The UK debate over the exemption of foreign source dividends raises issues about the appropriate treatment of such income from an economic perspective. This project develops economic principles for the appropriate treatment of the taxation of international profit, from both a global and national perspective. It argues that the optimal treatment from a national perspective is difficult to identify, but is most likely to imply source-based taxation: this supports the UK decision to exempt foreign source dividends from UK tax. However, the new system is far from perfect. The allocation of the profits of multinational companies to individual jurisdictions – which is particularly difficult with source-based taxation – is in many cases without any conceptual foundation. Further the taxation of interest income on a residence basis is also hard to justify if the aim of the tax system is to tax only the income arising from economic activity in a given country.