Menu
Tax Notes logo

OECD Pillars 1 and 2: Viable Without Consensus? (Transcript)

Posted on Nov. 1, 2022

The road ahead for the OECD's two-pillar solution on base erosion and profit shifting, or BEPS 2.0, seems to grow ever less certain. As the inclusive framework takes up the challenge of turning words into worldwide action, will cracks in consensus mean failure? Or is this only the beginning of a long process?

Panelists Mindy Herzfeld of Potomac Law Group and Stephen Shay of Boston College Law School joined Tax Notes International contributing editor Robert Goulder to examine those questions and more in an October 25 "Taxing Issues" webinar. Tax Analysts president and CEO Cara Griffith moderated the event.

0:00:03.2 Cara Griffith: Welcome, everyone. I'm Cara Griffith, the president and CEO of Tax Analysts. Thank you for joining us today for a discussion on international tax reform and whether we'll see a new international tax regime without the participation of the United States, and potentially without a consensus among EU countries. Today's event is another in Tax Analysts' series of public discussions that we call Taxing Issues. We launched this series as another way for Tax Analysts to encourage debate on tax issues. We've been bringing the tax community together with leading policy makers and experts for bipartisan discussions on the future of tax policy. We'll be hosting in-person events on occasion, but we will mainly hold these discussions in a virtual format and we welcome your feedback on how to make them more interactive. We also welcome your suggestions on future webinar topics. You can send your feedback and suggestions to events@taxanalysts.org. We also welcome questions for today's event. Thank you to those of you who emailed your questions in advance. Please use the chat feature to submit questions during today's event. For our panel discussion, I'll begin by asking a few questions and then I'll turn to questions from you, our audience, and I promise to get to as many of your questions as time permits. And now onto the topic at hand.

0:01:18.8 CG: Back in October of 2021, the OECD and G-20 countries agreed to the inclusive framework on base erosion and profit shifting, or BEPS. They also committed to reforms to make the international tax system fair and to address the challenges of the digital economy. At the time, 137 of 141 countries agreed to the two pillars in BEPS 2.0. By way of background, pillar 1 would provide for reallocating part of the residual profits that multinationals make in markets where their customers are located, even if they don't have a permanent establishment in all of those locations. Under pillar 2, large multinationals would pay an effective minimum tax rate of 15 percent in the jurisdictions in which they operate. Both pillars were expected to start taking effect in 2024, but there's been a lot of discussion all over the world about the two pillars because as those of us in the tax world know, the devil is in the details.

0:02:14.8 CG: While 137 countries may have agreed that international tax reform was needed, enacting the changes necessary to implement the two pillars is much harder. Nevertheless, the OECD is hopeful that we'll see a successful implementation of the two pillars. OECD Secretary General Mathias Cormann, said recently, and I'm quoting here, "Once there is some critical mass of countries who've legislated the global corporate minimum tax, it will very quickly become self-perpetuating as it will not be in any country's interest to leave money on the table for other jurisdictions to collect at their expense." But the real picture may be much less rosy.

0:02:54.7 CG: At the Economic and Financial Affairs Council meeting this month, EU finance ministers wouldn't even address pillar 2, let alone agree on it as they were expected to do earlier in the year. Pillar 2 has been stuck at the EU level since June when Hungary blocked the European Commission's proposal to implement it. Meanwhile, the efforts to address the digital economy also seemed to be falling apart. International tax experts have long acknowledged that pillar 1 might be harder to implement than pillar 2. And while all the discussions of the two pillars have been ongoing, Congress passed and President Biden signed the Inflation Reduction Act or IRA, which includes a 15 percent corporate alternative minimum tax on the adjusted financial statement income of large multinationals and corporate groups.

0:03:43.1 CG: While the IRA's new minimum tax might sound similar to pillar 2, it's actually quite different. The corporate AMT and pillar 2 both use financial statement income as a starting point to calculate a 15 percent tax, but the two taxes diverge from there. The question on everyone's mind is whether the new U.S. corporate AMT would be considered a qualified domestic minimum top-up tax or QDMTT. Even some proponents of the new corporate AMT have conceded it may not comply with pillar 2. So what now? What if we don't have U.S. participation and what if we don't have an EU consensus? Is BEPS 2.0 doomed? Is there a path forward without everyone on board?

0:04:26.2 CG: Well, thankfully we have the best panel to discuss and debate the issues, and I am very excited to have them today. First, we have Mindy Herzfeld, who is of counsel for the Potomac Law Group. She's also a professor of tax practice at the University of Florida and a frequent contributor to Tax Notes International. Next we have Steve Shay, who is the policy endowment senior tax fellow and an adjunct professor at Boston College Law School. He's also served as deputy assistant secretary of Treasury for international tax affairs, and he is a retired partner from Ropes and Gray. And finally, we have Bob Goulder, who is our in-house tax expert on international issues and a contributing editor for Tax Notes International. I want to welcome everyone and thank you so much for being here today. This is going to be a fantastic discussion, I have no doubt.

0:05:13.3 CG: So, Bob, if I could turn to you at the outset, I did the 30,000-foot overview of kind of what's going on. Could you start by further setting the stage in terms of where is the BEPS 2.0 project, and are there any upcoming deadlines, or what should we foresee in the immediate future?

