The Shifting Economic Allegiance of Capital Gains

Technological advances and the digitalization of the global economy have created an economic environment beyond the imagination of the original designers of the international tax system. Much scholarly attention has been paid to the question of how these economic transformations should affect which country is able to tax a multinational company’s income. But which country should be able to tax capital gains income from the sale of that company’s shares is an important and overlooked question. This Article answers this question.

It concludes that taxing authority over capital gains income must be reallocated to the countries in which companies conduct business. In our modern, digitalized economy, this reallocation is necessary to align international sourcing rules with international tax law’s underlying principles. While this Article is a primarily a proof of concept, it also seeks to begin a conversation about ways to implement this reallocation and describes one possible approach: an annual mark-to market tax at the company level on increases in company value apportioned amongst source countries based on a set formula.