WHO SHOULD TAX MULTINATIONALS?

Abstract

Who should tax multinationals? National political figures sometimes signal their assumptions by making superior or even exclusive claims about who may tax “their” multinational companies, and it is common to hear such companies or their incomes referred to as “belonging” to one nation or another. The rhetoric reflects conventional wisdom about sovereign nations and their assumed entitlements, and is often invoked to curb or even sanction the seemingly excessive tax jurisdictions of some nations. But this conventional wisdom often ignores the fundamental dependence of multinationals on ongoing, extensive, and multifaceted regulatory cooperation involving most of the nations of the world. The goal of this essay is to demonstrate that given this dependence, there are no clear legal or normative boundaries to virtually any asserted tax jurisdiction. The claim provides a solution for neither double taxation nor the problems associated with excessive tax competition, but the essay concludes that recognizing the dependence of governments and “their” multinationals on multilateral cooperation should lead to an increase in focus on how nations go about negotiating the terms of their cooperation on tax.

I. Introduction

In a 2021 speech announcing a major spending proposal focused on rebuilding U.S. infrastructure, President Joe Biden declared his plan for a “global minimum tax” for U.S. corporations, which he explained would eliminate companies’ “hiding their income … in tax havens” as well as “offshoring jobs and shifting assets overseas.” ¹ The speech signaled a renewal of U.S. commitment to multilateral efforts to build consensus on the taxation of highly digitalized multinationals, with a global minimum tax regime as one of two central pillars. ² This consensus building, taking place under the direction of the Organisation for Economic Cooperation and Development (OECD), emerged due to widespread concern that multinationals in general, and highly digitalized ones especially, have been steadily and unfairly extricating themselves from tax obligations all over the world. ³

The OECD characterizes this trend as the inevitable product of “base erosion and profit shifting” or BEPS. ⁴ President Biden alluded to this same idea when he noted that “at least 55 of our largest corporations [used] various loopholes to pay zero federal tax—income tax—in 2020. It’s just not fair.” The language of loopholes and BEPS suggests that the major problem to be solved in corporate tax is to close off opportunities for tax avoidance. But the language of fairness signaled that the plan for a global minimum tax touches on something more fundamental about who owes what to whom in the context of a world of nations whose economies are fully intertwined.

The prospect of global minimum taxes as the remedy for widespread dissatisfaction regarding the current norms for assigning taxing rights among nations implicitly raises a fundamental question of tax policy: Which nations ought to be seen as justified in claiming to have jurisdiction over the income that is earned through corporate structures that span territorial borders? This question has intrigued policymakers, practitioners, and academics for the entire history of corporate income taxation. To answer it requires grappling with a host of assumptions and norms surrounding the identification of obligations among nations and multinational enterprises.

By definition, a multinational enterprise is a profit-seeking venture that involves activities in more than one sovereign jurisdiction. Some multinational enterprises operate in two or three jurisdictions, others operate in dozens. In the popular imagination, a multinational enterprise is a sprawling, publicly listed company with thousands of shareholders and a global supply chain spanning multiple entities and jurisdictions. But a self-employed individual who provides goods or services to a single customer in another jurisdiction is a multinational enterprise as well. What is common to the existence of all multinational enterprises is that they would not exist—much less be able to carry out activities and transactions across borders—but for the cooperation of all of the nations in or with which they do business, as well as all those nations they happen to pass through or over in carrying out their business ventures.

Nevertheless, it is entirely common to hear companies characterized as belonging to one nation or another. President Biden signaled as much when he used the possessive pronoun “our” to describe the multinational companies he considered to be avoiding taxation, without defining what characteristics would be required to include a company in the category. His predecessor, Donald Trump, did the same when he attacked France’s adoption of a digital services tax in 2019, saying that “France just put a digital tax on our great American technology companies.” Trump went further, apparently claiming the exclusive right to tax any company included within the definition, stating that “If anybody taxes them, it should be their home [c]ountry, the USA.” ⁵

Trump did not explain what makes the United States the home country of a particular multinational company, nor according to what rationale only the United States ought to be allowed to tax such a multinational company, which by definition includes companies incorporated in or doing business in (or with) other jurisdictions. The informal claim of possession in political speech might be based on assumptions about the location of incorporation, corporate headquarters, public company listings, or other criteria, but it reflects a studied ignorance or indifference to the role of consensus norms surrounding corporate residence and source in income tax systems, which would in most cases defy any claim to exclusivity. ⁶ Even so, the intuition persists whenever one nation seeks to constrain the actions of another when it comes to taxation, including in the realm of tax competition.