0:05:33.4 Robert Goulder: Sure thing. And thank you, Cara. You did a very good overview there. I think the best way to articulate where the OECD work project stands today is to sort of take note of the evolution that's occurred over the last year. You mentioned in your intro, it was almost exactly a year ago, early October 2021. The OECD announced this milestone that we all got very excited about, the inclusive framework, the vast majority of the members said that they had agreed, made this commitment to go forward on the two pillars. Admittedly that left a lot of heavy lifting still to do, but nevertheless, it was a major accomplishment. And the OECD rightfully took a lot of credit for that.

0:06:19.6 RG: I walked away from that episode thinking that this all makes sense. The pieces all fit together. Really what you have here is a single unified project that happens to have sort of two prongs to it, but there's a unifying overarching theme, and that's the desire for enhanced stability. Stability is really the reason we're doing all this. If someone wanted to push back and say, "Why have any of these pillars, why change the status quo?" The answer is that we've got a problem with the international consensus. We have features like the PE doctrine, that doesn't seem well suited to the 21st century. The idea of having a physical nexus standard — that's not really going to cut it. And we still have profit shifting, so we have to do something about the race for the bottom, and the different pillars respond to those concerns in different ways.

0:07:13.2 RG: But the unifying concept is that we need stability and here are the steps we need to do collectively to get there. That sounds like a pretty persuasive sales pitch. Who doesn't want stability? Governments want it. Taxpayers want it. Civil society wants it. We all want it. All right, what happens? What goes wrong? Right? That was then, this is now a year later. What have we had? We've had progress reports. We've had public consultations. We've had the opportunity for key stakeholders to submit comments to these public conversations. In fact, just earlier this month the inclusive framework had a meeting where they evaluated and absorbed these comments that were coming in as to the amount A under a pillar 1... The things are happening and I don't mean to diminish the importance of them, but there's one real problem here, and it's that it's becoming increasingly clear that these two pillars are conceptually severable.

0:08:20.9 RG: Contrary to what I thought a year ago, this really isn't one unified project. It's two separate projects. And we could very likely, in fact, most likely have an outcome where we get real progress on one of them, pillar 2. But no real advancement on pillar 1, which arguably is very unfortunate because there's so many developing market countries out there that we're depending on that, that's the prong that they really want. A lot of poor countries are far more interested in pillar 1 than pillar 2, and they're going to feel poorly served by this unraveling. There's a timeframe out there. If you go to the OECD website, their grand vision is that members of the inclusive framework would spend the first six months of 2023, building out the multilateral convention, which will be how pillar 1 is to be implemented in each country.

0:09:19.8 RG: For example, in the USA it would presumably involve a ratification process involving the Senate. Who knows? That's still sort of an open question there. But the hope is then that they'd spend the second half of 2023 actually doing that ratification. So by the time you get to 2024, all of this would be operational. I just don't see that happening for various reasons. It's as if the wind has gone out of the sales of pillar 1. Why is that? Maybe the sales pitch I mentioned before, this desire for enhanced stability. Maybe that's not as great a selling point as we thought it was. So where do things stand today? That's the picture in a nutshell. We're expecting progress on pillar 2, not on pillar 1. Having said that, there's an issue with pillar 2 also. It needs a first mover.

0:10:17.6 RG: Some country or cluster of countries needs to take the plunge. And when they do, as Mathias Cormann mentioned, and you quoted him, others will follow suit. Just somebody has to go first. Who's that going to be? Well, there's a couple of candidates, maybe the EU, there's issues you mentioned with the veto. They don't have qualified majority voting for taxation, although they have it for many other subject matters. And that's a shortcoming in the design of the EU framework, I'd say. Last week we heard that maybe France and Germany will go entirely on their own if there's no progress at the EU level. There's also the U.K. The U.K. actually has draft legislation already in place. And the new prime minister who was just installed yesterday, he — by all accounts, Rishi Sunak has a very favorable view of pillar 2.

0:11:09.9 RG: So there's that. The last thing I'll say is that a lot of people out there are a bit dismayed that it's not us, it's not the United States that is the first mover. Because when you think about it, we really came pretty close, didn't we? When you think about how the legislative calendar went over the course of the summer, that transition from Build Back Better to the Inflation Reduction Act, we came very close. So now we've got the U.S. tax code with this shiny new object a corporate AMT. It's a minimum tax. It's got a 15 percent rate. It's based on book income. You put it all out there but it doesn't seem to do the job. So you could say that we have a minimum tax, we just don't have the right minimum of tax. And with that, I'll leave it to the other panelists.

0:12:00.7 Cara Griffith: Well, Bob, I wrote down about five questions that I have based on yours, but I'm going to turn to Steve first. And Bob mentioned that the wind is kind of out of the sails. So I'm curious from your perspective, how much global adoption do you think that we will see in the short term, and then in the long term, can we get the wind back into the sails of this to be enough that we'll have some level of adoption?

