Wells and Lowell: Income Tax Treaty Policy: Residence vs. Source - Why DSTs exist?

This is an AI generated podcast of a 2014 paper written by Professor Bret Wells and Cym Lowell titled: “Income Tax Treaty Policy in the 21st Century: Residence vs. Source”

Why this is important:

The Trump administration recently proposed (as part of the “OBBB”) a provision that would impose tax penalties on residents of countries that had DSTs (“Digital Services Taxes”). The U.S. objection to DSTs is largely based on the provisions in tax treaties which give the “source country” (where the profits are generated) the right to tax those profits only if the corporation as a PE (“Permanent Establishment”) in that country. Of course, Google, Microsoft, et al do NOT have a “permanent establishment” in Canada, UK, India, etc. As a result many countries (because they cannot tax the income of U.S. multitionals) have enacted DSTs which are a tax NOT income but rather on revenue.

Yes, the standard tax treaties (which are 100 years old) deny the source country taxing rights (absent a PE). But, why is this? Does it make sense in 2025 to deny the source country taxing rights over income?

I came across a FANTASTIC article written by Professor Brett Wells and Cym Lowell which provides some historical perspective on this issue:

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2380241

I then ran it through AI and here is the summary. The AI description is:

Income Tax Treaty Policy: Residence vs. Source

1 source

The provided text explores the historical evolution of international income tax treaty policy, focusing on the shift from source-based taxation to residence-based taxation following World War I. It highlights how the League of Nations' model, which favored residence countries (often capital-exporting nations) and introduced the concept of Permanent Establishment (PE), largely superseded an earlier International Chamber of Commerce (ICC) proposal for profit-split methodologies. The text argues that this historical policy choice, coupled with the later rise of "interim holding companies," inadvertently led to the creation of "homeless income"—profits that escape taxation in both source and residence countries. Ultimately, it suggests that a re-examination of these foundational principles is necessary to address current global tensions surrounding multinational corporations' tax planning strategies and to foster more balanced and equitable international tax policies for the 21st century.