Both in matters of taxation and beyond, exclusivity of regulatory authority is by definition inapposite to the multinational enterprise. At the most basic level, nations accommodate multinational activity by: recognizing standard corporate forms and property rights; making it possible to conclude legally enforceable contracts, exchange currency, and access courts or other bodies to settle disputes; and providing low-cost protection from theft and fraud. The production of profit by multinational enterprises depends on nations providing these things. Where essential protections or functions are in doubt, the risk of engaging in other jurisdictions becomes prohibitively high for most business owners. Where assured, they create tremendous value.

Because of the integral importance of these factors, all of which are facilitated, if not directly supplied, by nations, this essay argues that the answer to the question of who should tax multinational enterprises is that virtually all nations are simultaneously entitled to do so. If this is correct, then a second question flows from the first: If multiple jurisdictional claims are valid, (how) should nations coordinate their claims? This is a distinct question that cannot be answered in a satisfactory way unless the answer to the first one is well established. Unless we can be sure that multiple nations are in most cases equally entitled to make the claims that they make with respect to multinationals and their incomes, it is difficult to make arguments about how much any one nation ought to cede to any other should they decide to cooperate by splitting their simultaneous claims in some way. Focusing on the first question, the aim of this essay is therefore to defend the claim that most nations have nearly universal jurisdiction to tax multinationals, thereby laying the groundwork for future study on the second question.

II. What Explains the Right to Tax?

Exploring the right to tax typically involves identifying the dominance of a nation over the rights of a person, since the act of taxation is the act of preserving some resources for the use of the polity. Typically, the question is framed in terms of the rights (or entitlements) or, conversely, the jurisdiction of a nation to tax, but it is not always clear whether these terms are meant to convey the same thing. Power, which is the state’s ability to impose its will, is occasionally conflated with right, which is the normatively justified exercise of that power. In the tax literature, discussions about the right to tax are relatively rare, typically focusing on reconciling legal conceptions of individual rights with legal conceptions of rights presumed to be held by nations. Sometimes the normative question of the state’s claimed right is further conflated with the normative question of the taxpayer’s obligation to contribute to the collective order. It is not necessarily clear whether these are inseparable phenomena, or not.

Sorting out when we are talking about positive rights as expressed in law and when we are talking about normative rationales for the exercise of those rights is not necessarily a strength of tax law scholars. Yet there are (perhaps surprisingly) relatively few philosophical theorists who have put their minds to the task, so we tax law scholars must do the best we can with the tools we have available. The discussion that follows first analyzes the customary legal arguments explaining the right to tax and explores why these arguments often leave the question “who should tax multinationals” essentially unanswered. It then turns to the range of normative rationales explored in the legal and philosophical literature to defend the claim of virtually universal entitlement to tax.

III. Legal Arguments

Some legal scholars identify the power to tax as a defining feature of sovereignty, such that any state may in theory impose a tax on any person or thing it chooses, apparently through the act of declaring its power to do so. For example, in 1938, Harold Wurzel declared that “taxing power stems from sovereignty and sovereignty is omnipotence.” ⁷ He denied the existence of “anything in the written or unwritten law of nations” to limit the jurisdiction to tax, based on the lack of any such articulation by international tax law scholars and policymakers to that date. ⁸ Almost two decades later, noted expert Stanley Surrey explained that “the assertion of jurisdiction is essentially a matter of national policy and national attitudes” not restricted by law. ⁹ Martin Norr concurred when he determined in 1962 that “[n]o rules of international law exist to limit the extent of any country’s tax jurisdiction” and that “a country is free to adopt whatever rules of tax jurisdiction it chooses.” ¹⁰ Several decades later, Brian Arnold considered the relevant jurisprudence and wrote that “[a] country’s legal authority to levy tax is effectively limited only by practical considerations of enforcement and collection,” and that “[r]ules of public international law or domestic constitutional law restrict a country’s jurisdiction to tax only in narrow, relatively insignificant ways.” ¹¹ Examining the same terrain, Sol Piccioto concluded that “From the point of view of formal sovereignty, there is no restriction on a nation’s right to tax, and it may be exercised without regard to its effects on other states.” ¹²

On the view as these respected scholars expressed it, it is hard to imagine how any state could be prevented from asserting its right to tax any taxpayer, including any multinational taxpayer, on virtually any grounds it chose. A given state’s ability to impose its will would seem to be irrelevant to the question.