0:12:27.8 Stephen Shay: So as somebody who started practice in 1976, my perspective may be a little longer than some others. And I've lived through a couple of major tax law changes, the 86 Act, which I experienced partly in Treasury and then subsequently out of Treasury, and then FATCA again, the same. And each of those takes years. Years. So I think the perspective we should have on this is there are more years to come before we see implementation. And it's clear pillar 2 is now ahead of pillar 1, notwithstanding the numbering. But as Bob pointed out, we have draft legislation in the U.K. There are others working on draft legislation in other countries. There is a pretty strong political commitment expressed in France and Germany, two major countries who happened to also be a bit distracted right now as is all of Europe with a war in Ukraine.

0:13:35.0 SS: So when we move from October to today, I do think it's worth remembering of it earlier in this year with a major invasion on the continent of Europe. It's not surprising that the EU's efforts to push things over the line with Hungary and pursue possible alternatives have taken a backseat to both a war, but also very importantly an energy crisis on the continent that's affecting day-to-day lives of people. And that's what drives politicians. So that part of it, I do. And so let's even though assume that the EU doesn't adopt some institutional approach. It's quite clear to me that if some threshold number, and I can't say I know precisely what it is of developed countries move forward, that provides reason for developing countries to also want to participate. I would just modify a few things in terms of my view is that pillar 2 is important to developing countries, not so much for revenue that they would get but they would get revenue.

0:14:51.6 SS: It creates an umbrella under which first they can pick up top-up revenue if other countries don't. But more importantly, it also provides a rationale for them to re-analyze incentives and other areas of their fiscal picture that have given rise to erosion over the years. It provides cover, you might say, and I don't just mean political cover also cover from a practical matter. If a multinational is in scope and is in country and is going to pay the tax anyway, why wouldn't they pay it to the local country? And to do that, the local country has to either engage in pillar 2, or it doesn't even have to, it can just adopt a qualified domestic minimum top-up tax. So I see the incentives that are built into pillar 2 as providing a very strong suggestion at least at this stage, that it's going to move forward.

0:15:58.4 SS: Pillar 1 is being actively worked on at the technical level by all countries in the OECD as we speak. So it is not going to happen in the same timeframe, but I am not fully ready to say pillar 1 is dead by any measure. In fact, I think there is — where we do have a strong desire of countries, I think that can help provide some stability in dealing with a trade-off between what is the revenue share of countries that are the market countries compared with the countries that are capital exporters. And so that is a very important issue. It's been increasing in strength over the years, and so I think we will see further work on that because I don't think there's a stable outcome where that doesn't happen.

0:16:53.8 Cara Griffith: Excellent. Thank you. Mindy, let me turn to you. I first just want to sort of pose the same question to you on how much global adoption you think that we will see in the short and long term. And then also just give you an opportunity to respond to either Bob or Steve's remarks.

0:17:11.8 Mindy Herzfeld: Yeah, so in terms of adoption, I'm pretty close to — I don't think I have so much to add to what Bob or Steve said. I think pillar 2 will probably move forward, and maybe I'm more skeptical than Steve on pillar 1, but I view pillar 1 as kind of a longer-term project and so what emerges from pillar 1 may not be this version of the rules, but I think it will... The notion that there's some other way to re-allocate multinationals global profits in today's economy, I think is out there. And even if this version of a solution falls apart, which I think is probably the case, that doesn't mean that other versions will continue to be worked on. And whether you call it pillar 1 or something else, I don't think it's that important. I do want to push back on some of the points that Bob made, one that, the first point that this was all about stability. I'm not sure that I ever saw a whole lot of stability arising from this agreement. One because pillar 1, it was a political compromise. And as such, it was...

0:18:34.0 MH: That the political agreement was more important than the technical rules, but as you said in your opening, Cara, the devil's always in the details. And so the notion that a political compromise is equivalent to an international agreement that requires a lot of negotiation of technical rules was always questionable. So I never saw this as bringing in stability. But going to Bob's points on pillar 2, and where you ended, Bob, I think saying something like, has the U.S. enacted the right minimum tax? I'm not... I think, I question the narrative that there is a right minimum tax that is encapsulated in pillar 2's rules and the notion that the U.S. would ever have just adopted pillar 2's rules wholesale. I think anyone who's worked in the U.S. legislative process would be extremely skeptical about.

0:19:35.7 MH: Even the Biden administration never proposed the pillar 2 rules in legislation. The big change they proposed was moving to a country-by-country GILTI system, but that is far from adopting pillar 2 in full. For some reason it's what most people get hung up on as a difference between the U.S. rules and pillar 2, but I'd argue it's only one of many that distinguishes the U.S., what the Biden administration proposed or what we have now, from pillar 2. And I'd also argue that the U.S. is, instead of having failed at the adopting pillar 2, they were... We are actually the first mover in moving towards a pillar 2 global minimum tax. We now have three different types of minimum taxes, being GILTI...,

0:20:41.4 MH: ...obviously the first one; BEAT, a smaller role, but still trying to do some of the stuff that's in pillar 2; and then the new book minimum tax. And taken together, they cover a lot of ground, and sure, they're not exactly what pillar 2's rules say. But we're taxing a lot of global income through minimum taxes. And again, the U.S. is net... The legislative process just doesn't lend itself to full adoption of a globally agreed upon set of rules. And so why not celebrate what the U.S. has done and mark it as progress instead of continuously labeling it as a failure.

