Firm Suggests Definition for Digital Economy Tax Plan

March 12, 2021

Mr. Itai Grinberg
Deputy Assistant Secretary for Multilateral Tax
U.S. Department of the Treasury, Office of Tax Policy

Defining Relevant Unilateral Measures

Dear Mr. Grinberg,

Thank you for taking the time to talk with us last week. We appreciate your willingness to discuss and engage in thoughtful conversation. We are following up on your request for our thoughts on the definition of “relevant unilateral measures” for purposes of the OECD/G20 Pillar One discussions. Our proposed definition follows.

Proposed Definition: A relevant unilateral measure is a tax or element of a tax imposed at a national, subnational or regional level that exhibits one or more of the following hallmarks. A relevant unilateral measure would not necessarily exhibit all hallmarks to the same degree.

• Discriminatory application to digital services sector. A relevant unilateral measure may apply principally to the business sector of digital service suppliers, or otherwise discriminate against nonresident digital service suppliers. Discrimination may be created through a scope definition, revenue threshold, or other element that focuses the impact of the tax on certain sectors or taxpayers.

• Designed to fall outside the scope of tax treaties, trade agreements, and other limits. This hallmark includes measures that have been designed to fall outside the scope of the taxing jurisdiction's tax treaties and WTO obligations, as well as other limits such as its VAT regime. In addition, this includes tax measures enacted into the taxing jurisdiction's law through statutes other than the income tax law if the effect of the measure is to impose a tax on gross or net income of the taxpayer.

• Creates an alternative nexus standard that deviates from agreed OECD principles. This includes measures that depart from internationally accepted principles of nexus based on personnel, assets, or agent activity. Frequently these taxes are justified by the taxing jurisdiction as intended to tax nonresident suppliers of digital goods and services.

• Temporary. If, at the time the measure was enacted, the relevant jurisdiction stated that the measure was meant to be temporary in light of the OECD negotiations, the measure should per se be a relevant unilateral measure.

• USTR Determination. Any tax determined by the USTR to be unjustifiable, unreasonable, or discriminatory would also per se be a relevant unilateral measure.

It is important to note that there are other taxes that would give rise to double taxation of amounts that are allocated to the taxing jurisdiction under Amount A if there is no mechanism to eliminate those taxes in coordination with Amount A. The trade-off for states of residence of “paying entities” agreeing to a system in which market jurisdictions can tax non-resident entities with no physical presence in their jurisdiction should be the elimination of measures that tax the same profits as fall within the scope of Amount A. We believe that all taxes obviously meeting the hallmarks mentioned above would create that double taxation.

Other taxes that may not so obviously run afoul of multiple hallmarks mentioned above also could create double taxation in the market jurisdiction. One example is a withholding tax imposed on fees paid for digital services. The Pillar 1 solution should include a mechanism to eliminate market jurisdiction double taxation from these taxes. In the absence of an appropriate coordination rule, those taxes also should be designated relevant unilateral measures.

Please let us know if you have any questions on this proposed definition. We would be happy to discuss further, including how these hallmarks would apply to current and proposed measures.

Sincerely,

Gary Sprague

Mary Bennett

Alexandra Minkovich

Baker & McKenzie LLP
Palo Alto, CA

Cc:
Kevin Nichols, Acting International Tax Counsel, US Treasury
Christopher Bello, Senior Counsel, Office of International Tax Counsel, US Treasury
Bill Morgan, Financial Economist, Office of Tax Analysis, US Treasury