The position might seem a bit extreme, yet it can be seen implicitly at work behind some of the current tax policy discourse unfolding around the particular administrative challenges associated with taxing highly digitalized firms. ¹³ That discourse inadequately confronts the question of the boundaries of the tax jurisdiction, while at the same time it posits a world in which multinationals, having been apprised of a nation’s intention to tax them, can be expected to voluntarily comply, even where compliance and enforcement mechanisms may be missing.

A related yet incompatible view holds that nations, as creatures of international law, are entitled to autonomy but that the exercise of their regulatory power is subject to the equally valid jurisdictional claims of other nations. ¹⁴ Under this view, a nation’s right to tax would be defined and limited by jurisdictional rules in international law. ¹⁵ This view has arguably been influential to the OECD, which is the self-described leader in global tax policymaking. ¹⁶

In particular, the OECD has taken the position that nations are “free to design their own tax systems” but only on the condition that they “abide by internationally accepted standards in doing so.” ¹⁷ What are these internationally accepted standards? The OECD is not explicit, but the growing set of international norms and standards developed through its various programs of work are likely its intended referents. The OECD’s view is significant because its member states have in the past proposed, on the strength of such norms, to limit or even sanction nations that did not cooperate on terms it laid out for them. Current negotiations over the scope and rate of global minimum taxes are built on the same foundation. These norms are accordingly significant, and are examined in more detail below.

It is difficult to reconcile the claim that there are no limits to the tax jurisdiction other than those set by a nation itself, with the claim that nations are obligated to respect the jurisdictional claims of other nations. It is also difficult to explain what is meant by “respect” in this regard: Is this a matter of noninterference or active obligation? Throughout most of history, the idea that nations are obligated to assist each other in tax collection has been soundly rejected in favor of the opposite proposition, encapsulated in the so-called revenue rule that “no country ever takes notice of the revenue laws of another.” ¹⁸

On this view, which recent international developments seem to be revisiting in some respects, nations may make jurisdictional claims that other nations may be bound to respect, but no state is required to take positive action to facilitate, defend, or implement the tax claims of another. This might be interpreted to mean that any state’s particular claim to tax multinationals might be valid as a legal matter, but no state is obligated to assist another in determining the amount of the tax (such as through information exchange) or collecting the tax on behalf of another (such as through domestic enforcement measures). Both assertions make the taxpayer an object of regulation, possibly to be fought over where two sovereigns collide, but uninvolved in the act of claiming and regulating. Tax law scholarship seems to implicitly accept this view when it uncritically invokes the sovereign “right” to tax.

The legal analysis is complicated by the fact that most governments explicitly claim their right to tax under formative documents such as constitutions, and they do so without acknowledging any legal constraints. For example, Canada’s Constitution expressly authorizes the federal government to impose taxes of any kind. ¹⁹ Similarly, the U.S. Constitution expressly provided its Congress a broad power to “lay and collect” taxes, seemingly without limit as to personal or geographic scope. ²⁰ Constitutional documents around the world purportedly do the same for their governments. ²¹ Writers of national constitutions do not appear to have been compelled to explain the power to tax as related in any way to the competing efforts of other nations to do the same.

Despite the conceptually limitless regulatory range of the state, however, in practice no state actually taxes without limitation. Perhaps following the same intuition that one person’s liberty stops where another’s starts, nations have adopted some common conventions respecting the jurisdictional reach of their tax systems when applied to multinationals. ²² The starting point for these common conventions is that nations tend to accept the notion that the jurisdiction to tax hinges on the existence of a connection between the national territory and the company or income to be taxed. This acceptance can be observed within the legal doctrine of nexus.

IV. The Potentially Constraining Idea of Nexus

Nexus is a well-accepted yet habitually contested tax concept. At its core, it simply refers to whatever justification a nation might put forth to explain its intent to claim a person or a thing as within its jurisdiction, regardless of whether it seeks to impose a tax. Since there is no legal order to police tax nexus boundaries and resolve disputes, as established above, it falls to nations to continuously negotiate (or at least attempt to negotiate) the terms of their acceptance of the concept of nexus whenever the views of another state would seem to interfere with a national policy preference.

