Best strategies for tax advisory in technology and international markets

Introduction

The intersection of technology and international markets has created unprecedented opportunities for businesses, but it has also introduced complex tax challenges that require sophisticated advisory approaches. Technology companies operating across multiple jurisdictions face a unique combination of obstacles, from digital service taxes and transfer pricing complications to evolving regulations around artificial intelligence and cryptocurrency. Tax advisory in this landscape demands more than traditional compliance knowledge; it requires a deep understanding of how digital business models operate, where value is created, and how different tax regimes interact with each other. This article explores the most effective strategies for navigating tax advisory in technology and international markets, providing practical insights for companies seeking to optimize their tax positions while maintaining compliance with increasingly stringent global regulations. By understanding these key strategies, technology companies can build sustainable tax frameworks that support growth and minimize risk across their international operations.

Understanding the digital tax landscape and regulatory complexity

The global tax environment for technology companies has fundamentally shifted over the past decade. The emergence of digital business models that generate substantial revenue without maintaining significant physical presence has prompted governments worldwide to reconsider how they tax technological enterprises. The OECD’s Base Erosion and Profit Shifting (BEPS) initiative and the more recent Pillar One and Pillar Two agreements represent watershed moments in international tax policy, establishing frameworks that directly affect how technology companies structure their operations.

Understanding this landscape requires acknowledging that traditional tax planning based on physical presence and tangible assets no longer reflects how technology companies create value. Cloud services, software licenses, data analytics, and digital advertising generate enormous profits from locations where the company maintains minimal physical infrastructure. This disconnect between profit generation and physical presence has become the central tension in modern tax advisory.

Several factors contribute to the complexity of today’s digital tax environment:

• The implementation of digital service taxes (DSTs) in over 30 countries, each with different scope and application rules
• Increased scrutiny of intellectual property transfers and licensing arrangements by tax authorities
• Growing regulatory focus on substance requirements and anti-avoidance measures
• Expansion of permanent establishment definitions to capture digital activities
• Rising interest in country-by-country reporting and real-time tax transparency
• Emergence of new tax challenges around artificial intelligence, blockchain, and emerging technologies

Technology companies must recognize that compliance in 2024 is not solely about meeting filing deadlines. It requires proactive engagement with the regulatory environment, anticipating changes before they are formally implemented, and structuring operations in ways that withstand increased scrutiny from tax authorities worldwide. The cost of misjudging the regulatory landscape can be substantial, involving not just back taxes and penalties, but reputational damage and operational disruption.

Strategic transfer pricing and profit allocation frameworks

Transfer pricing stands as one of the most critical—and potentially problematic—aspects of tax advisory for technology companies. When a parent company in one country sells software, provides technical services, or licenses intellectual property to a subsidiary in another country, the price charged for these transactions directly determines how profits are allocated across jurisdictions. Tax authorities scrutinize these transactions intensively because they represent the largest opportunities for profit shifting and tax avoidance.

The fundamental principle underlying transfer pricing regulations is that related-party transactions should be priced at “arm’s length”—the price that unrelated parties would agree to under comparable circumstances. However, applying this principle to technology transactions presents genuine challenges. Consider a cloud infrastructure service: what is the appropriate margin for a parent company providing cloud hosting to its subsidiary? There may be few or no comparable unrelated transactions to reference, making the determination of arm’s-length pricing inherently contentious.

Effective transfer pricing strategy for technology companies requires several interconnected elements:

Robust economic analysis and functional analysis: Before establishing any transfer pricing methodology, companies must conduct detailed analysis of which entity in the value chain performs which functions, what assets it employs, and what risks it bears. A subsidiary that merely resells software written by its parent company has different economic characteristics than a subsidiary with its own development team and significant technical capabilities. Tax authorities increasingly demand evidence of this functional analysis.

Defensible transfer pricing documentation: Most jurisdictions now require contemporaneous transfer pricing documentation—detailed records prepared at the time transactions occur that justify the selected transfer pricing methodology. Documentation should include benchmarking studies, comparables analysis, and economic justification for the pricing approach selected. Poor documentation is frequently cited by tax authorities as grounds for transfer pricing adjustments, even when the underlying pricing may have been reasonable.

Intellectual property strategy alignment: Technology companies derive significant value from intellectual property. Where this IP is held, how it is developed, and how licensing arrangements are structured fundamentally affects transfer pricing outcomes. Some jurisdictions offer special regimes for certain types of intellectual property income. The Patent Box in European countries, for example, provides preferential tax treatment for income from qualifying patents and intellectual property. Strategic IP location and licensing can optimize outcomes while maintaining defensibility.

