Unraveling the Direct Tax Implications of the Metaverse: Where to Tax?

This study presents a case study on how the metaverse is challenging the current international tax framework. This study questions the workability of the permanent establishment (PE) concept as well as the OECD’s Pillar One proposal with regard to the taxation of the metaverse. Taxation of the virtual markets has been untouchable by tax authorities for now. The OECD’s Pillar One initiative represents a significant step forward, aiming to allocate taxing rights to market jurisdictions, independent of physical presence. This approach recognizes the role of the market in value creation and introduces a new taxing right over profits generated in specific jurisdictions. However, the Pillar One solution has been developed with the taxation of e-commerce in mind, without necessarily taking into account the undeniably unique characteristics of the metaverse. The author concludes that neither the PE concept nor the Pillar One proposal seems fit, based on the benefits principle, to capture business profits within the metaverse. In the final section, the author encourages further tax policy research by formulating a possible solution that would be in line with the benefits principle.