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Perspectives on the Taxation of the Digital Economy

David Stewart: Welcome to the podcast. I'm David Stewart, editor-in-chief of Worldwide Tax Daily. This week, perspectives on the digital economy. We're doing something a little different this week. I got out of the studio on May 10th and went down to the American Bar Association Tax Section meeting in Washington. My guests were Will Morris and Lilian Faulhaber, who I'll introduce a little more thoroughly in a minute. In a breakfast panel, we talked about the OECD's work on the digital economy, the spread of unilateral actions to tax the digital economy, and where things are likely headed. I hope you enjoy this discussion as much as I did.

Welcome, everyone, to the first live recording of the Tax Notes Talk podcast. I'm pleased to be joined by two distinguished guests to share their insights on the current debate on digital economy. Lilian Faulhaber is a professor of law at Georgetown University Law Center. She teaches classes on federal income tax, EU tax, and international taxation. She previously served as an adviser to the OECD's base erosion and profit-shifting project. Will Morris is the deputy global tax policy leader at PwC and he serves as the chair of the tax committee of the Business and Industry Advisory Committee to the OECD. The purpose of our discussion here is to first take a step back and look at how this whole thing got started, this whole discussion of the taxation of the digital economy. Then we'll look at where things stand, and finally, we'll look off into the future to talk about what a solution might look like for the digital economy. And so let's just jump right in and start with the origins. How did this whole thing get started?

Lilian Faulhaber: Well, so I think that this goes back about at least a decade and probably longer. I think that if you look back at around 2012, when in the U.K., the Public Accounts Committee had various hearings with U.S. technology companies. If you look at the U.S. Senate Permanent Subcommittee on Investigations having hearings with Apple and other technology companies, there was already discussion back then of why companies that were in the EU that were called the GAFAs — so Google, Apple, Facebook, and Amazon — why they seemed to have so much income, and why they didn't seem to be paying taxes. So I think you can see this as being similar to some of the concerns with just the idea of sorta brick-and-mortar stores competing with Amazon that you heard in the United States many years ago. The idea that there were these companies that seem to be competing and earning all of this income but seems to not have to pay taxes and so I think there's that backstory of concerns. Now we can talk a little bit about sort of the legitimacy of those concerns, whether or not this was really different, but that seemed to resonate with — especially in Europe
with citizens and voters and taxpayers. There was a sense that there was money to be had, and that it wasn't being taxed anywhere, and that these companies were coming in and competing with local stores and local companies, and not having to pay taxes. And so then, I think you have a longer a story sorta building off of that. There was BEPS, and there was a sense that when BEPS hadn't been able to address these issues to the degree that some taxpayers and voters wanted, that there had to be a different solution. So that's how I'd frame it, but, Will, do you have

