These are products and services that can be delivered electronically through the Internet. Because these types of transactions so easily cross international borders, their volume is likely to grow, and it is important to set down consistent tax rules early. The TAG has made recommendations that differentiate those digital transactions that result in royalties from those that result in business profits. Compare this treatment to that of business profits, which are taxable in the customer s country only if the seller is established and doing business in that country. This difference in treatment sets up a conflict between those countries, such as the United States, that are net exporters of digital products and services, and those countries that are net importers.
Exporters prefer rules that characterize digital products and services as business profits.
Because sellers of these digital products and services tend not to be established in customer countries, they will not be taxable in those countries. Instead, the seller s own country will retain jurisdiction to tax these profits. On the other hand countries that are net importers of digital products and services prefer rules that characterize sales as royalties. These countries retain the right to tax royalties paid to foreign sellers by their own residents. Clearly, without consistent rules, both exporter and importer countries might claim the right to tax the income from sales of digital products and services.