Menu
Tax Notes logo

What's Next in International Tax Policy: Transcript

Posted on Mar. 25, 2021

With the Biden administration indicating a new openness to the OECD's two-pillar approach to taxing the digital economy, international taxation could soon face a shakeup. In a March 17 "Taxing Issues" webinar, Barbara Angus, global tax policy leader at EY, and Louise Weingrod, vice president for global taxation at Johnson & Johnson, joined Tax Notes contributing editor Lee A. Sheppard to explore the OECD plan's implications for the G-20, developing countries, and business.

Tax Analysts President and CEO Cara Griffith moderated the discussion, which can be viewed on YouTube. A transcript is below.

 

Cara Griffith: Welcome everyone. I’m Cara Griffith, the president and CEO of Tax Analysts. I’m so pleased that you’ve joined us for what will certainly be not only a timely, but also a stimulating discussion on international tax policy. In particular, the possible interplay of U.S. international tax policies with the OECD’s two-pillar solution to taxing the digital economy. We are thrilled once again to have an audience tuning in from all over the country, and not surprisingly given the topic, from around the world. Today’s event is the seventh in Tax Analysts' series of public discussions we call “Taxing Issues.” We launched this series as part of our 50th anniversary celebration, and through the series, we’re bringing the tax community together with leading policy makers and experts for bipartisan discussions on the future of tax policy. While I am more and more hopeful that we will be able to hold in-person events not too far in the future, we can’t do so just yet.

With COVID-19 still threatening the health of Americans from coast to coast, we will continue to host these discussions in a virtual format. We welcome your feedback on how we can make them more interactive. We also welcome your suggestions on future webinar topics. You can send your feedback and suggestions to events@taxanalysts.org.

And now on to the topic at hand. The OECD has been working for nearly two years on proposals to tax the digital economy, but in developing its initial work plans, the proposals go beyond just digital tax issues. The work plan presents a two-pillar approach. Pillar one addresses taxable nexus and the allocation of taxing rights among jurisdictions. Pillar two addresses global anti-base erosion and implements a global minimum tax through a coordinated set of cross-border tax rules that include both income and base-erosion payments. The OECD released a unified approach last fall.

There were several meetings hosted by the group to discuss. Over the winter, the U.S. Treasury Secretary at the time, Steven Mnuchin, expressed reservations about pillar one’s potential departure from the arm’s-length and nexus standards and asked for a safe harbor regime. The safe harbor provision would let some companies opt out of the new global digital tax regime. Recently, however, U.S. Treasury Secretary Janet Yellen announced that the Biden administration is no longer insisting on the safe harbor implementation of pillar one. And as you may have read this week, Treasury Secretary Yellen is working through the OECD on a global minimum tax on multinational corporations. Her efforts are part of the current negotiations under pillar two. The implementation of both pillars one and two would significantly affect the taxing rights of countries and how they assert their taxing jurisdictions and allocate the taxable profits with multinational enterprises.

The unified approach would depart from longstanding tax norms regarding separate entity recognition and permanent establishment. And it would go beyond the arm’s-length principle, avoiding double taxation and multinationals is going to require global consensus. Then meanwhile, while the OECD has been working on this two-pillar solution, the United States has been resistant to changes that might disproportionately affect U.S. multinationals and reallocate the U.S. corporate tax base towards other jurisdictions. But during his campaign, President Biden promised more international cooperation. He proposed policies that would establish a minimum tax regime through revisions to GILTI on U.S. companies that appears to align with pillar two, the Biden campaign proposal would revise to apply a higher rate on a country-by-country basis and eliminate the exemption for qualified business asset income. There’s a lot to debate on how compatible Biden’s proposed policies are with the OECD’s efforts. Will businesses ultimately find themselves disadvantaged? Are we seeing the end of the race to the bottom with corporate tax rates?

To help us sort all of this out, we have three outstanding speakers and I will introduce them in the order in which they will speak. I’ve asked each of them to speak for five to seven minutes to set the stage for our discussion that I will moderate. As we noted at the outset, we welcome your questions and thank you to those who emailed your questions in advance. Please also use the chat feature to submit questions during today’s event. I will get to as many of them as time permits. Barbara Angus is the global tax policy leader at EY, where she focuses on tax policy development and implementation across the globe. Barbara was previously chief tax counsel for the House Ways and Means Committee. She has also served as the international tax lead for the Treasury Office of Tax Policy. She has a wealth of knowledge and experience stemming from both her public and private sector roles.

Louise Weingrod is the vice president of global taxation at Johnson & Johnson. She joined the company in 1999 as a senior tax attorney and has risen up the ranks. Before Johnson & Johnson, Louise was in private practice. She also serves as a board member of the Tax Council Policy Institute, the Tax Counsel, and the Alliance for Competitive Taxation. And she is the tax committee, vice chair for the U.S. Council for International Business.

