moves fast. Value is often intangible. Companies operate across jurisdictions at once. Michael Devereux has argued that policymakers have largely chosen to patch the existing framework rather than rethink its foundations. The point is hard to dispute. The global corporate tax system now needs redesign, not adjustment.
The system still turns on two concepts: residence and source. In theory, a company is taxed either where it is based or where it earns its income. In practice, both ideas have become difficult to apply. A multinational may be incorporated in one country, managed from another, and earn revenue in several more. Each jurisdiction can claim taxing rights, and each defines those rights differently. The result is a system that is not just complex but internally inconsistent.
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The complexity deepens with nearly 3,000 bilateral tax treaties, many based on OECD models. These agreements were meant to prevent double taxation. They also created scope for companies to reduce tax liabilities by exploiting differences in national rules. Terms such as permanent establishment and arm’s length pricing have become harder to apply. Even specialists struggle with them.
OECD reforms have not fixed the problem
Governments have spent the past decade trying to contain the damage. The OECD’s Base Erosion and Profit Shifting project sought to curb profit shifting and improve transparency. More recently, the global minimum tax aimed to ensure that multinational companies pay at least a baseline rate wherever they report profits. These reforms matter. But they do not settle the larger question of how taxing rights should be allocated.
That unresolved question sits at the heart of Pillar One. Amount A was meant to reallocate a share of the profits of the largest and most profitable multinationals to market jurisdictions, including where those companies have no physical presence. The OECD released a multilateral convention in October 2023 and has continued technical work, but the deal remains unfinished. Even in mid-2024, governments were still extending interim arrangements while negotiations dragged on.
The deeper problem lies in the changing nature of economic activity. Digital firms and businesses built around intellectual property do not fit easily into traditional tax rules. A company can generate large revenues in a country without any physical presence there. Profits, meanwhile, can be booked in jurisdictions with little connection to the underlying economic activity. The link between where value is created and where it is taxed has weakened sharply.
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Tax authorities have recognised this. They are considering a shift towards giving greater taxing rights to market countries, where consumers are located and sales take place. The logic is simple. Access to markets is itself a source of profit. That logic now informs proposals to let countries tax a share of a company’s profits if it earns substantial revenue or has a large user base there, even without a physical presence.
India’s tax rights in the digital economy
This shift matters for countries such as India. India is a major market for multinational companies, but that has not always translated into commensurate taxing rights. Large consumer markets increasingly believe that the current system understates their contribution to corporate profitability. India’s equalisation levy on digital services was one attempt to address that gap. The levy’s 2% charge on e-commerce operators was later withdrawn, with the change taking effect from August 1, 2024.
That episode also showed the limits of unilateral fixes. Digital taxes and equalisation levies emerged because multilateral reform was too slow. But they also triggered disputes, especially with the United States, which negotiated transition arrangements with countries including India while the OECD process continued. Once again, the immediate problem was managed. The structural question was deferred.
Google and Meta offer obvious examples. Both earn substantial advertising revenue from Indian businesses targeting Indian users. Yet a large share of those earnings is often booked through entities in low-tax jurisdictions or through regional headquarters outside India. Amazon, too, has built a vast customer base in India, but its reported profitability in the country appears modest because costs and revenues are structured across global operations. Netflix and Spotify present a similar pattern.
Their Indian user base has expanded rapidly, but a significant share of the income tied to that growth is recognised outside India, even though Indian consumers are central to their market expansion. This is not only about avoidance. It is also about how the present system rewards tax competition and allows jurisdictions to attract paper profits with lower rates, treaty advantages, or favourable rules for intangible assets.
Formula-based taxation vs destination-based taxation
Devereux has argued that limited reforms may no longer be enough. Instead of continuing to adjust the rules, countries may need to revisit the basic principles of international corporate taxation. That means returning to first principles: where should profits be taxed, and on what basis?
One option is a formula-based approach, under which a company’s global profits are distributed across countries using factors such as sales, employment, and assets. This would reduce the scope for profit shifting and simplify compliance. But it would also require an unusually high degree of international agreement. Another option is destination-based taxation, which places greater weight on where goods and services are consumed. That would align tax revenues more closely with market size. But it would also shift taxing rights away from countries that currently benefit from hosting corporate headquarters or intellectual property.
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Revamping the global corporate tax system
The obstacle is no longer just technical design. It is political economy. Any redistribution of taxing rights creates winners and losers between headquarters jurisdictions, investment hubs, and large consumer markets. That is one reason Pillar One has stalled. Another is the central role of the United States. Many of the largest groups potentially affected by reallocating taxing rights are U.S.-headquartered, and Washington’s commitment to the wider OECD tax deal has become visibly less certain. In January 2025, President Trump declared the OECD global tax deal had no force or effect in the United States.
That helps explain why the debate is widening beyond the OECD. The United Nations has launched an intergovernmental process, running from 2025 to 2027, to negotiate a Framework Convention on International Tax Cooperation. For many developing countries, this is not a procedural side issue. It is a response to the view that the existing architecture has given them too little voice and too little revenue.
International tax rules are shaped through negotiation among sovereign states, each defending its own economic interests. Any serious reform will involve trade-offs. Agreement is difficult even on bilateral trade deals. It will be harder still on the allocation of corporate tax rights. But the present system is losing coherence. A durable solution will require countries to step back from inherited arrangements and reconsider how corporate profits should be taxed in a globalised economy.