Following the first attempts to negotiate such terms at the dawn of the twentieth century, nexus is conventionally defined as a matter of “source”—that is, the geographic origin or wellspring of a given income—and “residence”—that is, the geographic location of primary residence of the income earner. ²³ The common conception of nexus on the basis of source is that nations are entitled to income that is said to arise within their territories (that is, the territory in which capital is invested or activities are carried out), while the common conception of nexus on the basis of residence is that nations are entitled to any income, wherever it is earned, when it is earned by anyone they define as a resident. ²⁴

In the corporate context, the residence question is complicated by the fact that assigning residence to legal fictions could be accomplished in all manner of ways, such as by location of majority shareholders, place of incorporation, location of directors or management functions, location of operations, or virtually any other plausible criteria. In practice, place of management and control and place of incorporation have been the primary indicators of residence, but there are many distinct rules across nations, including in the form of anti-abuse rules that deem a company to be resident in a jurisdiction in some cases.

In the sense used in political speech as discussed above, residence is what makes a company belong to a nation, while source is what makes a company’s income belong to a nation. Yet the residence or source of a given company or dollar of income are by no means in all cases exclusively assigned to one nation or another. Definitional overlaps are extremely common, sometimes solved by treaties but often not, and unresolvable as a matter of abstract legal principle. Disagreements most often end by agreement among relevant designated officials pursuant to treaty-based processes that do not include explanations and are not reviewable by courts. Despite these nuances, the concepts of source and residence have been so widely accepted that some scholars consider them principles of customary international law. ²⁵

Insofar as nexus is an idea rather than a legal standard, it is apparent that virtually any plausible claim in either residence or source can justify a claimed right to tax multinationals. Yet it is not entirely clear to whom or for what reason any such justification must be offered. Over the course of a century of lawmaking, administration, and jurisprudence, unless nations used treaties to reciprocally curtail the scope of their respective domestic definitions of these terms, relatively modest ties have been used to justify a finding of nexus when challenged by the taxpayer. The 1906 corporate tax residence case of DeBeers Consolidated Mines Ltd. v. Howe is exemplary in this regard. ²⁶ In that case, the UK House of Lords determined that a company that was registered in and earned all of its income from sources within South Africa was nevertheless “resident” in the United Kingdom for tax purposes because a majority of the company’s board of directors lived in England, and because they held meetings covering “important” business in England, even though board meetings concerning the mining operations themselves were held in South Africa. ²⁷

Similarly, absent treaty-based bargaining, nations have broad leeway to determine when an item of income has a domestic source. Such a claim can mean that the income is legally attributed to an income-producing asset or activity in a given country, or it can mean that the income is attributable to economic factors that have taken place in that state, regardless of the legal attribution. The two definitions are not always compatible. By way of simplified example, a multinational might define a given income stream as a royalty payment arising from a license that is legally owned by a corporate entity formed in a specified jurisdiction, while another state could object that the income in question is in economic substance a payment for services carried out somewhere else. Some nations are unassertive in defining source because they might be concerned that domestic taxes will drive away investment. This concern manifests itself in domestic tax incentives, as well as negotiated curtailment of taxation via treaty, but neither form of constraint is mandated as a matter of law. ²⁸

There is almost nothing to say about whether or how these justifications would matter in the case of overlapping or conflicting claims by nations. Applied to multinationals in today’s globalized economy, the flexible and imprecise nature of nexus, combined with the utter lack of procedure to test national disagreements about jurisdictional claims made under their respective mantles, means that the ability of nations to impose even expansive jurisdictional claims over multinationals and their incomes appears practically limitless. Income arising from cross-border investment can be attributed to any number of contributing factors in any number of nations.

It is perhaps still true that practical considerations regarding which nation has the ability to detect that a payment has occurred, as well as the power to compel payment from one of the parties to the transaction, provide a common explanation for the geographic source conventions we see in widespread use today. ²⁹ But these administrative constraints are not legal ones, and in any event they may be falling away thanks to technological innovation and increased economic interdependence. If they do fall away, there appears to be no legal backstop to act as a brake on the jurisdictional claims of any nation.

The conclusion to be drawn is stark: there appears to be no legal way for one nation to prevent any other from asserting jurisdictional rights with respect to multinationals and their incomes. As such, when it comes to coordination among states, no one source or residence state can be said to come to the negotiating table with any superior legal claim compared to the others, regardless of their respective intentions to tax such incomes, or not. The question that remains is whether the lack of legal constraint is followed by a lack of normative one, a question examined in the next section.

