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In a new article published in the International Tax Review, NERA Managing Director Dr. Yves Hervé and Director Philip de Homont analyse one of the most significant issues facing the transfer pricing community: the taxation of the digital economy. They present a case study in which they consider the data-based economic valuation of user contributions.

Even if the question of whether digital companies will be taxed more substantially has been addressed, a question remains as to where they will be taxed. In this article, the authors discuss the methods allowing the identification of the proportion of a digital company’s profits that should be attributed to the user base as opposed to the technology. The method they describe allows companies to determine an economically justified allocation to the overall user base, which can then be allocated to the various tax jurisdictions in which the users are located. They also highlight that, in practical terms, it is often necessary to consider other intangibles or activities as well.

The authors conclude that, since this method is economically justified in the first place, it would remain within the framework of the established arm’s-length principle and would reduce the scope for international disputes.