0:21:24.9 Cara Griffith: So you talked about political compromise and I think... And last month at webinar we heard Professor Clausing say that the corporate AMT was the political compromise that they could get past at the moment in the Inflation Reduction Act. We just got an audience question in that kind of relates to this. So I'm going to jump it ahead and pose it now. This one says, "Did the Biden administration propose the right system for low tax international jurisdictions in the earlier SHIELD [Stopping Harmful Inversions and Ending Low-Tax Developments] plan? And should the U.S. implement that in addition to the corporate AMT?" I wonder if any of you would want to respond to that.

0:22:03.7 Stephen Shay: I think a difficulty in responding is, that proposal was never worked at the technical level to the point that people, I think, fully understood its contours. So I think the most one could say is — even to the point where I'm not sure I can say, whether — how worthwhile it is to go back and look at that again, as opposed to investing resources in trying to integrate to the extent possible — And if not integrate, at least make more compatible — rules we have with rules that the rest of the world is going to apply.

0:22:50.5 Cara Griffith: Yeah, it would all — when you go back, and then if that's going to be an addition that — Then we have four, that would be a lot. It starts to get to be a lot to try to implement. So, Mindy, you brought up the corporate AMT and whether it would be... Whether it would qualify under pillar 2. Bob or Steve, I'd love to get your take on that and what are we going to see with this new corporate AMT and is it going to be QDMTT that works for purposes of pillar 2?

0:23:29.5 Robert Goulder: Well, I think the fascinating issue is who gets to make that call? There's some EU officials in Brussels who are making declarative statements that this is not compatible with what the OECD wants. Do they have the final say? What if someone on the U.S. side said, "Oh, this is fine, it's close enough." Just as Mindy said, it's taxing a lot of international income. There's a little slice of income that maybe it's not getting because it's not applied on a country-by-country basis. But is it good enough? Is it close enough? I look back to the first BEPS project, right? We're calling this BEPS 2.0. What happened with BEPS 1.0? It resulted in this multilateral agreement and much was made of it. And the U.S. just said, "We're not going to sign it because we already do all that stuff." All your, your minimum recommendations, the mandatory steps, we already have that. We don't need it, so we're not going to sign it, wasn't an issue for us. You could see something like that here, where the U.S. says, "Okay, it doesn't strictly comply, but you know what? It's close enough and we're the world's biggest economy. This is what we're going to do." Who's to say they're wrong?

0:24:49.4 Stephen Shay: Yeah, I'm worried that that question potentially conflates a number of different issues that I'm not sure what was actually being asked. I think we all, I think, pretty well understand that the GILTI without the changes that were going to be proposed is not consistent with pillar 2 itself. The corporate AMT I don't think it was ever intended to be a pillar 2 tax. And let's remind ourselves, the corporate AMT is focused overwhelmingly but not exclusively, on income that's earned in the United States, whether by U.S. companies or a foreign company, and to some extent on income that a U.S. multinational will realize with respect to its foreign subsidiaries. That's quite different from pillar 2 and there's no effort... It's not a substitute in any way. So the question I do think is important is, if the United States is not going to participate in pillar 2, will the corporate alternative minimum tax be treated as a covered tax, not a QDMTT, but a covered tax. I can't see why it wouldn't be. It's really now a part of our income tax and that additional liability that would be paid, I think, should be taken into account if somebody’s looking, again, at a U.S. company and saying, "How has it reached the 15 percent threshold under the pillar 2 standards, not under the CAMT standards?"

0:26:24.2 SS: And just while I'm highlighting some of those differences, I really want to commend Mindy for working through so many of the details in her articles. I read them, they both... cover things I haven't read in the underlying materials and also to check whether the way I thought I read something is consistent with the way Mindy is describing it. And so as sort of a community, thanks to you for helping us out on understanding a series of difficult rules.

0:26:56.3 Mindy Herzfeld: Gosh, thanks. Thanks Steve. You're just setting me up so that you can disagree with me at another point, right? [laughter]

0:27:04.9 Stephen Shay: I'm sure we'll find a place to disagree.

[laughter]

0:27:09.5 Cara Griffith: Mindy, I'm interested though, in your take on what Steve just said.

0:27:15.5 Mindy Herzfeld: On the alternative minimum tax being a covered tax?

0:27:22.7 Cara Griffith: Is it a covered tax?

0:27:24.2 Mindy Herzfeld: Yeah, I think that's probably right. I would argue that perhaps it could be also a qualified domestic minimum tax. I see that the new materials released by the OECD have now defined the term as QDMT and not QDMTT, so qualified domestic minimum tax. So perhaps it could be both, I'm not sure. It's probably more advantageous if it's a covered tax as opposed to QDMT, because there is, I think, questions about priority that are just left completely open in the model rules and haven't been clarified in the more recently released materials. But I would argue for a more holistic view of what the U.S. has enacted, that was the point I made before, and I'm not sure why the U.S. isn't taking that position more broadly. Sure, there was a lot of negotiation over the specific rules of pillar 2, but we've gone a long ways towards adopting much of what it was intended to do.

0:28:52.8 MH: But on that point, it's not really clear what pillar 2 was intended to do. The goals are not... So, they're nowhere spelled out in detail. Was it profit shifting? Is it a race to the bottom? Is it both? What measures success here? And so when we're debating whether the U.S. has done enough or gone far enough, we don't really have a yard stick to measure that by, and so that should probably be a first step.