And finally, Lee A. Sheppard, who needs almost no introduction. She is one of the most widely read and respected tax commentators. And we are thrilled to have her at Tax Analysts. She’s written on many topics for Tax Notes over an almost 30 years, perhaps most notably on financial issues and the taxation of multinationals. She is without a doubt, a must read every week.

And with that, Barbara, I turn it over to you.

Barbara Angus: Thank you, Cara. I appreciate the opportunity to be a part of this discussion. So right now is really a pivotal time for this project. The project began in early 2019, although its roots go back significantly farther than that. So it predates the current COVID-19 crisis. We saw the OECD and inclusive framework release 500 pages of technical detail on both pillars last fall and the inclusive framework and G-20 are committed to work toward reaching consensus on a path forward this summer. So it’s really a good time to take stock of the project and its objectives. This particular project is extraordinarily ambitious for the OECD. I think it would be fair to say that it really is unprecedented. First, in terms of its breadth. This is not an OECD or G-20 project. It is now being conducted through the inclusive framework with the participation of 139 countries. So it truly is a fully global project.

Also significant is the depth of the project. Pillar one, its ambition is to make fundamental changes to core building blocks of the international tax architecture that has been in place for many years. Pillar two, and the global minimum tax rules, has significant implications for key choices made by countries regarding their tax system design.

So it is a very far reaching project in that sense. It also is really unprecedented in terms of the degree of coordination and cooperation that’s envisioned. With respect to pillar one, the OECD is looking for consensus and commitment from all the participating countries. And what’s contemplated under pillar one would require cooperation, not just in deciding what the rules are, but in the day-to-day and year-to-year application of the rules to particular situations. And both pillar one, and maybe to a lesser degree but also pillar two, really require robust, multilateral dispute-prevention and resolution mechanisms that we haven’t seen before.

The project is also facing enormous pressure. There are a proliferation of unilateral measures, in the form of digital services taxes and other unilateral approaches to taxation of the digital economy, that are uncoordinated and overlapping. And so that creates significant urgency with respect to this project. And there is high-level political interest in the project. That, I think, is really important, particularly because what’s at stake in this project would have revenue implications for countries in terms of reallocating taxing rights away from one country and to another country. So there’s potential for winners and losers from a revenue perspective.

Looking ahead, there are significant political and policy differences to be resolved with respect to pillar one. A big open issue is what’s the scope of these new rules? Also, what is the quantum of the taxing rights to be reallocated? And what will the dispute-resolution mechanics look like? There are a wide variety of views across countries on all of those points.

With respect to pillar two, there’s the fundamental matter of what will the minimum rate be? And there are some complex issues about rule coordination, which country that would have priority with respect to any given stream of income to impose their minimum tax. Beyond that there are a lot of technical issues that need to be addressed, and there is a significant amount of process and infrastructure that will need to be established.

And there continues to be an overarching interest in trying to manage the complexity here. When you’re talking about this level of cooperation and coordination, having rules that are simpler would make that easier. As countries work toward the agreement that they’re trying to reach this summer, I think it really will be useful, for the countries to take a step back and refocus on what the core objectives are of the project, to ensure that the architecture that they’re looking at is well suited to those objectives. We really need to have fully informed consensus, that ultimately is supported by agreement on the technical details and all of the operational mechanisms.

This really is an ambitious project. But in today’s increasingly globalized economy, the ambition of greater global coordination and cooperation has the potential to bring significant benefits, in terms of confidence in the global investment climate and certainty for businesses and governments alike.

Griffith: Wonderful. I have to admit, I jotted down a whole bunch of questions, but before we get to that, Louise, I’m going to turn it over to you.

Louise Weingrod: OK. Terrific. Thank you, Cara. And such a privilege to be here with all of you today. Maybe we could put up my first slide. I’m Louise Weingrod and Johnson & Johnson is a healthcare company. We are a pharmaceutical company, we’re a medical device company, and we’re a healthcare consumer products company. And so with those three very different models, we have a perspective that is, I think, interesting. But I just want to be very clear at the outset that I’m speaking for Johnson & Johnson and would not want my remarks to be overly applied to other business models. Is the first slide up? It is. OK. So, I wonder if I can just get to the point where I can see it too. So, thank you very much.

This slide describes some of the major themes very important to Johnson & Johnson, as we’ve been engaging on the OECD current process for the last two or so years. The overarching goal that we have as we approach any tax policy project is in support of our company mission, which is to transform health for humanity, is to ensure that cross-border trade is unencumbered by tax disputes. And also, to ensure that the ecosystem for innovation is secure and functioning well.

