This seemingly innocuous analogy, which is intended to justify the application of the passage-of-title rule, fails to address the bigger issue looming in the background: How the U.S. concept of residence-based taxation may jeopardize the revenue sharing between the U.S. and other OECD members under the treaty network.
Let us assume that Microsoft does not ship disks to German customers but has a permanent establishment or wholly owned subsidiary in Germany through which it presently sells its software products. Under the U.S.-German double tax treaty Germany may tax the presumably sizable profits attributable to the permanent establishment; the subsidiary's profits are subject to corporate income tax, while the imputation credit under the German integration system is not available to the U.S. shareholder. Thus a portion of Microsoft's profits remains in Germany.
In the very near future, Microsoft will be able to sell most of its products over the Internet (Windows, MS Word, Excel, Access, Internet Explorer). These sales are done by the head office in the U.S. and probably not attributable to a permanent establishment; they will not result in income of the subsidiary. Since the tax rates in Germany are higher than the U.S. rates (taking into account the trade tax imposed on business profits and net worth) there is a strong incentive for Microsoft to end its excess credit position and to switch over to sales via download which are not subject to tax in Germany. In effect, Microsoft will take this approach towards all European high-tax countries in which it sells software.
Other U.S. software companies will follow so that an entire sector of U.S. export industry is no longer exposed to foreign tax (the "shift to residence-based taxation"). However, since the U.S. has a virtual monopoly on software there will not be any similar advantages for the other OECD members' exporters. In fact, the result is a rather lopsided system that maximizes U.S. national income and tax revenues at the expense of other countries.
Two additional factors are likely to exacerbate this effect. First, every product that can be sold in digital form (TV, radio, movies, music, magazines, and books) and highly paid services that can be performed online without physical presence are no longer subject to foreign tax. Secondly, treaties eliminate or reduce the withholding tax on royalties so that the export of know-how is also virtually free from foreign taxes. While the other countries' exporters in traditional sectors still need permanent establishments and subsidiaries that expose them to U.S. taxation, U.S. exports in a key sector of the global economy become non-taxable outside the U.S.
This result jeopardizes the historical compromise on which the treaty network is based: the sharing of revenues between OECD member countries and the reciprocity of treaty benefits. Eliminating the source-based taxation of income derived from telecommunication, software, services, and licensing of intangibles will only improve the position of the U.S. Moreover, the public announcement not to introduce any new taxes (principle of neutrality) implies a request to other countries to adopt the same policy. If they do so, the U.S. will have made sure that there is not going to be a substitute for the disappearing source-based taxation.
The argument has been made that technological advances often result in a shift of tax revenues and that it is neither practical nor desirable to respond to these changes by adopting new rules. This is a valid objection. However, I would like to point out that the U.S. is not at all "neutral" towards the actual or perceived erosion of its own source-based taxation. For example, the Internal Revenue Service is particularly concerned about new financial instruments that convert dividends subject to withholding tax into other kinds of income taxable only in the residence country (e.g. interest under the U.S.-German treaty, capital gains). In these cases it is at least sometimes difficult to distinguish between tax avoidance, which justifies appropriate countermeasuers, and mere changes in technology that alter revenue distribution.
In my opinion, the other OECD members should think twice before they follow the U.S.-concept of residence-based taxation. Due to the current U.S. export advantage in information technology, services, and know-how they would forego source-based taxation without being able to increase revenues from residence-based taxation.
New York, 04/19/97
 Excess credit position: The foreign income tax paid exceeds the allowable foreign tax credit under Internal Revenue Code section 904.
 Another example for the protection of U.S. source-based taxation is section 897, under which gain on the sale of stock in a domestic corporation whose assets consist principally of U.S. real property is taxed as effectively connected income, even though Article 13.4 of the OECD Model Convention assigns the right to tax exclusively to the seller's country of residence.