0:29:27.8 Stephen Shay: Yeah, if I could... On that, I do think it's that there are two aspects of pillar 2 that Mindy's alluding to, one of which is profit shifting, 'cause it's got... It's clearly... If it becomes adopted in any material way it is clearly going to reduce profit shifting. It seems to me that's evident. Some people have held it up to be, that it is as a tool to prevent tax competition. It will reduce the scope for tax competition, but in terms of the... When you have the substance-based income exclusion, which means that pillar 2 isn't going to affect a certain amount of income with respect to real investment, it's not ending that level of tax competition on real investment. And there are some good recent papers that get into that in greater detail, and I think show that there are limits as to what it will do on tax competition. I think directionally that's probably a good thing. It gives more scope for countries to adopt fiscal systems, and particularly poor and lower middle income countries to adopt fiscal systems that'll help 'em support their populations.

0:30:40.5 SS: And on that point here, I think I want to make a pitch. And the pitch a little bit is, as Americans, we benefit greatly when other countries have reasonable taxes, but certainly have sufficient taxes to fund their own public goods needs, and particularly in the area of health. If there's anything we've learned in the last three years, we need countries to have functioning health systems, we need them to have the resources to do that. And among our trading partners, we need countries to be able to help fund their security needs. So the old approach of the U.S. wins when other countries lose, or a credit for tax paid to another country is a bad thing. . . . I think that from a policy point of view, I've always thought it's wrong headed, but I think it's even more clear now that it's bad policy.

0:31:40.6 Cara Griffith: So that actually makes very good sense. I hadn't thought of it in those terms in sort of taking and extrapolating the need for international tax reform that broadly. We had someone from the audience asking, "If pillar 2 is implemented by a few countries only, will it still need a multilateral instrument to function properly?"

0:32:11.9 Mindy Herzfeld: I think there's a question whether you really need a multilateral instrument for pillar 2 to begin with. I think there's a general thought that a multilateral instrument would help certainly with the more complex aspects of the undertaxed profits rule, which would be really complicated to implement without some kind of multilateral agreement, but it could... Much of pillar 2's goals and specifics could function if individual countries adopted legislation without any kind of multilateral instrument. So, to Steve's point about the U.S. should have some stake in ensuring that other countries collect sufficient tax, part of me increasingly wonders whether a large part of pillar 2 is driven by the fact that the EU can't fix its own internal EU systems without the cover of something like pillar 2 and whether... Because they can't enact full CFC legislation. And so whether a large part of pillar 2 is about roping the U.S. in to help the EU fix the internal dynamics of having a union that allows for free movement of capital without being able to mandate conformity among countries' tax systems.

0:33:58.6 Stephen Shay: I think that's a very insightful comment in the sense of helping them from a governance point of view, or providing cover from a governance point of view, but from a point of view of self-interest... Actually, you reminded me on one of our preparation calls that the U.S. was the first mover on GILTI, and as a first mover, we also had, I think, been disappointed in BEPS 1.0 and there not being more countries moving on action 3 and bolstering their own control of foreign company rules. And I think your comment connects those two points, which is pillar 2 essentially brings the rest of the world closer to the United States, with the cost of the United States making some changes to its first mover approach to adapt to what the rest of the world is doing.

0:34:54.9 SS: My own view is that is a very worthwhile outcome for the United States, and I have to say I'm puzzled that the business community, which has always been a strong proponent of level playing fields and being treated the same way, didn't do more to push the U.S. effort to become a convergent pillar 2 tax in the predecessors to the Inflation Reduction Act over these last two years. Because without that, that means we still have GILTI, and if pillar 2 doesn't move forward, which I thought was the assumption of some of the businesses, not all, we're left with a CFC regime that others don't have, not anything like the same thing, and if it does move forward, we're really in an awkward position now trying to integrate them.

0:35:56.1 SS: Again, I learned from one of your articles, reminded that there are differences in thresholds, there are differences in approaches, and so I see there's more potential for double tax with our not having made that move than if we had made the move. I agree with you, I do think that one of the things pillar 2 did was help achieve a consensus in the EU, which obviously has achieved a consensus when you have all but one country, over 25 countries agreeing, and only one left, I think it's achieved that outcome. Now the question is, how mechanically do we get it over the line? Coming back to your question, Cara, I don't think we need a multilateral instrument, but...

0:36:46.1 SS: And one of the things is, other countries in the world are far more interested in a provision that we haven't talked about, which is the subject to tax rule, and the subject to tax rule is a rule that would allow the source country to essentially derogate from a treaty obligation if the income that is sourced in the source country and paid out as a deductible payment is taxed at below... It's currently 9 percent, whether that's the right rate, I frankly have a lot of questions about, but leaving whatever that rate is, clearly for those countries that are interested in subject to tax, being able to implement it rapidly rather than a whole series of bilateral negotiations in much the same way that the treaty aspects of BEPS 1.0 were implemented by using a multilateral instrument makes a great deal of sense.

0:37:44.0 Cara Griffith: So if we see a multilateral instrument develop to achieve that purpose, the United States shouldn't be concerned. It doesn't mean we have to join it; it just means that it would be a facilitating implementation factor for all those countries, particularly those that want to have a subject to tax rule, something also I think, as Mindy alluded to, could help in the implementation of some aspects of pillar 2. So it's helpful but not necessary from the U.S. perspective.