Will Morris: No, I mean, I agree with that, and that's clearly the proximate cause, but I would actually take it back a little further, as well. If you
for those of you who are old enough, I would remind you that in the late ‘90s, there were tags which dealt with electronic commerce. And a huge amount of effort was put into this. And it was — it was a very cooperative effort — which of course is a dirty word these days — a very cooperative effort between governments, between taxpayers, between other stakeholders to try to come up with something for this nascent industry, which at that point was focused on e-commerce. And out of this process, you get the so-called Ottawa Accords about the taxation of e-commerce, but the language can be read more broadly. And essentially what it said was, ‘We actually think there's a lot of good which can come out of what we see emerging here, that actually this can help drive things forward, that this can bring huge benefits to countries which currently aren't connected.’ And, you know, there's lots of good language in the report, which, when you read out as I occasionally do to governmental groups and others, just elicits groans at this point. But there is actually, you know, something in there which is, if you look at the way that I can use these terms very loosely the digital economy has grown in just the past 15 or 20 years, it has gone from almost nothing to something which is — you know, it's not the whole economy but it's getting there. And one of the reasons at least for that in the beginning was because of the light touch which the Ottawa Accords put on cross-border taxation of these emerging industries. They were able to grow and that is something which I think gets forgotten. There’s always a — we can have an even — a much longer philosophical conversation about this, but I view tax as being about at least two things and actually many more. One of them is clearly about raising revenue, I understand that. I mean, that's written on the tin and that's clearly what taxes are meant to do. But there are other things that taxes can do in the area of the broader economy. In that broader area, they can either help to encourage things. And again, I worked at the Clinton Treasury, which was one of the places where using the tax system to do almost everything started and trying to do almost everything through the tax system is, it has to be said, a mistake. But nevertheless, seeing tax as something which can also have an impact on growth, either to the upside or to the downside, I think is very important. And what the Ottawa Accords did and what they looked at in that space was saying, ‘Here is something which we think could powerfully improve people's lives, improve economies, create growth. And therefore in the tech setting, we're gonna put a light touch in there.’ Now again, sort of that argument, take it 15 years on, and what the Europeans say is, ‘Well, the reason why these guys have been so successful is because of tax.’ And you go, ‘No, that's actually not why they've been so successful.’ What this did was to sort of clear away some of the undergrowth. There are other reasons why very large companies that we now see are enormously successful. But nevertheless, it's that point that at least back in the ‘90s, the way that tax and e-commerce and digital were looked at, these were meant to facilitate growth in this area. And to the extent that they are a cause of what's happened, then that's been successful. As Lilian says, we get 10, 15 years on, some of these companies have become very large, some of them have become very profitable. And for a series of reasons, some of which Lilian has described, and some of which go down to competitive reasons, some of which go down to other reasons, there becomes a different focus on these companies. And then throw into that — which I think we always have to — the financial crisis and what the financial crisis did to governments' budgets, what the financial crisis did to people's perceptions, to their trust of large organizations — whether it's governments, whether it's business, whether it's anything else. And what you get is a mix, which is very different — the rise of social media, the ability to spread stories very quickly about almost anything, to form interest groups, to get people interested in something very, very quickly. And all of these things come together in the situation we now find, which Lilian has described from sorta 2000 — you pick your number, but 2012 in particular onwards. And you get something which is very focused on large companies, on tax in the digital area. And as we'll discuss, it's much more complex than that. But when you're telling a story, you need a hook, and preferably a simple hook. And some of the cases involving some of those large companies have provided that hook upon which the story now hangs.

David Stewart: It strikes me in some of the coverage that we've had that this issue of these large digital companies not paying enough in tax is a much larger story in the public's mind outside of the U.S. than it is in the U.S. What is it that creates that disconnect? Why are there two different perspectives?

Will Morris: Sure, so, I mean, as you know, until recently I was — lived in London, although I've worked everywhere. And the U.K. has tended to be ground zero for quite a few of these stories. And there are a number of reasons of that. Some of them are individual to particular countries, and some of them are a little more systemic. And the systemic ones, if you will, are a number of things. It's concerns about globalization, which obviously you see in the U.S. as well. But it's about the disruption caused by globalization, which is a 30-year story. It is about the increasing disruption, and I mean to jobs, caused by, you know, some of the leading edge of some of the technological innovations, which cause disruption in the job market as well. So it used to be the easily mechanizable, low-paid jobs which were taken out. Now it's the easily mechanizable, middle-ranking jobs which are being taken out. And so, you know, there's a lot of concern about the future. There is this — all of these problems around a lack of government revenue, around so-called austerity. I mean, how's the hole going to be filled? There was anger, public anger. It has to be said that, you know, as the phrase goes, not a single banker went to jail. And all of this government revenue going to prop up these institutions where nobody seemed to pay the price. It — you know, it’s become a toxic mix. And it's a populace mix, as well. There are stronger NGOs in Europe — again, many in the U.K., some in Brussels, some in other countries — who have latched on to this story. And I'd say there are two types of NGOs as well. And again, both exist in the U.S., but both are probably weaker. So there are the development NGOs — there's the Oxfams, there's the ActionAids, there's the Christian Aids, who come at this from the point of view of how do we help solve poverty, particularly in the global south. And then there's another type of NGO — sort of more Tax Justice Network, or Citizens for Tax Justice, who are focused on the actions of the multinationals themselves. But, you know, these came together at a certain point, probably in the late ‘00s and moving on from there, where these two things came together, because sort of the thing which linked them together was bad multinationals, effectively. And the development story is that, you know, multinationals aren't paying their taxes in developing countries, and you've seen some of the numbers for the reports which get put out about that — some focus on individual companies, some focus on more global numbers. And you see the stories being told by the TJNs of this world, about what's going on in Luxembourg, or wherever. And you know, you put those two stories together, you put together the fact that they are incredibly adept at using social media, and the fact that most corporations are totally inept at using social media. And you get, so there's a sort of asymmetry there. You also get the fact that — I may be little blunt about this — a number of politicians did help to facilitate some of the loose rules which led to some of the events around the financial crisis. I'll leave at that. And some of those self-same politicians, once the crisis came along, felt a need to lay that blame off onto somebody else pretty smartish, and business was there. Now, that's not to say that some people hadn't pushed the edge of the envelope to well beyond the edge of the envelope, if you know what I mean. But what it meant was that in these countries in particular, there was more concern about this. I mean, you know, the austerity issues didn't strike the U.S. in quite the same way. Not as developed an NGO community as in Europe. And then the other thing, it has to said, and I'll say this gently, in this context, is there is in Europe an element of anti-Americanism to this. This is about largely large, successful U.S. corporations. And it does, again, provide an attractive political target. You know, it's a lot easier to say, ‘Hey, it's that guy over there, OK, who's causing all your problems.’ And there has been an element of that as well. Now again, that's not to say that some things went on that probably shouldn't have gone on, and that some things didn't need to change. But in terms of an environment where this could flourish, there is more of that in Europe than there is here. I mean, you saw Occupy Wall Street, and it's sort of for a year, maybe, it was relatively strong. It was out in Franklin Park and various other places, but it never really caught light in the same way. Now, there's an interesting question as to whether, you know, with a new group of progressives, who are much younger, much more adept at using social media, more linked up with some of the NGOs, you know, could you see more of that in the U.S.? Yeah, possibly.

