Taxing Royalties Where Value Is Created

This Article examines whether Article 12 of the OECD Model Tax Convention should be redrafted to tax royalties where value is created in an increasingly IP-driven and digitalized economy. It traces the historical evolution and current structure of royalty provisions in the OECD, U.N. and U.S. Model Conventions, highlighting inconsistencies between formal source rules and the underlying economics of royalty income. Building on an economic concept of value creation, the Article argues that royalties are best understood as active, business-related income generated through research and development, IP protection and market exploitation across multiple jurisdictions. It then proposes a reallocation of taxing rights—through an expanded permanent establishment nexus and, ultimately, a move toward formulary apportionment—to better reflect countries’ contributions to the royalty value chain.