So let me just spend a moment on both of those concepts. Whether it’s our ability to deliver our vaccine to countries around the world or other lifesaving products, or whether it’s my ability to grab a cup of coffee -- coffee beans are not grown in New Jersey -- to grab a cup of coffee, or any of our ability to text our family or friends, especially at this time, cross-border trade is of paramount importance. And as we’ve seen in very recent times, there is a strong potential for unilateral measures to disrupt cross-border trade. And our view is that the multilateral alignment that can be achieved at the OECD, while unlikely to be perfect in all details, so long as it’s reasonable will be far superior to an environment where we have unilateral measures predominating, and that might be from countries or from groups like regional groups as well.

So we strongly, strongly support multilateralism at the OECD. In addition, we strongly believe in the value of innovation and its potential to progress the life of humanity. Innovation is the heartbeat of our business and of many businesses, and it is based on a fragile ecosystem. Large companies are often headlined, but significant innovation involves universities and think tanks and startups all around the world, because scientific talent and engineering talent is dispersed all around the world. And it’s very critical that tax policy support innovation, which means, with respect to this project, that countries that bear the risk of innovation, whether it’s through loss carryforwards, or R&D credits, or what have you, earn an appropriate return so that they will be able to keep doing that. And similarly, innovators, who are taking in our space a significant risk, are able to continue to fund their investments in R&D.

So with those two overarching principles, we also see this project as a tremendous opportunity to simplify. We have an inordinate amount of audits around the world, focused on marketing company returns. And these are, these are a routine activity, and the typical argument is whether it should be 5.25 percent or 5.4 percent that the local country should earn. It is not significant. And it takes up for us, and it takes up enormous resources, both ahead of time and during audits. And we would very much welcome an approach that simplifies, which the OECD has been looking at since around 2010, 2011, with very specific projects. And so we think when it comes to routine activities like marketing, and perhaps in the future, R&D, or manufacturing, it would be very helpful to simplify and create greater certainty for countries and for companies, and take friction out of the tax system. And we think this is a great opportunity. This project is a great opportunity to do that, and what’s simple is going to produce certain results and what’s certain is going to be sustainable. Next slide please.

So at Johnson & Johnson, with a special call out to Katherine Amos on my team and a large team of people, we’ve developed some proposals that we shared with the OECD and one of them is called Amount Z. And I happen to have an Amount Z shirt on today, which I’m very proud to support. And what Amount Z does in short, it’s one of several simplification proposals that were featured at the last OECD public meetings. And I just want to say that as long as we get to simpler results and they are reasonable, we support them. What Amount Z does is it says, let’s look at a very, very large data set.

We looked at the Orbis database and let’s select out outliers. And we ended up looking at over 11,000 companiesAand let’s sort out where returns fall based on enterprise profitability. Let’s forget looking at different industries, that’s extremely complicated and there’s a lot of porousness when you do that. For example, is a pharmaceutical product you can only get with a prescription consumer facing or not? How about a medical device that’s inserted in your body in the hospital? Is that considered? There’s a lot of porousness around industries. Also, rules based on industries miss the fact that there may be large ones that are quite profitable and smaller ones that are not, and all sorts of things in between. Our view is to look at business model and look at profitability of the business. And based on that, we can look at what results are achieved based on arm’s length, looking at very large data sets and come to recommendations about what would be reasonable.

And if you turn to the next slide real quickly, and by the way, this is for businesses with substance and mass. This is not addressing businesses that lack mass, that’s a different issue. But you know, what we’ve done is we’ve proposed what we think are reasonable returns based on enterprise profitability. It’s not perfect, but it’s extremely simple. The numbers could be calculated by the OECD or any central body and applied. And we recognize that moving towards such a system, which is not arm’s length for this limited function, we would propose saving the arm’s-length calculations, which are very complicated and time intensive, for areas that are complicated that really matter like pricing intellectual property cross border. But for routine activities like limited risk distribution, we believe that there would be a lot of attraction for companies to have certainty, for countries to have certainty. It would be very straightforward, and whatever bit more we pay in tax, we’d probably have savings in preparing transfer pricing documentation and audit.

However, we recognize this would be a very significant shift and we believe in change management. And so we would propose a different type of safe harbor than what Secretary Mnuchin proposed, which would be a period for companies and countries to have the option of transitioning in, and in an iterative fashion, pick up learnings along the way. We think that would help bolster confidence and bolster the system. And we suspect that as long as the rates are reasonable, they would be very attractive to companies and they would want to opt in, in order to drive certainty. So that’s our Amount Z, and there were other simplification proposals as well. And what we’re looking for in pillar one is simplification and pillar two is reasonable, simple, supporting innovation. Thank you.