Lilian Faulhaber: I would follow up on the anti-Americanism of Europe to also point out the pro-Americanism of America, which is the fact that, if you look at the difference in how the Public Accounts Committee hearing in the U.K. went versus the Senate hearings in 2012 — the Senate hearing on Apple led to senators apologizing to Apple for the U.S. tax system. The hearings in the U.K. led to U.S. companies such as Starbucks apologizing themselves, and then voluntarily paying more taxes. So there is an element of the fact that the companies who, at least at the start of this discussion, were in the crosshairs, the fact that they were all American, I think, also explains the difference in responses both in the United States and in Europe and in other countries, in the sense that it's a lot easier for European politicians to not target their own companies, but to instead target the successful companies in the United States, and it's a lot harder for the U.S. to do that. And I think there's also the fact that this resonated with taxpayers and citizens in Europe because their politicians were actually pushing for this, for all the reasons that Will mentioned. So I think there’s — there's a role, and I think maybe it's possible this will change for the reasons you said because there's sort of a new generation of progressives in the U.S. — that there's a story that, up until now, it's been sort of politicians in Europe and in other countries focusing on U.S. companies, and not U.S. politicians focusing on U.S. companies.

David Stewart: OK, I think that brings us, next, to the OECD's BEPS project. The digital economy was action item one. So it seemed that that was the most important part of what they were going to address, you would think. But early on, we heard, ‘Well, there's no such thing as the digital economy, there's just the economy, so we have to address all these issues holistically.’ But at the end, we end up with this additional project to then go back again and look at the digital economy. So was this a failure of the BEPS project?

Lilian Faulhaber: So, given my position, I probably can't say that it was a failure of the BEPS project.  But I do think there are several things to keep in mind. So, we'll talk in a few minutes about all of the unilateral and multilateral non-OECD proposals that came about to focus on the digital economy. And a lot of those actually arose during the BEPS project. So there was already a sense amongst countries, including the U.K. and other countries, that what the BEPS project was focusing on was addressing things that were important to them, but it was not addressing all of the elements of the digital economy that they were concerned about. So, I think that gives you a sense that we haven't actually had a chance to see if the BEPS project has failed. I mean, BEPS outputs came out in 2015, they've been implemented in many countries, but there's still a lot to be done. There's — it’s still to be seen whether or not this will be effective. But I think this is highlighting that there were a lot of concerns with just the fundamental international tax system that we have, that countries still have, and that they're trying to address. And I think this actually builds on what we were talking about, about the history of how we got here, which is that, I think there are some legitimate concerns that the digital economy debate highlights, which is that we have an international tax system that was designed in the early 20th century, and that relies on physical presence, that relies on concepts that were created by the U.K. and the U.S., and that were helpful for certain types of countries, and not as helpful for other countries. And I think the digital economy has — whatever that means — has actually sort of accelerated the awareness that maybe that doesn't work for the economy that we're sort of moving into. And so I think that there might have been that awareness that happened while the BEPS project was going on. So I don't know that I'd say that it's failed. I think there's just been a realization that maybe this is a bigger challenge than what was originally set out in the BEPS action plan.