V. Normative Arguments

Because the legal realm appears to place few hard limitations on most jurisdictional claims over multinationals and their incomes, it is no surprise to find philosophical theory occasionally called upon to provide some clarity. Many scholars turn to Hobbes, whether as a matter of convenience or convention, referring to the claim that “[t]hese are the rights which make the essence of sovereignty … the power of raising money.” ³⁰ Others equate necessity with entitlement, citing the state’s need for revenues in order to exist as a moral justification for taxation. ³¹ Neither claim seems to add much by way of limitation on the power to tax as outlined in legal terms above, and all are silent on the particular subject of multinationals, whose very existence reflects the concurrent jurisdiction and cooperation (or minimally, comity) of nations.

For example, in maintaining that taxation is essential to sovereignty, Hobbes was defending an argument that the sovereign, ideally a monarch, possesses the divinely bestowed and inviolable right to command its subjects, including an absolute power to raise money from them. ³² Hobbes’ appeal to sovereignty defends the idea that even a self-appointed and unaccountable ruling class, so long as it maintains order, has an inherent right to extract rent from everyone else, including by force or threat of force. This is not a very compelling justification of the right to tax. ³³ Moreover, it says nothing about how to think about competing or overlapping claims, each of which rests on the same notion of sovereignty.

The scholarship generally tends to focus again on the taxpayer to government relationship, rather than that between nations. For example, prompted by the influential work of Robert Nozick, some scholars consider the act of taxation as an infringement of the rights of private persons and therefore liken the act of taxation to theft. ³⁴ Yet Nozick acknowledged the equally valid counter proposition that individuals cannot ensure that any of their rights are protected unless they voluntarily relinquish some resources to the state to act on their behalf. ³⁵ Nozick asked, if the state did not exist, “[w]ould one be needed and would it have to be invented?” He launched from this question into a theory that justified taxation by the (minimal) state to order human society by positing that even if it didn’t exist, the state would naturally arise in the form of mutually agreed contracts and norms. This observation, while intriguing, does little to explain whether or how multiple nations ought to interact when each makes the same claims on a given taxpayer. The problem is especially stark when the taxpayer in question is a multinational with income that arises as the product of the interactions and coordinating actions of multiple nations.

Liam B. Murphy and Thomas Nagel’s book, The Myth of Ownership: Taxes and Justice is an influential and compelling analysis of tax law and philosophy, but it similarly provides little guidance for thinking about the simultaneous claims of nations in respect of multinationals. ³⁶ Murphy and Nagel argue that the nation-state has a normatively defensible right to tax because it contributes to economic outcomes by providing the laws, institutions, and mechanisms necessary to enable market transactions. The argument is that, but for the state, no rights to property (or liberty, or security, and so forth) would be possible, roughly following Hobbes. These accounts implicitly condition the state’s right to tax on its doing so by means and methods that protect the rights of those who initially agreed to its authority precisely because they sought to forestall the constant state of war that is life without the state, again in Hobbesian terms. ³⁷ But they do not speak to the level of inter-nation relationships any more than the other claims do, and they are all but silent regarding the issue that multinationals face: what matters is not whether one nation has a legitimate claim, but whether multiple nations might have the same claim at the same time.

From the perspective of a single nation and its relationship to a given taxpayer, the government undertakes to order society to prevent war and violence and must sustain itself financially in a manner that does not simply recreate state of nature conditions with itself as the main threat to order and peace. Commandeering resources is out of the question in that case; instead, taxation arises as a potentially justifiable method for raising money. But which nation may make these choices with respect to a given amount of income earned by a taxpayer that spans jurisdictional lines? Casting the nation as facilitator of entitlements invokes social contract theory as a justification for the authority of the sovereign, thus setting up an alternative answer to the question “who should tax multinationals.” ³⁸ Social contract theory glosses over some major difficulties by assuming that a clear relationship always exists between a given nation and a given individual, and then extending the analysis to legal persons, that is, corporations. As soon as multiple nations are involved, the number of unanswered questions in the literature multiplies accordingly.