Griffith: That was really interesting. And both you and Barbara noted the need for simplicity, which drives a certainty for businesses, which ultimately can then get to innovation. And I guess I may have not ever connected the dots between that need and then how to drive innovation, because it seems like that is we’re all trying to do right now, even at a small business like Tax Analysts, we’re trying to drive innovation. What can we do? Lee, let’s move on to you.

Lee A. Sheppard: Oh, I feel like the skunk at the picnic here. I am very grateful to Louise and Barbara for being here with us. I would rephrase Barbara’s question, "What is our objective here," as, "Why are we giving the OECD more power?" I can’t think of a project in the last, say -- and Barbara and I go way, way back -- in the last 20 or so years that the OECD has done well. And, you know, we can go back to things like the authorized approach for attribution of profits to permanent establishment.

When we think about this mess, we really have about five -- and if you don’t count the OECD as a party, and they kind of are a party -- you have about five parties. You have the United States, Europe, developing countries, FANGs, and consumer-facing companies like Johnson & Johnson, and they all have different interests, and the project really isn’t going to any of those interests.

If we look at the United States, that’s almost, why are we here? Because the United States didn’t want special digital services taxes on the FANGs. I wrote an article by the way, called "DeFANGed International Taxation," which all of you should read if you haven’t already, but this talk is going to be even nastier than that.

The United States didn’t want these nice, simple, quick, and dirty digital services taxes on a relative handful of very large companies. A lot of them have permanent establishment, a lot of them have local affiliates, but in some places they have only digital contact to do business in the country. Now, Cara originally came up through State Tax Notes. She is quite familiar with an economic nexus for a business. Our states have been working on that for 30 years and they didn’t get together with a multilateral organization and cut a deal. They all sort of simultaneously went to a sales base for corporate income taxation. But let’s put that aside.

OK, so we’re here because the United States didn’t want those taxes. Now, once those taxes go into place, and there’s something like 30 of them now, they are not going to be dislodged. The reason they are not going to be dislodged is because they are quick and dirty and easily administered. Just give me 0.2 percent of that number right there on your income statement. And that’s the kind of thing we should be going to now.

Now, the United States does not have to agree to that. The United States does not have to give a foreign tax credit for that. And that may be where we end up, with countries putting these taxes in and the United States saying, like they say in the proposed regulations, look, it’s got to look like an income tax before we give a foreign tax credit.

Then we move on to Europe. The Europeans can solve their own problems and they have their own quite lavishly funded institutions to do this. And when we look at what the European motives are in this project, you know, they’re really better suited to European institutions. If the Germans want everyone to have a GLOBE tax, and about half of what’s in that GLOBE tax is in German law already, if the Germans want everyone to have that tax, fine. Go to the European Commission, go to the European parliament, get a directive that says everyone has to have that kind of tax. Because when we’re talking about a country wanting that kind of a tax, we’re talking about two things.

We’re talking about big companies competing with other big companies for capital, even though they’re not in the same business. We’re also talking about countries protecting their own parent companies. And really, you know, whether you put on a tax like that, that’s kind of your business between you and your parent companies. But we’re talking about countries competing with each other. You handle that in the EU. 

Developing countries, I will get to that, because we have a question about it.

And, then when we get to the big giant digital companies, if other countries put on those digital services taxes, and they don’t like it, they can lobby the governments of those companies. These are companies that are bigger than a lot of countries, they can take care of themselves.

Then when we look at Louise’s company, and all the other fairly large multinational, consumer-facing companies that have a physical footprint, so they’ve got either a local subsidiary or a PE in the countries where they’re doing business. How did we get here with that? Well, we got here because the United States in the BEPS negotiations wanted to confuse the issue and say, "Oh, heavens to Betsy, you can’t ring-fence digital. And you know, other modern, large companies use digital communications and stuff," which is just obfuscating the issue, because, this is the way Louise is describing it, is what we’ve got is a pretty conventional issue of well, you sold some product in this country. You used the distributor. What is the rate of return on that thing viewed as a separate company, and is that large enough? That’s a pretty conventional issue. We can have a formula for that.

Like Louise is proposing, and it’s great that folks are being constructive here, but we can do that without redesigning the whole tax system. We can put stuff in the transfer pricing guidelines that says, we think that the routine profit of a distributor is blah-di-blah. That’s not hard. It’s like we’re making this thing harder.

What else do I have to talk about here? I also think that the dispute resolution problems that Louise mentioned is bigger than people are letting on here. And I’m old fashioned. I think that if you’re doing business in the country, you’re going to litigate your taxes in their courts, and that’s what you should be doing.

But the United States foisted this on folks. We’ve got a view of the United States and its multinationals, and probably other people’s multinationals too, that, well, we should be entitled to arbitration whatnot, for some of these things, and we should be entitled -- that’s what BEPS did. BEPS said you have to allow arbitration for transfer pricing. A lot of countries did not want to do that because it’s a fact issue.