Will Morris: Yeah, I'd agree with that. I mean, I'd put a couple of those things in a slightly different way. The first is that the BEPS project, by design, and you know, maybe this is right, maybe this is wrong, but by design, steered away from the most difficult question of all, which is really, essentially, do we want to change the rules on allocation between residence countries and source countries? And now redefine to residence countries and destination countries, which I think is slightly different, but that's where the argument has gone. And the answer to that was: ‘No, we don't want to talk about that. We have a number of specific issues which we've identified, some of them arising from the cases which had already started to pop up in the newspapers post the financial crisis, and we'll deal with some of those.’ You know, I mean, there had been ongoing work at the OECD for a long time on the taxation of intellectual property, obviously, you know, mostly in the transfer pricing context, but also other elements around that. And the BEPS project was in a sense designed at sort of pinpoint issues which had been seen to rise. Now that's not to say that as the BEPS project then started, it didn't grow — it did. But it was based on a number of things which had gotten people's attention. In  the lead-up to whenever it was — November of 2012, which was essentially when the project started, when a couple finance ministers wrote a letter to the G-20, asking them to ask the OECD to look at this. And clearly, digital was one of the issues which started that off. Was is digital as such? I mean, obviously, it was focused, at least at that point, on the tech sector. But was that a question about intellectual property? Was that a question about transfer pricing? Was it a question about — who knows? And, you know, I mean, the other thing is that — did it succeed? Did it fail? I think it did what it had to do, which was to balance out the interests in that context, which were existing. And that's why you had this slightly strange pairing leading the Task Force on the Digital Economy, of the U.S. on the one hand and France on the other. And it wasn't exactly that they fought themselves to a standstill, but there were such differing views in that context that it was always going to be hard to come up with a set of solutions. So I think the analysis that the Task Force on the Digital Economy did leading up to the 2015 report was entirely appropriate. But it was always clear, I think, that that was not going to be the end of the story. In other areas of BEPS — this is where it all gets a bit mixed up. In other areas of BEPS, as Lily said, it's very hard to tell what has happened in part because BEPS is, in many real ways, still being implemented. So to say that it's failed before it's been implemented seems to me to be either somewhat defeatist or somewhat disingenuous. And, you know, I think, a lot more of BEPS to work out, and the effects are actually quite significant already, I think. I mean, I think, if you look at — I'm assuming that most of you are advisers rather than in-house folks. But, you know, if you talk to your clients. Clearly, their appetite for tax planning — cross-border tax planning — has quite dramatically altered in the past 10 years. And that was part of the effect that BEPS was meant to have. Even before the rules came into effect, it was meant to have a behavioral effect as well. And certainly if you look at things like the anti-hybrid rules in particular, which obviously are coming into effect in Europe — which we got, to some people's surprise, in tax reform as well — those have had an effect on hybrid planning, absolutely no doubt about that. As people begin to think about how the MLI is going to work out, and you know, again, remember the MLI really isn't effective yet. But if you look at that. I mean, if you look with a lawyer's eye at that general antiavoidance rule, the principal purpose test — that'll give you real pause for thought in using strings of treaties for tax planning. So again, you know, I think that actually BEPS has — is in the process of having significant effect but the political narrative here is moving at a different speed and in a different way. And it is still driven by antiavoidance. And that's an important thing to bear in mind as we come to talk about the digital stuff.

Lilian Faulhaber: And I'd also point out that BEPS created the groundwork for the work that's being done right now. So this might transition us to the next discussion. But the Task Force on the Digital Economy was necessary to sort of be created in BEPS and to come out with the reports it came out with, because if you look at the reports that came out with the interim report, the later report, they build on each other and they set the groundwork for what's being discussed now and what's interesting is they actually start to discuss some of the unilateral proposals that the discussions now are responding to. And so if you look at what was created with action one, it may not in two years have solved all the problems, but it started the discussion and it sort of created the context for the discussion that's being had now and so they're not starting from scratch, they're actually building on the two years of work that was done by that task force. Now, as we'll discuss, we now have a lot more countries who are part of that discussion who are sitting around the table. But they're all responding to what the task force came up with and sort of the idea that the digital economy is not ring fenced and the idea that there are certain interim measures which are not preferred and that the task force doesn't actually want to have end up as the ultimate solutions. I think that's helpful to remember in the context when we talk about what's going to happen sort of in the current discussions.