The following table illustrates how transfer pricing methodologies differ across various technology transaction types:

Transaction type	Primary methodology	Key considerations
Software licensing	Comparable uncontrolled price or cost-plus	Comparables difficult to find; licensing terms vary significantly
Cloud infrastructure services	Cost-plus or transactional net margin method	Service margins for similar entities; cost allocation complexity
Technical support and maintenance	Cost-plus	Cost allocation; identification of appropriate service markups
Data analytics and insights	Comparable uncontrolled price or cost-plus	Difficulty in establishing comparables; value attribution challenges
Intellectual property development	Cost-sharing arrangements or profit-split method	Allocation of development costs; ownership of improvements

Beyond the mechanics of transfer pricing, companies must understand that tax authorities in different jurisdictions increasingly coordinate their transfer pricing investigations. When one country’s tax authority challenges a company’s transfer pricing, authorities in other countries often follow with their own investigations. The mutual agreement procedure process, while theoretically designed to resolve such disputes, can take years and creates substantial uncertainty. Sophisticated tax advisory therefore requires not just optimizing individual transfer pricing positions, but designing the overall architecture in ways that will withstand coordinated scrutiny across multiple jurisdictions.

Structuring operations for compliance with Pillar Two and emerging global tax minimums

The OECD’s Pillar Two agreement represents perhaps the most significant change to the international tax landscape in generations. The agreement establishes a global minimum tax rate of 15 percent, with implementation beginning in 2024. This agreement fundamentally alters tax advisory strategy for technology companies, particularly those with complex international structures designed to achieve lower effective tax rates.

Pillar Two introduces two complementary mechanisms: the Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UPR). The IIR allows parent companies in high-tax jurisdictions to impose additional taxes on income earned by subsidiaries in lower-tax jurisdictions where the subsidiary’s effective tax rate falls below 15 percent. The UPR allows jurisdictions to impose taxes on the same low-taxed income if the parent company does not impose sufficient IIR tax. This creates a multi-layered enforcement mechanism that makes it increasingly difficult to achieve effective tax rates significantly below 15 percent.

For technology companies, this shift requires reconsidering operational structures that were previously optimized for lower-tax regimes. Companies with substantial operations in countries like Ireland, Luxembourg, Singapore, or other jurisdictions with preferential tax regimes may need to restructure to avoid triggering Pillar Two liability. The strategic options available include:

Increasing substance in higher-tax jurisdictions: By relocating meaningful business activities, intellectual property, or decision-making functions to higher-tax jurisdictions, companies can increase the local tax rate applied to profits generated by those operations. This approach requires genuine economic substance, not merely paper restructuring. Tax authorities increasingly scrutinize relocations for signs of artificiality.

Accelerating investment in research and development in higher-tax jurisdictions: By increasing deductions available in higher-tax jurisdictions, companies reduce the overall effective tax rate differential between jurisdictions. Many technology companies are exploring expansion of R&D operations in major markets partly for this reason.

Evaluating the cost-benefit of low-tax jurisdictions: For some companies, the benefits of operating in low-tax jurisdictions may no longer justify the complexity and compliance burden. The analysis must weigh ongoing tax savings against the costs of maintaining the structure and risk of future regulatory changes.

Pillar Two also introduces important carveouts and safe harbors that technology companies may leverage. The framework includes substance-based carveouts that exempt a portion of income from Pillar Two rules if the company maintains sufficient substance (payroll and tangible assets) in a jurisdiction. This creates incentives for maintaining real operations and employment rather than pure profit-shifting structures.

Looking beyond Pillar Two, technology companies must prepare for continued evolution of the international tax framework. The OECD continues developing guidance on the taxation of artificial intelligence, digital transactions, and other emerging business models. Tax advisory strategy must build flexibility to adapt to future regulatory changes rather than optimizing rigidly around current rules that may evolve significantly.

Digital service taxes, jurisdictional exposures, and mitigation planning

While Pillar Two establishes a global minimum tax floor, Digital Service Taxes (DSTs) represent a different type of tax challenge that technology companies face today. DSTs are unilateral national taxes—not coordinated through international agreements—that attempt to tax digital services provided to residents of a country even when the service provider has minimal physical presence in that country.

More than 30 countries have now implemented or proposed DSTs. These taxes typically target large technology companies and apply to services like digital advertising, online marketplaces, data provision, and streaming services. The tax rates range from 2 percent to 6 percent, applied to revenue derived from digital services provided to customers in the taxing country. For a large technology company providing services globally, DST exposure can aggregate to a meaningful additional tax burden.

The challenge for technology advisors lies in several dimensions:

Scope definition and interpretive uncertainty: DST legislation is often ambiguous about which services qualify for taxation, creating uncertainty about compliance obligations. Is providing a cloud service a “digital service” subject to DST? What about a company that provides a digital advertising platform versus one that provides advertising technology to other platforms? Different countries interpret DST scope differently, creating the possibility of multiple exposures on the same revenue stream.

Jurisdictional sourcing: DSTs typically apply to services provided to customers located in the taxing country. For many digital services, determining the customer’s location is straightforward. However, for other services—particularly data services and analytics platforms—identifying where the customer is located can be ambiguous. A company may use a service for purposes across multiple countries, making sourcing determinations complex.

Credit and offset availability: Most DSTs are not creditable against corporate income taxes. This creates a scenario where companies may pay income tax on the same revenue stream plus a DST, resulting in an aggregate tax rate that exceeds statutory income tax rates. Tax advisors must help clients evaluate whether DST payments can offset corporate income taxes in any jurisdiction, which requires detailed analysis of each country’s rules.

