AI-Driven Revenue or how AI will impact International Taxation
Oleksandra Mali?henko, Ph.D in Law, LL.M.
?? Global Tech IT Commercial Product Lawyer, AI Lawyer, General Counsel, Head of Legal (Multi-regions, worldwide) ??Black Belt in International IT SaaS Contracting, Compliance, AI Regulation & Data Protection Expert
The rapid advancement of AI is likely to bring significant changes to international taxation from a legal standpoint.
Without harmonized AI tax guidelines, differing national approaches could lead to double taxation.
AI’s influence on international taxation is driving the need for the OECD - OCDE to update its guidelines on nexus standards and AI revenue characterization.
?? These changes aim to ensure fair taxation, prevent base erosion, and streamline global compliance while adapting to AI-driven business models.
I'm Oleksandra, an experienced IT/Tech Global Commercial Lawyer with over 18 years of international expertise,? and I’m sharing my legal practice knowledge and insights here.
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???? Here are the key ways of AI Profit Allocation and AI Taxation ??
???? AI as a “virtual” presence
Permanent Establishment (PE): Traditional physical presence requirements for PE may become obsolete, as AI systems create value in jurisdictions without physical assets or personnel.
AI-powered systems could create a “virtual” presence that may need to be recognized for tax purposes, challenging existing definitions of PE.
???? AI-Driven Revenue
Revenue from AI-based services (e.g., AI as a Service) could challenge current classifications of income.
For instance, revenue generated by AI could be categorized differently, such as royalty income (for intellectual property) or service income, impacting where and how taxes are applied.
Increased Focus on Transfer Pricing: AI-generated revenue streams require precise valuation, which complicates transfer pricing. Legal frameworks may need to address how to fairly allocate profits generated by AI in multinational operations.
????AI in Transfer Pricing and Profit Allocation
Increased Focus on Transfer Pricing: AI-generated revenue streams require precise valuation, which complicates transfer pricing. Legal frameworks may need to address how to fairly allocate profits generated by AI in multinational operations.
Split Profit Models: Authorities may need to adopt split profit approaches or create entirely new allocation mechanisms that capture the value generated by AI activities within different jurisdictions.
???? Enforcement Using AI
Enhanced Tax Monitoring and Enforcement: Tax authorities increasingly use AI to detect non-compliance and uncover tax avoidance. This could lead to faster, more detailed audits, reducing loopholes and increasing transparency.
???? AI-Driven Economic Substance Tests
Evaluating Economic Substance with AI: AI could make it easier for tax authorities to assess whether companies meet the economic substance requirements in a jurisdiction by analyzing financial and operational data across borders.
New Standards for Substance and Function: AI may require legal updates that set clear guidelines on what constitutes “substantial” activity for tax purposes, especially when AI conducts essential functions.
????Digital Taxation and AI
AI in Digital Services Taxes (DSTs): With AI integral to many digital services, digital taxation frameworks like the OECD’s Pillar One may need to include AI-driven profits under DSTs, ensuring that value generated in market countries is taxed there.
Country-Specific AI Taxes: Some countries may introduce targeted AI taxes (similar to digital taxes) on companies heavily utilizing AI, creating a new category within international tax laws.
????Intellectual Property (IP) and Withholding Tax
IP Ownership and Withholding Tax: AI-generated IP ownership and the licensing of AI models could lead to cross-border withholding tax implications. This may necessitate treaties to address royalty withholding taxes on AI IP income streams, especially given the complexities of defining AI as a service, IP, or product.
Royalties for AI Algorithms: Income from AI algorithms licensed across jurisdictions might be classified as royalties, potentially subject to different tax treatments than other business revenues.
????Legal Uncertainty and Dispute Resolution
Need for International Consensus: Without harmonized rules, varying AI tax treatments can lead to double taxation or tax base erosion, increasing the need for consensus within OECD, G20, and other tax frameworks.
Integrating AI into international taxation is driving a need for updates in tax law, enforcement mechanisms, and frameworks for fair taxation.
The complexity and variety of AI applications mean that countries must adapt quickly to ensure that taxation systems remain equitable, resilient, and enforceable across borders.
Let’s discuss how we can create a balanced AI framework!
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