David Stewart: And as we're about to move on in this discussion, I'll point the audience to two microphones, one on each side of the room. If you have a question at any time, stand up and we will recognize you at the next break. Let's move on to the current proposals in front of the OECD Task Force on the Digital Economy. What solutions are they looking at?

Lilian Faulhaber: So — so the Task Force on the Digital Economy is — issued a consultation document several months ago and it had a public consultation and it laid out what it referred to as two different pillars. And you can think of pillar 1 as a little bit choose your own adventure. There was sort of the option of three different options within pillar one. And then pillar two had two proposals, but the idea was that the two proposals would work together. And so pillar one was focused on nexus and allocation, so these are the difficult issues that, as Will pointed out, the BEPS project really didn't want to address. And this is really fundamentally the question of who gets to tax? Are we changing the previously existing source versus residence divide? And are we coming up with a different basis to tax? And are we also coming up — once we do that — with a different way of determining the amount that these different countries get to tax? And so there are three different options in pillar one. The first one is the user contribution proposal. And the idea here is that there's a focus — no longer on the source of income or the residence of the taxpayer, but instead on the — where the users are and the contribution that the users are making. We can discuss sort of what this means and what — how users relate to destination, but this is focusing on the idea that in the digital economy, at least some countries think that one of the fundamental differences between the companies that we're talking about now and more traditional companies is that they're able to get value from their users even if the users are not sort of traditionally viewed as consumers. The second proposal is the marketing intangibles proposal. This is focusing on the location of marketing intangibles and this is seen in some ways — I actually get a lot of questions about what marketing intangibles are. If you look at the public consultation document — it has sort of a footnote that just says ‘marketing intangibles are what marketing intangibles are for transfer pricing purposes.’ But that doesn't actually address the issue. This seems to be an effort to be focusing on consumers, but it's focusing on the location of marketing intangibles as a way to get at that. There are debates about whether or not users and the user contribution model and the marketing intangibles model are actually focusing on the same thing or on different things. I think there are — you can read them differently to think of them as two separate proposals or sort of different ways of looking at the same shift toward destination. The third one is the significant economic presence proposal. This builds on proposals that were made in the European Union and in some other countries. The idea that we need to move from a permanent establishment model which is based on physical presence to the idea that a permanent establishment can be based on economic or digital presence. So this is — Will and I agree that we should not just be sort of shifting Wayfair into this context, but I will say this is — the concept is similar to the South Dakota rule that was at question in Wayfair, just the idea that economic presence could itself create something akin to a physical presence even without a physical location. So those are all the options in pillar one. Pillar two, interestingly, will seem similar to U.S. tax lawyers who have been following tax reform — in that pillar two, it’s called the global anti-base-erosion proposal. I think it's still called the GLOBE?

David Stewart: The GLOBE!

Lilian Faulhaber: Yes, they've managed to create an acronym from global anti-base-erosion proposal that spells GLOBE. And that has two parts that are supposed to go together. And I think you can think of the first part as a GILTI and the second part as a BEAT. And so the first part is an income inclusion rule. It's a minimum tax essentially for income earned possibly by subsidiaries. Maybe it will have a 10% rule similar to the GILTI, maybe it will not, but the concept is similar to the GILTI in that it's a minimum tax where there's income inclusion. And the second rule is attacks on base-eroding payments, which is similar to the BEAT in the sense that it applies to eroding payments being made out of the jurisdiction. So that's what's being discussed. The OECD has stated that these are being discussed without prejudice. The idea is that there's not sort of a thumb on the scale for any one of these and that’s sort of the background. Do you wanna add to that with —