If you go with something completely crazy, like pillar one -- and pillar one is completely crazy. And I’m a person who I like, I like sales taxes. I like give me a simple hit off that number there. But if you have a situation where a multinational that is subject to this goes to its books, pulls out a number, and then it’s going to file returns, sprinkling that number out over a bunch of countries, a lot of countries. And we don’t think that there’s going to be disputes of "I didn’t get enough?" We don’t think that some of those European countries that are angry right now about their view that the BEPS isn’t regular BEPS, the first BEPS is not going to cut the mustard for them. You don’t think that they’re going to raise their hands every single time with every single large American company and say you didn’t give us enough under pillar one? Of course, they are. You’re going to get, even though it looks like, “Oh, we’re just whacking it up and we all agree,” you’re going to get more disputes, not less. And part of what your problem here is also trying to leave this in the rubric of corporate income tax, just take it out of corporate income tax. Let them have a digital services tax, then the country at hand and the tech provider at hand can sit there and fight about how much ad sales you had in this country. That’s a whole lot simpler than this thing would be in practice. And I think I’ll shut up here and wait for questions. Thank you.

Griffith: Awesome. So I have a lot of questions now that start with "Lee said," and then some additional questions. So Barbara, I’m going to kick a question back to you. Lee just mentioned that pillar one is crazy and without a doubt, the United States loses under pillar one in some instances as more income gets shipped to market jurisdictions. Do you think the United States would support opting out of pillar one, but agreeing to pillar two?

Angus: I think the administration is engaged in discussions of both pillars, that the United States has a long history of being actively involved in all of the OECD tax discussions, that the United States always brings its own interests to those discussions but has always been an active participant, and I would expect that to continue. In terms of your suggestion that the United States would lose in terms of revenue with respect to pillar one, I think there’s a lot of work to be done on the design of pillar one before that analysis really can be concluded. It is true that the United States is a significant headquarters jurisdiction, but the United States is also a significant market. And so, all of the design questions and the scope questions will be relevant to that. And that is something that will have to be considered down the road. But I think it’s premature at this point.

Griffith: It is difficult talking about it at this point, trying to predict what the new administration is going to do. And another question that I would pose to any of you is, as we look at whether or not the United States is going to participate at all, given that the new administration is just now putting people in place in their roles -- Is a mid-2021 deadline, is that at all doable? Or do we think that it’s going to extend far beyond that?

Angus: Well, maybe just a point about the deadline. Mid-2021 is a target date and they’re looking for sort of agreement on a path forward. I mean, you make a very good point about the fact that we’ve got a new administration in place that is busily staffing up the Treasury Department, that they’ve made a big commitment to this project by creating a new role, a new deputy assistant secretary position focused on multilateral engagement, which is engagement with the OECD and the inclusive framework right now on this project. And I think that’s a significant commitment of resources. I think a big question that I think all of the countries that are participating are going to have to focus on between now and, and sort of the next date that they’re looking as a progress measure is whether they’re looking to reach agreement on all of the technical details, or are they looking to reach agreement, that is more directional and conceptual, a higher level agreement, and then continue the work on all of the technical details. To me that is perhaps the more likely approach, given the timing and the amount of technical work that needs to be to be done. And it’s both technical work and working out what the process is. This idea of consensus and commitment is really new for the OECD. And certainly doing that across 139 countries is brand new.

Weingrod: Also, Barbara, you might agree, and Lee, that pillar two is further along than pillar one, a lot of work is still to be done on it, but you can at least see where the plumbing and wiring would go. Pillar one, after the last public consultation, it would be great if we saw a highly simplified version of it coming out, when we get that. But pillar two seems fairly far along, at least in terms of overarching framework, with still some needs for changes.

Griffith: So absent an agreement on pillar one, can pillar two move on its own? And would it move on its own then to reverse the trend towards unilateral digital services taxes?

Angus: Well, pillar two, I think is pretty separate from the digital services taxes. They’re pretty wrapped up in pillar one. Pillar two on global minimum taxes, certainly that is something that a country could do on its own, or as Lee described, the EU could do it as a group. And what the OECD is looking for in terms of agreement with respect to pillar two, I think is quite different than pillar one. They’re looking for agreement on an approach, more like a recommendation. I think about it as looking more like what they did with the first BEPS project, maybe a good example is the antihybrid rules that they -- they developed a mechanism of hybrid rules that would give different jurisdictions the ability to counter a hybrid, and a prioritization among those rules. And they put out that framework. Countries could choose to adopt it or not, but the idea was, if you want to have antihybrid rules, we recommend that you use a framework like this because it’s better coordinated globally. And that seems more like the ambition with respect to pillar two, not trying to get 100 percent commitment of every country to implement these rules. And so that is another reason why it may be easier to reach agreement. Also it is something that the countries could begin doing on their own. The idea of having some coordinated approach, I think there are some benefits from the perspective of businesses, so that there’s less risk of multiple minimum taxes applying to the same item of income.