Effective mitigation of DST exposure requires several approaches working in concert. First, companies should map their service offerings against each DST regime they potentially fall within. This requires legal analysis of DST scope legislation, which is often vague, combined with practical assessment of how tax authorities are interpreting provisions. Second, companies should examine whether their service delivery model can be modified in ways that reduce DST exposure without sacrificing operational efficiency. Some companies have explored structures where certain digital services are provided through different legal entities or combined with non-digital services in ways that may reduce DST scope.

Third, companies should engage with tax authorities and government agencies in jurisdictions where DSTs apply. Many DST regimes provide safe harbors or exemptions for companies that meet certain criteria or engage in certain types of activities. Additionally, several bilateral arrangements between countries address DST concerns, and companies should understand these arrangements to determine if they provide relief.

Finally, companies should monitor ongoing changes to DST regimes. Several countries have modified or proposed modifications to their DST regimes as the international tax landscape evolves. Some countries have indicated willingness to modify or repeal DSTs if Pillar One provisions—which would establish a new international framework for allocating taxing rights on digital services—enter into force.

Building integrated tax compliance systems and documentation frameworks

The evolution toward more aggressive tax enforcement, real-time reporting requirements, and heightened scrutiny of technology companies has made comprehensive tax compliance systems essential for managing tax risk. Compliance is no longer a purely back-office function executed at year-end; it must be integrated into operational decision-making throughout the organization.

A robust tax compliance system for a technology company operating internationally should include several interconnected components:

Real-time tax data integration: Rather than assembling tax information months after transactions occur, modern tax systems pull data from operational systems in real time. This allows companies to identify tax exposures quickly and make adjustments while transactions are still in progress, rather than discovering problems during annual reconciliation. For technology companies where transaction volumes are often enormous, this capability is increasingly essential.

Entity classification and jurisdiction mapping: Maintaining accurate records of legal entity structure, jurisdiction of incorporation, tax resident status, and permanent establishment status across global operations seems straightforward but is frequently mismanaged. Tax compliance systems should automatically classify transactions against legal entities and jurisdictions, ensuring that transactions are properly attributed and reported in appropriate locations. This is particularly important for companies with complex structures involving multiple subsidiaries, partnerships, or other arrangements.

Transfer pricing documentation generation: Tax compliance systems can automate collection of data needed for transfer pricing analysis and documentation. Rather than assembling supporting documentation after-the-fact, systems can collect functional analysis data, cost allocation information, and comparable transaction data throughout the year as transactions occur. This improves the quality and defensibility of documentation.

Tax provision accounting and effective tax rate tracking: Finance teams need real-time visibility into the company’s effective tax rate, tax provision liability, and uncertain tax positions to manage financial reporting accurately. Integrated systems that link income tax accounting with operational data improve accuracy and reduce the risk of misstatements in financial reporting.

Regulatory tracking and compliance calendars: With rapidly changing tax regulations across multiple jurisdictions, maintaining a centralized system for tracking regulatory changes, filing deadlines, and compliance obligations prevents inadvertent non-compliance. Many large technology companies have experienced penalties for filing errors in specific jurisdictions simply because filing deadlines and requirements were not tracked centrally.

Beyond systems, documentation frameworks are critical. Technology companies should maintain comprehensive documentation of their transfer pricing methodology, intellectual property strategy, permanent establishment analysis, and tax positions across jurisdictions. This documentation should be updated annually and maintained in a form that can be quickly accessed and presented to tax authorities if audited. The cost of maintaining thorough documentation is trivial compared to the cost and risk of not having defensible support for tax positions during an audit.

Additionally, companies should establish processes for monitoring tax risks and uncertain positions. The Financial Accounting Standards Board’s guidance on accounting for uncertain tax positions requires companies to evaluate the likelihood that tax positions will be sustained upon examination and to record provisions accordingly. But beyond compliance with accounting rules, companies benefit from maintaining a register of tax risks, probability assessments of different outcomes, and contingency planning for potential adjustments.

Conclusion

Tax advisory for technology companies operating in international markets has become significantly more complex and strategically important. The convergence of multiple pressures—increased global coordination among tax authorities, implementation of Pillar Two’s global minimum tax, proliferation of Digital Service Taxes, and tightened transfer pricing enforcement—requires that technology companies approach tax strategy with the same sophistication they apply to product development and market expansion.

Effective tax strategy is no longer about finding loopholes or exploiting regulatory gaps. Those approaches have become increasingly costly and risky as tax authorities have become more sophisticated in identifying and challenging aggressive tax positions. Instead, modern tax strategy focuses on building defensible structures that withstand scrutiny while achieving legitimate tax efficiency. This requires deep integration of tax considerations into business decision-making, comprehensive documentation and compliance systems, and proactive engagement with tax authorities and regulators. Technology companies that build these capabilities will position themselves to navigate the evolving international tax landscape successfully, maintaining compliance while optimizing their tax positions in sustainable ways.