In his influential work A Theory of Justice, Rawls developed what are now fundamental principles of a just society, including the protection of fundamental liberties and acceptance of social and economic inequality only when conditions of equality of opportunity and of maintaining or bettering the lot of the least-advantaged are met. ³⁹ In later work that attempted to apply his reasoning to a world in which there is more than a single society, Rawls envisioned nations, as embodiments of their populations, becoming parties to a second-level social contract. ⁴⁰ He argued that rational nations should seek an international system that favors political independence and noninterference among themselves as nations, while ensuring a truncated list of essential individual rights for their associated populations. ⁴¹

One way to operationalize Rawls’s conception might be to look for justification of the jurisdiction to tax in the form of the “membership principle.” In simplified terms, this principle attempts to explain a link between person and polity by reference, at least in some accounts, to voluntary choice on the part of the taxpayer (whether individual or corporate). ⁴² The membership principle is a component of the concept of political obligation, which attempts to explain why one can be expected to obey laws laid down by a sovereign. ⁴³ The principle is invoked rarely in tax scholarship, but has been proposed as a key normative framework by Peter Dietsch and Thomas Rixen. ⁴⁴

Dietsch defines the membership principle as one’s intrinsic obligation to obey the tax laws in every nation of which one is a member, with membership arising when one benefits from the public services or state-provided infrastructure. ⁴⁵ Dietsch offers this principle explicitly as a normative explanation for the jurisdiction to tax, linking it conceptually to the universally accepted residence and source principles. ⁴⁶ The use of benefit from specified items as a threshold in the membership principle (at least as Dietsch explains it) suggests the addition of two principles that have not been fully explored in tax policy discourse.

These two principles may be stated in simple terms as: (1) a nation may justifiably assert its jurisdiction over a taxpayer or a given amount of income if it can point to certain tax-specific evidence of voluntary consent to the jurisdiction, and (2) a nation may not interpose (or allow itself to be used) to defeat the claims of another state with respect to those likewise observed to have voluntarily consented to that other state’s jurisdiction. These are not claims about what nations can accomplish as a practical matter. Rather, they are claims about what nations have a right to expect from each other in the international tax order, and what taxpayers have a right to expect from all nations in which they are members.

Tying the jurisdictional claim to benefit specifically from public services and infrastructure is a central plank in this account of the membership principle. The membership principle would conclude that using publicly funded services and infrastructure is tacit evidence of a taxpayer’s unforced expression of belonging, and therefore acceptance of obligation to others. ⁴⁷ Applying this idea specifically to multinationals, it is easy to see why multiple jurisdictions could make the exact same claim to the exact same income, with no one claim clearly superior to the others.

In order to assess the potential normative strength of the membership principle as applied to the jurisdiction to tax multinationals, a few areas of ambiguity require resolution. The first involves whether the public services and infrastructure that benefited the putative taxpayer must have been funded by taxation and not taking. If this is necessary, there may be difficulties in implementation because much infrastructure, and many national borders, will be traceable to past instances of forced taking and exploitation that were unjust then and are no more just now. ⁴⁸ It seems necessary to explain how the legacies of war, exclusion, and slavery that touch so many nations would not invalidate virtually any normative claim regarding political obligation.

A second is that the definition of public services and infrastructure is open to interpretation. ⁴⁹ Presumably the definition would include actual use of tangible things such as roads, schools, hospitals, sanitation, and so on. But in thinking about multinational companies, intangible goods, such as the rule of law and a reliable global reserve currency loom large as vitally necessary elements that make corporate existence and profit-making potential possible. If the rule of law that protects contract and intellectual property rights, backed by institutions of review and redress, are not public services, it is not clear what principle would exclude them. But if these things are not excluded, it is difficult to exclude laws promoting legal or financial service industries specifically to assist taxpayers in avoiding taxation by other nations—precisely the problem for which Dietsch turns to the membership theory as a solution. If these are included in public services and infrastructure, the membership principle, like nexus, provides further support for the claim that multiple nations have justifiable reasons to claim jurisdiction over every kind of multinational activity, with no one claim obviously superior to the others.

For these purposes, it is notable that the scope of requisite benefit is undefined: membership is explicitly used only to establish, as a threshold, a necessary prior link to the legitimate claim of jurisdiction. ⁵⁰ The membership principle is therefore not simply another name for the benefit theory of taxation. Benefits theory posits that people should contribute to government in proportion to the benefits they receive from it. ⁵¹ This is an intuitively attractive idea, grounded in the notion that societies form for the purpose of engaging in shared projects, and a government’s main role, perhaps especially in a democratic state, should be that of aggregator of preferences. However, scholars universally reject benefits theory in domestic tax policy given its many shortcomings. These include the impossibility of accurately measuring the value of noncash transfers to specific taxpayers (especially when they are intangible or difficult to disaggregate, such as clean air or a corruption-free legislature); and the difficulty of collecting payment or excluding benefits from those without the means to pay (such as those with incomes below subsistence level).