Weingrod: And let’s be stating the obvious -- the United States has a pillar two.

Sheppard: Yes. We do have a pillar two and we should basically insist that GILTI, however, we want to write it, be accepted as a pillar two. But let’s go a little further with the pillar two. Suppose we all agree on this thing or the Europeans put in their own GLOBE tax like they wanted to. A lot of these countries, because they were quasi-territorial, because nobody’s really territorial, a lot of these countries don’t have a lot of experience with foreign tax credits. You have to with pillar two, and somebody correct me if I’m wrong here, put in a foreign tax credit mechanism. If your company’s going out there and they’re getting, and you’ve got the clawback tax on and they’re still paying little taxes all over the place to all these other countries. We’ve got a foreign tax credit, it’s very complicated. We still haven’t, after how many years we’ve had the thing -- more than our lifetimes -- worked out the bugs in the thing. And you’re asking countries that dealt with foreign taxes with an out-and-out exemption, so every foreign tax was a final tax on that income, to not only put in this role, which is going to be very complicated the way they have it written, but also put in a whole foreign tax credit system. That’s going to be messy, which is another reason it’s best left to the European institutions because, you’ve got people with a taste for complexity and a taste for bureaucracy and okay, fine. So don’t impose that stuff on everybody else.

Griffith: So Lee, early on, we got a question on developing countries. So the question was whether it’s beneficial for a developing country to ratify MLI. Did you want to address that question for us?

Sheppard: I thought our developing country question was about capacity building and the whole ball of wax. If you’ve got the treaties in place, which -- and this whole thing is kind of weird and ironic, because this is the first time I’ve been invited to be a panelist at one of these discussions where developed countries were on the menu. I get invited to lots of developing country discussions, and I say the same things every time. First of all, don’t sign those treaties. Second of all, withhold on everything. Third, try to move away from the corporate income tax. Fourth, if you’ve got the corporate income tax in place, put on some simplifications like the Indians and the South Americans have, and I’ll get to that in a second. But if you’ve got OECD model treaties in place, you have no choice but to go through that MLI and sign the parts of it that are going to help you and hope that other people -- because you have to have a match, it’s like a dating service -- hope that other people sign it.

But when we get back to the corporate income tax, what we have in developing countries is the corporate income tax is a very large part of their budgets. But it’s also, and we know this from our own experience, it’s a big mess. It’s very complicated and expensive to administer. It requires a bureaucracy of highly educated people. If I’m a developing country, my highly educated people might be running out the door to the United States and Europe. So I’m probably looking at limited human resources in my country. I really don’t think I want to be making these people into transfer pricing specialists and training them up to do that, so then one of the big four can hire them two years down the road. I really don’t think that’s a productive use of human resources.

If you’re going to keep the corporate income tax in place, because you can’t get rid of it politically, then you got to start looking at simpler rules and tougher audit procedures. Simpler rules, like just flat restrictions on interest deductions, no deduction for stewardship expenses, which by the way, is a rule in South America. The commodity leaves the country, or there’s a first sale, it’s at the market price. That’s a rule in South America. Fixed margins for stuff. And that’s what Louise is actually moving towards. They’ve got that rule in South America. The OECD screams that about all of these things, but it vastly simplifies what you’re doing.

The other thing they do in Central and South America, they do real-time audits. We’re sitting here with the country-by-country stuff and, "We wish you’d stop lying to other governments, and we wish you would fill out your return properly...." In Mexico, and in Brazil, they’re looking at the invoices in the computer while they’re occurring. If you don’t have an invoice in the computer and the government doesn’t see it, you don’t get a deduction and you don’t get a value added tax credit. That’s the kind of thing, if you’re just talking about enforcement, you’re better off getting a couple of good computer programmers than running around training up your people to be transfer pricing specialists so they can go argue with the lawyers from some big sophisticated company about what price that commodity should be sold at, which is not something they should be arguing about in the first place. Thank you.

Griffith: So we got a question in and I will open this up to whoever wants to answer it. The question is, can someone speak to the current status of the four-step process for identifying tax-relieving jurisdictions in chapter seven of the pillar one blueprint.

Angus: That’s very specific --

Griffith: That's very specific.

