After a couple of background considerations, such as the decline of the arm’s length standard, the recent trend of tax unilateralism focused on the tech sector, and the relevant US tax reform provisions, the paper examines the first policy option, which is allocating more revenue to the countries where users are located, and value is allegedly created. This option is the most interesting, because some European governments justify the DST based on such user participation theory. Everyone agrees that income taxation should be aligned with value creation, but no one agrees on the meaning of “value creation,” especially when it comes to the digital economy. On the one hand, HMT and the European Commission argue that users’ data collected in the course of users’ participation in the platforms in GAFA is later used and monetized for targeted advertising. Such user participation contributes to the value created in the country where the users are located, which is different from the value created in the country where the advertising algorithms have been developed. Thus, it should be recognized as a source of taxing excess returns. On the other hand, Grinberg criticizes the user participation concept that is limited in use in the digital economy by showing many similarities between the digital economy and a more traditional economy, such as the financial sector and a clinical trial in the medical industry. He concludes that the concept of user participation is intellectually indefensible, and at most amounts to mercantilist ring-fencing. However, he noted such an important implication of the user participation theory as an effort to shift towards destination-based income taxation for fundamental international tax reform.

Grinberg then introduces a second policy option that allows destination-based income taxation on “residual” market profits generated by “marketing intangibles.” This approach allocates i) residual returns generated by customer-based or marketing intangibles to the market and ii) residual returns generated by other production-based intangibles, as well as routine returns, based on current transfer pricing rules. Because it is a compromise between the traditional transfer pricing system and a destination-based income tax reform, it might function in the same way as the first option. However, it is a more principled approach because it applies across the whole economy, instead of ring-fencing the digital economy. Nevertheless, he criticizes the second option as complex, creating new conflict as between countries and as between countries and multinationals, and more importantly, as unrealistic to implement because it requires extensive tax harmonization and exchange of information.

Finally, Grinberg proposes a third policy option to impose “minimum taxes” on both inbound and outbound digital transactions. Unlike the first two options embracing a certain extent of source/destination-based taxation, this is an attempt to defend our residence-based taxation. (Note: The recent GLOBE proposal explored by Germany and France also falls under this option.) He suggests that the GILTI and the BEAT introduced in the TCJA could work as an alternative for the United States if they are reshaped as something like a “reverse CFC” rule. Considering that achieving extensive harmonization in a shift to destination-based taxation tackling all the established concepts and principles in international tax is extremely difficult, he seems to choose a practical path toward a reform. However, as he noted, this proposal is by nature limited to seek the second-best outcome.

Then, what would be the optimal theory of taxing the digital economy, at least in a theoretical and ideal world? Is the second option based on formulary approach theoretically superior? Should we delve deeper into a more fundamental reform, such as introducing the digital PE or a shift to the destination-based cash flow tax (although not analyzed by Grinberg because the most recent US tax reform has dropped it)? Also, why has the first option, which has been fiercely criticized by many scholars for its theoretical defects, gained the most political momentum in major economies? Does the recent phenomenon imply that increasing source/market country taxation is inevitable in the 21st century? The reader of this paper will be thrilled to be able to pan out his or her own take on the taxation of digital economy with a deeper understanding of the current debate.