Applied internationally, given that so many of the benefits enjoyed by multinationals are the product of the combined actions of nations such that the contributions of any one cannot be easily isolated, the benefits principle is wholly unsatisfactory as a dividing tool. Even so, the benefits principle supports the idea that the tax jurisdiction is normatively unlimitable. In the context of the membership principle, benefit is instead a broad threshold concept that, when triggered by the actions of the taxpayer, gives the state normatively legitimate jurisdictional claims. Rather than drawing any lines between acceptable and unacceptable action by nations, benefits theory merely reinforces the idea that multinational businesses benefit from the cooperation of nations, such that multiple nations may have equally legitimate claims of jurisdiction. Just like the legal idea of nexus, in this context benefit might be defined broadly to mean virtually any contact with any person or any asset—real or intangible—that even tangentially involves a nation, such as using its currency as investment or medium of exchange, or buying goods that were developed from scientific research it funded. This conclusion will be unsatisfactory to those who would seek to limit the use of tax systems as a tool to attract investment capital by, in effect, shielding it from the jurisdictional reach of others. The challenge for those who would seek to do so is to formulate a clear normative prohibition on the most tenuous jurisdictional claims.

The membership principle is likely too wide-ranging to provide this kind of clarity. If its ambiguities could be resolved, however, it might provide more acceptable limits on the scope of tax jurisdiction claims than nexus given that express consent is a threshold requirement for the former but not the latter. Requiring a benefit from public services or infrastructure as a prerequisite to membership might prevent some forms of manipulation that plague the nexus theory and force nations out of an otherwise rightful claim to tax, or, conversely, entice them to resort to nonnormative grounds (especially diplomacy) to produce a preferred outcome. For example, if certain types of favorable regulatory regimes provided by nations are not considered public services or infrastructure, the multinational entity that uses such a regime to strategically place itself outside of the jurisdiction of a given nation (in membership terms, denying or disguising its obvious consent to be a member of that state) may fail to accomplish that task.

VI. Conclusion

Who should tax multinationals? This essay has shown that, as a matter of legal jurisdiction, the answer appears to be: virtually every nation may do so, because there are no strong constraints on the jurisdictional claims that any given nation can make. The essay has further argued that there is no clear normative prohibition on any jurisdictional claim that any nation might wish to make with respect to multinationals and their incomes. The lack of prohibition arises from the essential dependence of governments and multinationals upon the continuous cooperation of virtually all nations with cross-border trade and investment. This cooperation is secured through extensive regulatory coordination, including in the area of taxation.

These observations do not lead inexorably to the normative conclusion that all nations should tax multinationals, but they demonstrate the absence of any support for the inverse proposition, that any nation shouldn’t do so. In the fully economically integrated world in which we now live, it is virtually impossible to say where the jurisdiction of one state ends and that of another begins when it comes to the activities of multinationals. If so, then the question of whether, as a legal and normative matter, any given nation should lay some type of claim to the income earned by multinationals is almost certain to yield a positive answer in all kinds of cases and for all kinds of reasons.

This will seem to be an unsatisfying conclusion. On the one hand, it seems to imply that there is simply no way to prevent nations from imposing multiple levels of taxation at will. On the other hand, it effectively denies nations the right to scold, sanction, or restrain any nation that refuses to cooperate with prevailing tax norms, even if jurisdiction is claimed with the express intent to assist taxpayers in avoiding taxes elsewhere. As such, the conclusion that every nation can tax multinationals—and that there is no clear normative prohibition against any one of them doing so—provides no solution for either double taxation or the problems associated with excessive tax competition.

Even so, recognizing the dependence of governments and “their” multinationals on multilateral cooperation should lead to an increase in focus on how nations go about negotiating the terms of international coordination on tax. The apparently unsatisfactory implications laid out above might be less so if the methods of international coordination used to address them are themselves normatively acceptable. Such coordination methods currently lie in negotiated agreements and an extensive network of soft law instruments developed to support them; it is therefore appropriate to continue to interrogate the normative aspects of these measures. This includes the complex international institution-building that has gone on to date, largely without sufficient normative scrutiny.