Angus: -- and I would say that it’s hard to say what the current status is or hard to say anything beyond what’s in the blueprint, because there haven’t been further technical level discussions that the OECD had the consultation process and there, and there were comments. The question -- The mechanics of determining what some refer to as the surrendering jurisdiction are complicated mechanics and are a really important aspect of what they’re trying to accomplish with pillar one. If the aim is to give more taxing rights to the market jurisdiction, in order to avoid double tax there needs to be a jurisdiction that gives up those rights. I think that clearly is an area where more technical work needs to be done. But I don’t know that any of us can say more about where it stands right now. Although Lee might.

Sheppard: I have an opinion on everything, whether I know about it or not. In the OECD model treaties, and somebody correct me on the article, I think it’s somewhere in the 20s, like 26, 27, they say, Oh, we really, really wish you would give double tax relief. And we don’t prescribe a method. We haven’t worked the bugs out of that yet. And we’re talking between roughly equal size to European comp countries with similar economies. So, you know, how are we going to work on the problem that Barbara is talking about here?

Weingrod: Yeah. And this is a consequence of the effort to take innovation, entrepreneurial country profits, and spread them around the world. And as Lee mentioned, and Barbara, it’s very, very complicated and very likely to be awfully hard to manage and to ratchet up disputes. And that’s why our simplification proposal, we’re not the only one, blows past that and says, if you have substance and mass, look at the return in the market country, determine what it ought to be and leave it at that. And don’t say that you’re going to figure out what a residual profits and what portion of those get spread everywhere, because it’s the plumbing and wiring on that is impossible, frankly.

Sheppard: In the Obama administration, when the BEPS started, the administration basically laid down a marker and said, look, we’re going to tax the residual profits of our own companies, meaning the returns to innovation. And I do not understand why this administration is seemingly going back on that. I do not understand why you want to even concede stuff before you know where you’re going. I do not view this as some big kumbaya thing, I view this as a poker game. And you wouldn’t make that concession unless you got guarantees somewhere else like there’s going to be a lid on this.

Griffith: It seems so challenging. And I am, I come from a state background and not an international tax background, so I’m learning a lot listening to you all. But it seems like we have a desire for more simplicity and pillars one and two introduce more complexity. What is the likelihood that the United States will participate? Should it participate? And how challenging will it be for developing countries to implement something like this that is so incredibly complex? And I probably just asked four questions there, so I open it up to all of you.

Angus: I would say that an important point is that the alternative seems to be, not that nothing happens. We’ve got a proliferation of unilateral measures of various types; there’s digital services taxes, which are gross revenue taxes, they are complicated in their own right and they are potentially overlapping, both with income taxes and overlapping with each other. And that is potentially a very chaotic environment. You add to that potential changes in approach to income taxation, either changes in approach to redefining permanent establishment, new legislation in that area, or the potential for reinterpretation of existing rules and existing treaties. So there’s a lot of potential risk to not having a global discussion about some coordination, whether the outcome is an entirely new set of rules or better understanding across countries. To me, there’s value to having these countries at the table discussing these issues.

Sheppard: I don’t think the United States should agree to any of this stuff. I agree with Barbara that this is what will happen, but that is why you have treaties. And that is why you have dispute resolution mechanisms. Those things are supposed to sort that out. If a bunch of people put on digital services taxes and you think there’s double taxation, then fine, go make some new treaties or make some new dispute mechanisms. That will be easier than doing this. As far as the developing countries are concerned, as Peter Blessing pointed out the other day, the resource-constrained countries -- because to be a developing country, you don’t need to necessarily be small. Although small countries, this is another thing that we don’t even think about regarding Europe. Little bitty countries have problems across the board, whether they’re developed or developing. They have resource problems.

But if you’re a country with resource problems, no matter what your level of development, you are not going to be able to enforce this pillar one thing. You are going to have to depend on Google or whomever to file a proper return and give what you think is a fair amount of tax on the amount of revenue they said they earned in that country. France can afford to get in a fight with them about it. And you probably can’t. And if that’s going to be your situation, you’re better off putting on your own little digital service tax or a new value added tax like India did, or something like Israel did one of these too. Something like that that says, yeah, this is our tax, this is how we’re going to enforce it. You want to get into an argument with us? Here’s the parameters. You’re better off from an enforcement and a sovereignty perspective, doing that.

Weingrod: Lee, I’m sorry to disagree with you, but I very much want the U.S. at the table to help shape the proposal, I want GILTI to be grandfathered to the full extent possible, I want pillar one to be as rational and as productive as possible for companies and countries. And so I want the U.S. at the table shaping. And my sense is that this doesn’t have to be a politicized issue in the U.S., this is about being part of international alignment on how cross-border taxation works, which is what supports cross-border trade. We’re one of the largest markets in the world, and I would welcome a world in which this was pretty routine and we could easily automate and love the idea that governments can audit as the transaction happens. And we were not in the cycle of waiting for audits and such. I think that’s great. So I’m very encouraged that the incoming Treasury staffed up quickly and I’m hopeful that they will be mindful of the need to align the United States around positions that can have bipartisan support in Congress.