0:38:13.9 CG: U.S. perspective. As we go through all this, we still have the U.S. kind of sitting on the sidelines. We're doing our own thing, but we're not entirely moving in step with either pillar 1 or pillar 2. And as we talked briefly about on our prep call, the Chinese have never said that they're actually going to implement pillars 1 or 2. They signed on, but it's sort of the mum is the word. So you've got the two largest economies in the world not really signing on to this... Signing on, but not really participating in this international tax reform project. What does that say of international tax reform? Is it that it is... Is it not successful because we've got these two large behemoth economies that are sitting on the sidelines? Or can we draw enough together that it actually will make it a workable system where we're getting something out of the BEPS project in the end? I'm not sure if there was a cohesive question in there other than what becomes of BEPS 2.0 if the U.S. and China are sitting on the sidelines?

0:39:28.8 Mindy Herzfeld: Yeah, so Cara, I like the way you framed the question. I think that there was a really interesting article in the Financial Times over the weekend on de-globalization, and in it, it quoted an Economics professor from Harvard, Dani Rodrik, who's well-known for articulating this dilemma of that you can't have sovereignty, democracy and globalization, full globalization. That they can't all co-exist. And so the premise of that thesis and also the FT article, I think, is it sets the stage for a more, a less rigid type of international agreement, a less specific type of multilateral agreement and it allows space for international reforms to move forward on a more flexible basis that allows countries to adopt the broad principles to their own domestic needs.

0:40:38.3 MH: And so I think if we view the potential for international tax reform less as “every country must adhere in full to adoption of the rules outlined in pillar 2 and the specifics of pillar 1,” and more as a set of guidelines that that country should follow in order to achieve both the goals of preventing large amounts of profits from moving to places where they escape tax altogether and perhaps trying to better reallocate global profits for today's economy, then I think there is a lot of room to think about international tax reform moving forward with both the U.S. and potentially China going forward in a way that works for their economies and other countries also.

0:41:34.0 Stephen Shay: I would just refer back to the purposes we described for pillar 2. And I was in practice for a long time, although it's been a while now, but even then, had a number of deals in China, and I don't ever remember wanting to shift income into China, notwithstanding potential for lower rates. And with respect to the absence of clarity about where China is on pillar 2 today, I think, just as I said before about Europe, there have been other things going on in China too between the COVID lockdowns and the enormously important meetings that were held over the weekend, which ratified Chairman Xi's position, and just, if I were in the Finance Ministry in China, I wouldn't have wanted to say anything without knowing where Chairman Xi is, and I'm not sure that he's had time to think about this issue in depth. I mean, that's a little apocryphal obviously, but I think...

0:42:36.9 SS: So could it go forward in advance of China indicating participation? I think clearly, yes. Then they would be faced with a dilemma because there would be potential UTPR for lower tax benefits in China, of which there are quite a number, and I assume that China would fairly readily adopt the QDMT, at least as a first step, and then decide how much it wants to engage subsequently. So I don't view either China's absence from sort of a full participation or our lack of clarity about where they are right now as a bar, if there's enough scale, as I said before, among both developed countries, and then I think there needs to be a comparable degree of scale among other countries.

0:43:36.0 Cara Griffith: That makes sense. I want to turn and ask a question too on pillar 1, and then we have gotten a ton of audience questions, and so we'll leave some time at the end. You guys are very interesting, and there's a lot of... There's actually a lot of really good questions and I would love to ask them. So we'll leave some time for that to. But, Bob, let me turn to you, 'cause I know you like to talk about DSTs, so if pillar 1 fails, or is slow to move, or shows that it's not making the progress forward that some would like, will there be further attempts to change how we're taxing multinationals in the digital economy, and essentially will we see more DSTs?

0:44:16.7 Robert Goulder: Oh, I think so. I really think that's inevitable because a DST is a very strange animal. It's a tax that is politically popular at home. Say what you will about the French being a high tax social welfare state, whatever. If you sit down and you talk to an average French person, they don't like the idea of taxes anymore than somebody from the American heartland. They don't like paying taxes. They also love the idea of DSTs. They call it a Google tax, and they have this idea that the tax burden is going to fall on somebody in a far away place, maybe the West Coast of the United States, maybe the shareholders of these tech companies. They're wealthy, they can afford to pay those taxes, and they're foreign. And French politicians look at this, saying, "Who bears the burden of the tax? Is it not one of my constituents? If it isn't, then I should be fine with it."

0:45:18.6 RG: So the fact that these DSTs are politically popular at home means that they're going to have a lot of traction, and I just see them staying around for a long time. I think countries are going to look for every possible excuse to adopt them and they can take a wide variety of forms. India has the equalization levies. Is that a digital service tax or not? They're going to vary from country to country, but they're going to exist and they work, they bring in revenue, and if they're politically popular, I see them having a future.

