Streaming, Social Media Companies Comment on OECD’s Digital Plan

April 9, 2021

The Honorable Janet Yellen
Secretary
Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220

Dear Secretary Yellen:

We at Netflix, Snap, and Spotify are supportive of Treasury's proposed plan to the OECD relating to international taxation. We welcome the opportunity to introduce our views regarding Pillar One, and work with your Administration, in coordination with the OECD, to complete the design and implementation of a globally agreeable resolution to international tax reform that addresses the digitalization of the economy. It is our belief that the international tax framework is at a crossroads in determining whether an agreed reallocation of taxing rights can succeed without triggering harmful trade disputes. We are fully confident that with your leadership, a multilateral, consensus-based solution will be possible.

While our three companies vary in size and business model, we all share the goal that this solution must ensure a level playing field for companies of all sizes. The alternative to an OECD solution is chaos and uncertainty, which would be to the detriment of all stakeholders, including the United States. Even today, we are witnessing a serious threat to the stability of the international tax system due to the proliferation of unilateral measures such as digital services taxes (DSTs). These are based on gross revenue and by default result in double taxation, primarily harming U.S. taxpayers and therefore U.S. competitiveness. While some industry stakeholders find these to be part of the solution, we believe DSTs will raise the cost barriers to business startups that want to use low-cost digital platforms to compete in new markets.

With this in mind, we believe that such a solution should adhere to a few guiding principles. The solution should (1) tax only net profits, and only once, (2) keep existing arm's length guidance intact as much as possible, (3) address the treatment of losses in an economically rational way, (4) maximize simplicity, certainty and administrability while minimizing controversy, (5) provide generally applicable rules rather than ones that are industry-specific and (6) eliminate unilateral regimes. The OECD's Blueprint for Pillar One, with a few simplifications including those outlined below, may accomplish the goal of an appropriate allocation of taxing rights among countries, while adhering to these guiding principles. We support Pillar One and are encouraged by the news of the Administration's intention to support and drive the discussion as well, as it is in the best interest of the U.S. economy as a whole.

Pillar One needs clarity and simplicity. As the contemplated rules represent significant departures from the existing international tax system, they involve a high degree of complexity, and consequently will subject both taxpayers and governments to substantial costs for compliance, administration and controversy. Therefore, finding opportunities for simplification must be a driving focus and should lead to a clearer path to achieving technical and political consensus over the coming months, in particular by avoiding undue definitional complexity regarding specific industries. We agree with the comments in your presentation to the Steering Group that the qualitative definitions of ADS (Automated Digital Services) and CFB (Consumer-Facing Businesses) to identify in-scope taxpayers are subjective, arbitrary and highly complex, which will likely lead to significant confusion and controversy. We agree with your recommendation of a simple, quantitative approach to scope, similar to what has been previously proposed by Germany and various academics.¹ Specifically, (i) a global revenue threshold (equal to or greater than EUR 750 million) and (ii) a global operating margin threshold (equal to or greater than 10%), in each case based on public consolidated financial statements, could be used as the defining criteria for scope, with any exclusions for specific industries that are deemed appropriate.

Similarly focusing on simplicity, we believe it particularly crucial from a U.S. perspective to clearly identify a simple and administrable notion of “relieving jurisdiction” and also provide for a clear mechanism for double tax relief. With respect to the former, we see a few options for simplification and would be happy to share them in more detail if helpful. For the latter, we recommend eliminating the credit method as an option by which a relieving jurisdiction may grant relief, and requiring the exemption method as the global standard.²

A focus on simplicity should also help improve the administrability of Pillar One. As the solution will be a completely new method of taxation, there will not exist the level of precedent that both taxpayers and governments alike can rely on. As a result, the authors of the Blueprint are faced with a choice to write prescriptive and detailed rules to try to address many different specific fact patterns or more general, foundational rules that may require further clarification as to specific sets of facts. We recommend the latter, which will then necessitate a significant investment in the panels, which we anticipate will be available to taxpayers to engage with to clarify the application of the rules to their facts — forming the precedent to be used by other taxpayers and governments. The right mix of specificity and simplification will allow the panels to use reasonable methods within the agreed rules to resolve disputes.

We respectfully request a meeting with you and your staff to elaborate on these and other key topics in a constructive manner. We would also be happy to discuss our own empirical data to help quantify the business and growth impacts that we are seeing and expect to see should a consensus solution fail. Additionally, we would be willing to “opt in” to a pilot implementation of Pillar One on a trial basis to help build and improve the process, depending on the nature of the final rules and provided that an immediate repeal of relevant unilateral measures is in place.

Thank you in advance for considering our letter. The next few months will be crucial in creating momentum to restore faith in the leadership of the U.S. in the international tax arena. Our companies are ready to support you in this important endeavor to build a firmer foundation for international cooperation in the 21st Century.

Respectfully,

Lisa Wadlin
Vice President, Tax Netflix
Netflix

Jonathon Locascio
Senior Director, Tax Snap Inc.
Snap Inc.

Maureen Johnson
Vice President, Global Tax Spotify
Spotify