Taxing Cross-Border Services

Faced with the limitations of existing tax frameworks for cross-border trade in services — particularly the lack of taxing rights over certain income from highly digital business models and the continuing scope for profit shifting through payments for cross-border services — countries and scholars have adopted or proposed a wide range of tax measures. This paper brings these measures together in a coherent framework and examines them from both an economic and a legal perspective. It documents how cross-border services trade has grown, become more digital in composition, and become increasingly concentrated across sectors, firms, and jurisdictions. It then develops a comparative synthesis covering destination-based consumption taxes such as VAT, gross-revenue taxes — notably digital services taxes — as well as income-based instruments such as nexus and withholding rules, and anti-avoidance rules aimed at limiting profit shifting through deductible cross-border payments. The paper argues that the economic incidence of each instrument is central to policy assessment and that evaluating these instruments in isolation obscures their interaction. Its main conclusion is that broader reliance on destination-based taxation can address many of the core problems raised by digitalized services trade more effectively than narrower, more distortionary alternatives.