0:45:53.4 RG: Now, the irony is, if the French put attacks on Finance Ministry in China or Finance Ministry in China and those companies turn around and increase their prices so that the burden is basically shifted back to the digital user, which in the case of France would be a French digital user, then the burden isn't really being borne by this non-resident. But it reminds me of the situation with the U.S. states. Cara, you're an expert on U.S. state and local taxation. Why is the hotel tax so high in the state of Florida? Why is the rental car tax so high in the state of Florida? Because there's this perception that it's largely being paid by non-residents. I think to a large degree, you have that same phenomenon with Digital Service taxes. Make those guys pay it over there.

0:46:40.7 Cara Griffith: That's right. No income tax, hotel tax and other taxes that you can export. You always export the tax burden.

0:46:47.5 Robert Goulder: Always.

[laughter]

0:46:48.0 Cara Griffith: So if we've got more countries, so let's say pillar 1 slows down, and which it sort of has, and we see more digital services taxes pop up, is that self-perpetuating in that it will further slow and eventually kill pillar 1?

0:47:08.6 Robert Goulder: Well, it could... I hope it doesn't, but it could have an effect of making it less of a rush to actually get it done. If revenue is coming in from somewhere, even if it's not an income tax, that seems to take away the impetus for getting it done in the short term, but Steve made a very wise comment earlier about needing to take the long view here. If we get all these DSTs, what else are we going to get? We're probably going to get a trade response, and this is an interesting issue 'cause there doesn't seem to be a difference between where the Trump administration was on DSTs and where the Biden administration is on DSTs. No U.S. administration is going to like them. They're going to look at them and think that these disproportionally fall on U.S. taxpayers, so sure, there's going to be a trade response.

0:48:02.5 RG: Do we want to have a trade war? I don't think so. I don't think that's in anyone's interest. Especially with the possibility of recessions being just around the corner, it's not really the time to be doing that. Personally, I don't like the idea of tariffs, but yeah, that's what I think you'd get. More DSTs, a tariff response, and then after all of that works itself out, which could be who... A decade, like Steve said, you're going to come back and people are going to say... Maybe in the context of the OECD, maybe in the context of Finance Ministry in China, we need to go back and figure out how to share taxing rights with market jurisdictions.

0:48:42.2 Stephen Shay: Well, let's just pause though and understand how completely stupid an outcome is of imposing DSTs that actually fall on your own countrymen, and then the United States imposing tariffs that also in large part fall on our own countrymen. So I agree that in rhetoric, the U.S... That this administration has not backed off from the approaches taken in the prior administration. I have hopes that there's more rationality, and I will say, as somebody who spent some time recently reading the section 301 reports, being dismayed by their lack of correctness, coherence. Apparently, it seemed to me there was no tax person involved because they made statements about tax that were wrong, they drew conclusions about international tax policy that struck me as facially wrong, and there was no mention anywhere in there of our own DST, and that is the United States imposes a tax on gross insurance premiums paid to foreign insurers. If somebody can tell me how that's different from a DST except for the industry... In many respects, it's very similar, so nowhere discussed in any of those reports.

0:50:12.7 SS: So I think this is not an area where the U.S. has covered itself in at least intellectual glory in terms of really, let's be honest with ourselves, say what's really going on and understand it. And I think the reason is, as you alluded to, Bob, it's a good political move in the country's set of adopted DSTs. So I do think if they do start to collect revenue, you have to find a substitute 'cause they have budgets like everybody else, and on our side, it was a bipartisan political move. In other words, we had Democrats just as eager to get tough on DSTs. I have not heard the business community get involved to a point where they want to preserve the U.S. ability to use pillar 1 as a tool to push back DSTs. And indeed what I hear is, at least as implemented so far, and we have to recognize some significant DSTs have been held in abeyance by reason of actions in the Trump administration, so to that they deserve that credit. But they're not a meaningful... They don't seem to be a really meaningful issue economically for even some of the larger companies involved. So it'd be nice to get this one dialed back from the politics and see if we could get some rationality, and I think the professionals on all sides I do think understand that this is not a very fruitful way to go.

0:51:44.6 Cara Griffith: Yeah. I, wise words and that, I think that's very... Point well taken. We're going to turn to a few audience questions. We'll stay on pillar 1 and then I'll switch back to pillar 2. Someone asked, "What is your view on the future of formulary apportionment? And is pillar 1, a step in that direction." And I would open this up to anyone who would like to take it.

0:52:08.3 Mindy Herzfeld: Well, I think pillar 1 is definitely a step in that direction. It's not really hidden that well. But as Bob said, you're the state tax expert, and so you could tell us about how well a formulary apportionment works when you have states that all share a common legal system and culture and language and how well that might translate to a global arena.

0:52:44.9 Cara Griffith: It will be exceedingly difficult, where the U.S. states have failed, it will be exceedingly difficult to do on a global level. Let's turn back to to pillar 2. We had another question and that is, "If any country treats GILTI or the corporate AMT as non-conforming, do you think the U.S. retaliates with section 891 by double-taxing companies from those countries?” Sort of interesting is what would be the response as you alluded to earlier, is who's making the decision of whether or not the corporate AMT is treated as a covered tax? Well, if it is not, does the U.S. retaliate then, or what happens?

0:53:28.1 Robert Goulder: Cara, it's a happy day when we get to talk about Internal Revenue Code section 891.

[laughter]

0:53:35.2 RG: When is the last time that was directly applied? If it's ever been directly applied? We need a tax historian. Find Joe Thorndike! But yeah, I think...