Griffith: So we had another question that came in, and this is one that we’ve seen for many years at the state level, is you’ve got these old rules and regs, and you’re trying to kind of cram new technologies and new things and to work in this existing framework. So the question was, what do you all think of alternatives to the OECD project? What do you think of the financial transactions tax? As a form that is more in line with a taxing the digital world. So in other words, I guess is the OECD project, is this the right direction to move in to tax the digital economy? Or are we still trying to shoehorn new technologies into old frameworks?

Sheppard: Let’s get back to what Louise was just talking about. Because it becomes pertinent to this. If you’re going to do something like this, you do have to have it as simple as possible. You do have to have, we will not use the word formulary, we will use the word formulaic methods where, give me this amount of that number, or this is your imputed income on your distribution function. That’s the kind of thing you have to do. The problem, as your questioner correctly identifies, is that we’re trying to keep this within the corporate income tax framework. When your questioner talks about financial transactions taxes, I’m totally in favor of those because those are just automatic. You do them on the exchanges, they’re teensy, weensy, little things, and they’re non-negotiable. You just say, I’m going to take and places, the British have one, but they’ve got one in Singapore. I mean, these are jurisdictions that are very investment-friendly and they’ve got them and they just take a teensy-weensy bit of every transaction. So yeah, I have no problem with those, but that’s not going to solve your problem with somebody whose business is monetizing customer data and selling advertising. And maybe if you want to stay within the corporate income tax framework, you do pillar one for that. But how did we get in this pickle to begin with? The corporate income tax pickle we got into also because of the United States, also because the United States had the most multinationals, regardless of what business they were in. And those multinationals many, many years ago, went to these countries when they were in their taxwriting stage and said, well, have one of these because we get credit for it back in the United States.

Now, the foreign tax credit after the Tax Cuts and Jobs Act is less important. It’s still something we have to have and enforce, but it’s way less important. I don’t see any reason for countries that would rather do something else to have to maintain a corporate income tax to keep a U.S. multinational happy because it will be getting a corporate income foreign tax credit back in the United States. I think that’s a chicken-and-egg problem, to the extent that we get into simpler taxes and get beyond it. Because why are we talking about today -- I know I’m confusing things -- overlap with corporate income taxes and double taxation, if we weren’t talking about foreign tax credits. I mean, we could, we could let the world’s poorest countries put on whatever crazy tax they want. They could put on more value added taxes, digital services taxes, whatever. And we could say, okay, we’re going to do a little tax sparing for you. You can have a 20 percent foreign tax credit, but the Europeans are only going to get a foreign tax credit for income taxes. We can do that. That would be easier too.

Weingrod: I totally agree with simplification. I just want to make two short observations. One is, it would be very helpful in the context of the OECD to be clear on what the goals are that are being gone after. And it’s nothing new to note that they’re not as clear as they ought to be. One goal appears to be that governments need more revenue and that couldn’t be more the case in this economy. It just couldn’t be more the case with all the cost of stimulus and the cost of the pandemic. GILTI was a U.S. giant revenue raiser. Through GILTI there was a lot of broadening the base that helped pay for the rate cut and other countries are looking for revenue raisers to. And in addition, there are issues around business models, nothing new to us, business models have evolved and tax rules haven’t kept up.

And the old model around physical nexus being the basis for taxation. We’re at a moment like we were in, in the late 80s, early 90s with global trading where suddenly profits were being made in the course of a split second in New York and London and Tokyo all at once. And we had to figure out how to tax that, so that needs to catch up. But let me pass the baton to Barbara since I see we’re almost out of time and I’m sure she has something to wrap us up.

Angus: I guess I would say that taxes of all types have significant economic implications and those need to be fully assessed before a country considers a new tax type. I would say that I think it is notable that this particular project is in the corporate income tax. And the OECD’s own economic analysis has said that the corporate income tax is the least efficient tax of all taxes, in terms of the detrimental impact on economic growth relative to the revenue raised. But as countries -- and I don’t think that the original aim of this project was really about overall raising revenue. It was about changing how revenue from the corporate income tax is shared across countries. But with the revenue issues that the countries are needing to look at, I think they’ve got to think about all of these things, but they need to think about the economic implications of any tax choices that they make.

Griffith: Wonderful. Well, thank you all. I know I learned a lot and I hope our audience did as well. I can’t thank you guys enough for your time today and for sharing your knowledge.

And with that, it looks like we’ve come to the end of our hour. So I wish everyone a wonderful day and I look forward to the next time. Thanks everyone. Bye-bye.

 

Copy RID