AI Executive Management and Taxation of digital firms.

The economic nature of a firm.

There are three very important mechanisms in describing the economic nature of a firm;

• Employees 

• The authority of the firm's manager 

• Contracts 

The authority of the firm’s manager.

Today’s microeconomics says that the authority of the firm’s manager is the most important economic principle when it comes to determining how the profits of a firm are generated.

The manager of the firm has authority over the firm’s employees and thus control and authority over the operations of the firm.

The manager also has the authority to enter into long term supply contracts. Thus, obtaining supply at lower negotiated prices.

The manager’s authority is thus extremely important when it comes to operations. The manager directs the employees and the operations that enables the products or services to be delivered due to collaboration of employees at a production cost lower than market price.

The manager has the contractual authority to sell the products and services at a market price. 

Digital firms, digital platforms and AI.

When the digital firm uses AI, they can;

• Generate documents 

• Enter into contracts with third parties 

• Market and sell products and services 

• Direct employees and customers

• Carry out operations - AI Agents/chatbots etc.

An AI can trade securities and crypto, do sales and marketing, generate reports, and give advice. 

 Who has authority in an AI firm?

If  AI is carrying out the operations described, then who has been exercising authority?  There is a lot of evidence that the management of a company is not ‘exercising authority’ in a lot of operations. 

How can the CEO or manager be held responsible for actions and decisions on operations that he or she did not really authorize.

What are the international tax law implications of AI?

The economic nature of a firm can be described by economic principles and axioms such as managerial authority.

✅ Managerial authority is fundamental to U.S. Tax law as well as international tax law in particular transfer pricing.

✅ If the firm is digital,and there is little, or no managerial authority being exercised then today’s international tax laws will not apply properly to the business profits of such digital firms.

✅ This means the tax laws that are driven by managerial authority will not work when applied to digital firms with digital platforms that deploy AI.

There is not yet any economic analysis of artificial intelligence that can be used to replace the presence of the managerial authority emanating from human beings who are managers.

 

The implications of No employees in an AI digital firm.

 In contemporary transfer pricing laws of the OECD and the USA, the presence of employees and managerial authority are significant aspects of the analytical framework used to determine whether the business profits of a digital firm are subject to corporate taxation.

If a digital firm with a digital platform deploys AI extensively to carry out its international operations, there could be no employees and no managerial authority. The result under current tax law could be no corporate taxation of business profits. 

No taxation of the profits of digital firms.

If a digital firm operating through a digital platform relies on AI, it may have no traditional managerial authority and few, if any, significant employees. Individuals responsible for maintaining the physical infrastructure that supports the AI would likely be considered ancillary or economically insignificant under current international tax rules.

Because existing tax laws lack underlying economic principles that account for AI, they fail to capture how AI-driven digital firms generate profits. As a result, the profit-generating activities of such firms often fall outside the scope of today's international tax frameworks.

Non taxation of SMEs with digital platforms.

The challenges of taxing the digital economy have persisted for over 25 years—and they are on the brink of accelerating exponentially with the rise of AI. Digital platforms themselves, built on increasingly autonomous algorithms, are diminishing the need for traditional employees and undermining the economic relevance of managerial authority.

Historically, digital platforms have been a core driver of the non-taxation of digital firms. Over the past two decades, their ability to avoid traditional tax frameworks has only become more entrenched. With the integration of AI, these firms are now positioned to generate profits in ways that are no longer captured by existing definitions of the economic nature of a firm.

A new generation of owner-managers will be able to build and scale digital firms using AI and digital platforms in ways that systematically evade taxation. For instance, such firms can collect and leverage user data—an asset of immense value—while accumulating economic benefits in a manner comparable to tax deferral.

When an AI-driven digital firm operates across international jurisdictions and generates dynamic intangibles like user data, its economic activity remains largely invisible to today’s tax systems. Entrepreneurs can achieve de facto tax deferral—not through loopholes, but because current tax laws fail to recognize the economic principles underpinning digital platforms and AI.

Recognition is a foundational concept in tax law. If an asset is not recognized, its fair market value cannot be realized for tax purposes. This disconnect between emerging digital business models and outdated tax concepts poses a fundamental challenge to the integrity of global tax systems.

How long will it take tax authorities to formulate the underlying economic principles of digital platforms and AI?

What are the implications of robots for taxation of international business profits?

Owners of SMEs who deploy AI and digital platforms are going to be able to achieve tax deferral and accumulate great wealth rapidly over the next ten years.