[chuckle]

0:53:47.1 Cara Griffith: No, no. That's a good... [0:53:47.2] ____.

0:53:47.2 RG: No. It Hasn't been, No, it was, if I remember correctly, there was a legislative history done about it at one point, and it was about the French, and it was about wine taxes. The French were going to tax U.S. wines or something like that. And we're like, "We're just going to double tax all French companies if you do that." Yeah, I think you go after it with some sort of a diplomatic solution. So I'd like to think that section 891 is maybe used as leverage. Maybe it comes up in discussion, but that tax is not actually invoked, but it's there. It's on the books. They could use it if they wanted it to.

0:54:26.9 Stephen Shay: It's an incredibly stupid tool. I mean...

[laughter]

0:54:31.5 SS: Really again, I got another instance where much of the damage would end up indirectly born by U.S. persons.

0:54:42.1 Cara Griffith: Has there been any conversation as to what does happen? Is it a diplomatic approach to...

0:54:49.9 Stephen Shay: I don't see, I don't see a really credible outcome where the U.S. taxes aren't treated as covered taxes. We have a really complex set of interactions with respect to treatment of QDMTs and GILTI and all that. And that I, that is the subject of a debate. I've... I think I recall correctly that the New York State Bar has a recent report where I thought they're suggesting an approach that was rational and conceptually correct. Not everybody's necessarily going to share that view in terms of how you stack the ordering of rules of... But I don't see it getting to that point, frankly.

0:55:42.2 Mindy Herzfeld: Cara, I think it... This is a topic we haven't touched on, but I think it's tied into U.S. and pillar 2 which is a foreign tax credit regulations. And so under the regs that were released late last year, or early this year, none of these taxes, none of the pillar two taxes would be... Much of them would not be creditable. And so when you're thinking of U.S. responses or retaliations, question whether it... The U.S. I think has said they would revise the regs if pillar 2 went forward. And so, and if the regs aren't revised then U.S. companies would be subject to double tax. And so how does the fine tuning of the rights fit in with the way this plays out if other countries move forward in assessing additional taxes on U.S. companies?

0:56:41.1 Cara Griffith: That's interesting. So in the final few minutes that we've got, we had one question that said, "If the GOP takes the house in, or in 2023 what is the fate of the pillars moving forward?" This is sort of an interesting question of, so the midterms happen if the Republicans take the House and/or the Senate, does that have any impact on this project, on the U.S. involvement in depths and or in any of, either the pillars?

0:57:12.9 Stephen Shay: Well, I think it clearly has an impact. I think there's a very, very big difference, between whether or not the Republicans take control of both houses as opposed to just the House. When I expressed the view, you need to take a long view, in part that was taking into account the possibility that at least one house would be taken over by the Republicans, in which case I don't see any legislative movement forward. Or if you need legislation for this, then it's going to be difficult. Again, there to me, the key issue is the business community. If the business community starts to feel enough pain as a result of inconsistent application and ends up paying tax to the wrong country, which is what happens when countries don't participate, even with a Republican House maybe, but I... Now we're getting way beyond both my expertise and my ability to guess what the next, a Republican House were going to end up doing. But I think if both houses are controlled by the Republicans, I think it's going to be more difficult to do things. There's going to be a lot more pressure on all these issues. It's very hard to predict what the impact would be. But the administration... It seems to be clear the administration can, through its own actions, push pillar 2 forward.

0:58:54.3 Cara Griffith: Yeah, I mean, that was our general consensus is that if you... If we end up with split government, which seems somewhat likely at this point, then it becomes very difficult to get any legislation passed. And there's unlikely to be movement. If the Democrats retain control, which does seem unlikely at this point, then we have sort of the likelihood that we might... That we would see a larger tax bill, we would see something else that happened in the coming years. It will be interesting to watch. Well, we have a minute left. So, Mindy, do you have any final thoughts that you'd like to share?

0:59:31.2 Mindy Herzfeld: So, I think I want to emphasize the point about, we should celebrate the progress that's been made rather than engage in what often seems to me an exercise of pointing fingers at the U.S. for failing to get pillar 2 enacted in full.

0:59:54.5 Cara Griffith: I think that's a really good point. This has been such a... It's a huge mammoth project that has actually moved in the right direction. And a lot of topics have been discussed that might have otherwise not and a lot is on the table that wasn't. Bob or Steve, I'll give you guys a last word as well.

1:00:14.5 Stephen Shay: My only observation is I've... There's more volatility in the world today than any time that I can remember. And it's very hard to predict when opportunities will occur to move things forward. I think I misspoke just now. I think if the Republicans did take over the House, I do think to an extent you need legislation, it would be hard to move forward on pillar 2 other than encourage it, but I think that, turn to Bob for any last comment.

1:00:45.7 Robert Goulder: Oh, let's just fast forward to single sales factor.

[laughter]

1:00:51.6 RG: Cut to the chase.

1:00:53.1 Cara Griffith: Cut to the chase. We'll just go right there. Well, I want to thank you guys so much. This was a lot of fun. It was very informative and I know our audience appreciates that you took your time and shared a lot of insights. So thank you. And thank you to everyone that was watching and for all of your questions. We appreciate it very much. Have a great day everyone.

Copy RID