Treasury Must Make Good on Pledge to Eliminate Digital Services Taxes

September 2, 2021

Dear Mr. Grinberg:

Booking Holdings Inc. (Booking) appreciates the opportunity to engage with the United States Department of the Treasury (U.S. Treasury) on the ongoing discussions at the OECD/G20 Inclusive Framework on BEPS (the Inclusive Framework) regarding the tax challenges arising from digitization. As we have previously said¹, we strongly support the Inclusive Framework's aim of reaching an international consensus solution.

This letter serves as a follow-up to our virtual meeting on March 11, 2021, and our previous letter from around that same time. Since our discussions in March there have been several important milestones, including the June G7 Finance Ministers & Central Bank Governors meeting, the July OECD/G20 Inclusive Framework meeting and the July G20 Finance Ministers and Central Bank Governors meeting, all of which showed significant progress in the negotiations on Pillars One and Two. Of particular significance to Booking, both the June G7 Communique and the July Inclusive Framework statement provided for "appropriate coordination between the application of the new international tax rules and the removal of all Digital Services Taxes, and other relevant similar measures, on all companies".

As we have previously emphasized, unilateral measures, including Digital Services Taxes (DSTs), have led to competitive distortions, increased compliance burden, and multiple taxation. The competitive distortions that we face because of DSTs are very real. The United States Trade Representative (USTR) noted the following in its 2019 report on the French DST:

"When French hotels book rooms through their own websites, that transaction will not be covered because hotels own the room they are listing. However, the same room booking made through Booking.com would be covered by the DST."²

It is, therefore, a welcome development that virtually all members of the Inclusive Framework have agreed to remove all DSTs and other relevant similar measures, on all companies, and we commend U.S. Treasury for securing such a commitment.

While a general commitment to eliminate all DSTs, and other relevant similar measures, is welcome, it is also insufficient. Further action is required in four areas:

First, the commitment for the removal of "all DSTs . . . on all companies" should be more explicit. We have interpreted the language in the July Inclusive Framework statement as requiring jurisdictions to eliminate all DSTs even in respect of companies that fall outside the scope of Amount A. Given the significance of this point to Booking and several other MNEs, and recent public statements from other jurisdictions indicating concerns about exactly this point, it should be made even more explicit in future statements.

We suggest that the next Inclusive Framework statement (likely in October) expand on the language in the July statement by providing for "appropriate coordination between the application of the new international tax rules and the removal of all Digital Services Taxes, and other relevant similar measures, on all companies, regardless of whether a company is within the scope of Amount A." Equally explicit language should also be included in the multilateral instrument.

Second, "Digital Services Taxes, and other relevant similar measures" needs to be defined, and a list of existing measures that meet that definition should be published. In a presentation to the OECD Steering Group on April 8, 2021, which is now publicly available, U.S. Treasury indicated that it was seeking to establish a precise definition of a relevant measure and proposed the following indicia for making such a determination:

• Applied irrespective of the tax treaty framework,

• Discriminatory (de jure or de facto),

• Creating an alternative nexus standard (in light of and separate from Amount A).

We support these factors. And it is our view that these factors capture DSTs, equalization levies, and several other existing measures, including, for example, the UK Diverted Profits Tax, Australian MAAL, Australian Diverted Profits Tax, and the New Zealand PE Anti-Avoidance Rule.

To avoid future controversy, we suggest that the definition of a relevant measure also include explicit language to address measures presented as indirect taxes, such as the following language: "The name and presentation of a measure has no bearing on whether that measure is a relevant similar measure. For example, a measure presented as a VAT/indirect tax could be considered a relevant similar measure."

Beyond seeking an agreement on the definition of relevant measures, we strongly encourage U.S. Treasury to seek an agreement on a specific list of existing measures that meet that definition. Agreeing on a general definition without agreeing on and publishing a specific list of existing measures would result in significant uncertainty for both taxpayers and governments and inevitably lead to disputes.

Ideally such a list would be published in conjunction with the next Inclusive Framework meeting (likely in October), however we expect it to be challenging to reach agreement on the specific list of "other relevant similar measures" by then. Assuming that's the case, we recommend prioritizing the list of DSTs, and equalization levies, by October, with the list of "other relevant similar measures" to be published later. This approach recognizes that (i) getting agreement on a list of DSTs is likely less controversial than "other relevant similar measures" because many countries have already committed to eliminate their DSTs, (ii) DSTs are most politically salient, and (iii) a list of DSTs is already available.³

Third, a robust process should be established for the evaluation of future unilateral measures. For example, who will decide whether a future unilateral measure should be formally referred to the Inclusive Framework for evaluation? Who will be involved in such an evaluation? How long will the evaluation take? Will tax related to the unilateral measure be payable during the evaluation period?

To address these types of questions, consideration should be given to adopting a formal panel review process like what is described in the Pillar One Blueprint in the context of the broader tax certainty agenda. From our perspective, the review process should adhere to a few key principles:

• The requirements for triggering a formal evaluation of a measure should be relatively low,

• Once a measure is subject to a formal evaluation, taxes paid under that measure should be immediately suspended, or refunded if the measure is ultimately deemed to be a relevant measure,

• The review should be completed within 12 months, and

• Jurisdictions that implement what are deemed to be relevant measures should be penalized, for example the jurisdiction could be locked-out from collecting Amount A tax for a certain period.

Fourth, the question of "appropriate coordination", specifically timing, must be addressed. Booking and many other U.S. MNEs continue to pay DSTs, and will likely, absent U.S. Treasury securing a commitment from the other members of the Inclusive Framework to the contrary, continue paying DSTs for the foreseeable future.

In parallel to the discussions at the OECD, on June 2, 2021, the USTR announced tariffs against six countries in response to those countries' DSTs, and, at the same time, suspended those tariffs for up to 180 days. If these jurisdictions continue to have DSTs in place after the 180-day suspension period, the USTR may impose retaliatory tariffs. The continued existence of DSTs and potentially U.S. retaliatory tariffs, even after a political agreement has been reached at the OECD, undermines the significance of that agreement and calls into question if anything has been achieved, as these are the very things an international agreement was intended to prevent.

It is, therefore, essential that the comprehensive political agreement (expected in October) include a commitment from all members of the Inclusive Framework to immediately stop the collection of tax for all DSTs (with a reference to the list of DSTs that would be published as per our above suggestion) and other relevant similar measures (once that list is agreed), for all companies, regardless of whether a company is within the scope of Amount A.

Unfortunately, it has been reported that other jurisdictions may not be prepared to make such a commitment and are instead tying the suspension of taxes under unilateral measures, including DSTs, to the time of implementation, which could be 2023 or even later. The justification for keeping DSTs in place until then seems to be based on the premise that DSTs are a crude substitute for Amount A and immediately stopping the collection of DSTs would cause a revenue collection gap during the implementation period. Such an argument may apply in respect of MNEs within the scope of Amount A, but it does not at all apply in respect of MNEs outside the scope of Amount A. We, thus, strongly encourage U.S Treasury to seek a political agreement in October that ensures all companies outside the scope of Amount A are not required to continue paying DSTs during the implementation period.

Furthermore, we recommend a refund mechanism whereby all companies would be eligible for a refund equal to the amount of DSTs paid in excess of the Amount A liability, which would be the full amount in the case of a company outside the scope of Amount A. The refund should be available for all prior years.

Thank you in advance for considering our letter. The next few months will be crucial to restoring stability to the international tax system, and we stand ready to support you in this important endeavor.

Sincerely,

Kathleen Weston
Senior Vice President of Tax
Booking Holdings Inc.