The Traditional Concept of ‘Source’

Abstract

The implications of ‘source’ have been diversely interpreted by both academics and judges. It is possible to have a state of affairs where there are multiple sources and two ‘dominant’ causes for generating income. Vogel’s ‘benefit theory’ argues that the country that furnished the majority of benefits pertinent to the generating of income carries the costs of such benefits and should be entitled to exclusive taxation rights as compensation. The ‘entitlement theory’ is based on the source State being entitled to tax income generated within its geographical borders. The ‘economic allegiance’ theory attributed to the introduction of the ‘permanent establishment’ concept, which is utilised to attribute profits of a business to the ‘source’ country. ‘Permanent establishment’ is a topical issue apropos the virtual world. Contentious points at issue are ‘place of business’, ‘fixed’ and ‘carried out’. Implicit to the ‘geographical location’ test is that the ‘specific location’ need not be a specific ‘fixed point’ and a ‘geographical area’ will suffice. The ‘duration’ test requires that an activity is regularly repeated during a certain period of time but there may be interruption in business operations. ‘Permanent establishment’ has been extended to embrace the concept of ‘agent’. Vogel deems ‘source’ to be the “state that in some way or other is connected to the production of the income in question, to the state where value is added to a good” (Pinto refers to Klaus Vogel, “Worldwide vs Source Taxation of Income – A Review and evaluation of Arguments (Part I)” (1998) 8–9 Intertax, pp. 216, 223 [op cit Pinto, Dale E-Commerce and Source-Based Income Taxation (2003), Netherlands, p48]).