Will Morris: Sure, so, I mean, let me start with that, with your last point first. I guess unlike BEPS, or at least unlike the story of BEPS, and so much of this is perception which has become reality. That's the world we live in. So much of BEPS, the BEPS story, was about untaxed income. It was about double nontaxation. It was essentially about pots of untaxed gold into which lucky countries could dip their hand and pull something out and nobody would be hurt — other than the untaxed pot of gold. And that was the story which prevailed during BEPS. And again, there was obviously a kernel of truth about untaxed income at the heart of it. But that was what carried countries through, and what enabled them in many cases to reach consensus because no government was being harmed. This is a different story. This is about reallocating taxing rights. And it's not completely a zero-sum game. I can, and do, occasionally pitch you a story where, because it increases stability, it increases cross-border trade and investment, that actually economies grow and therefore it isn't a totally a zero-sum game. But it can be viewed as a zero-sum game. So if you have country X over here gets more, then country Y is over here is gonna get less. And that makes it into a much more difficult conversation at a governmental level. And so what we have is — and this goes without prejudice point — is at least four or five different sets of interests, governmental interests, at work in this project. And in order to pull it together and to move it forward, hopefully to a point where it reaches consensus, at the moment, everybody gets to put in their favored idea, even though they may loathe all the other ideas. They get to put in their favored idea and that moves forward in the project. So, to call out some names, the U.K. has been very central in the active user participation idea. They've been thinking about it for a while. Obviously, it became then the basis of the European digital services tax — a number of the European proposals, both the DST and significant digital presence. But it — essentially, as Lily said — it's this idea that the users in a country, when they interact with the algorithm, effectively with the platform, with the marketplace, are creating value. Now, the U.K. have put an interesting twist on that by saying, ‘Well, that's still on the supply side though. That's not on the demand side.’ And you think, ‘What are they talking about?’ And what they're really talking about is — what this means is that, you know, just an ordinary exporter — say, a British exporter, for example — but not a digital exporter, who exports something to somebody who buys it in a different country — well, that's a demand element, OK? That's not a supply element. So you begin to see sort of the self-interest which works its way in there. And again, that's not to say that there isn't something interesting to be asked about how it is that users interacting on a platform might create value and obviously be driving advertising value, for example. So there's an interesting point there — as a sort of stand-alone self-sustaining system, that doesn't quite do it for me. Marketing intangibles, this is an interesting one. Because marketing intangibles, I think it's becoming increasingly clear, is a bright shiny label which has been put on the front of something which is really about how can we allocate more income to a destination country? And the details below that I think are still very unclear. Are we just talking about just residual profit? Are we talking about, you know, the profit above the routine allocations once you've done those? Are we talking about systemwide profit? Are we talking about doing this on a purely formulaic basis? Are we gonna try and do this under, you know, normal transfer pricing rules, normal transfer pricing rules? Is this some type of a profit split? Oh my gosh, what are we gonna do? And that's exactly what they're talking about at the moment. This may have started as a pure marketing intangibles idea. You have marketing intangibles over here, you have production intangibles over here, well, at least, we'll be able to divide those upright. Well again, for those of you with memories back to pre-197, maybe, maybe not. You know, how do we attribute value to those things? How do we deal with things like useful lives, what about depreciation, all that stuff. So, none of this is simple, to be clear. But I do think that marketing intangibles is probably slipping towards something which might better be called market intangibles, which is the market itself is worth something and therefore, we're going to allocate more to it. And then there's the significant economic presence idea. Now, at a very basic level, if this is going to work — I think most people agree on this — if this is going to work, you are, in the end, going to have go into the treaties and change them. You can't simply just sort of wave a wand over something and say, ‘Well, the attribution rules have changed. There we are. Don't need to worry about that, and don't worry about nexus either.’ I think you need to go back in and change the nexus rules. And obviously, what the significant economic presence test — the first part of it gets to, is OK, how do I change nexus? How do I design a provision which allows me essentially to say, ‘Yes, that level of activity gives me the right to tax under a treaty’? And, you know, the significant economic presence test does, at least in the Indian version of it — and India has a domestic version of it, which doesn't override treaties, not yet anyway. And, you know, that proposal, which is part of the G-24, which is a group — I had to look it up myself — which is part of a group of large developing — really developed/developing countries — have put forward this idea. Part one of it says, essentially, if you have revenue in a country — and this is sort of the Wayfair gloss, if you will. If you have revenue in a country and minimal digital connection, which, if you follow down the Wayfair route, could be a cookie — if you look at the . . . what they're saying, you know, it's interaction on a website — then that gives you a right to tax. Of course, the interesting important question is still then, OK, what do I attribute to it? And what they say after that is — and this is where Lily was talking about sort of — the links with the European proposal and the common corporate consolidated tax base, or CCCTB, they would use formula reapportionment. And we've seen how well that's worked in the States. So who knows exactly how this would work in the SEP? And then on the other side, yeah, you have pillar two, which has a sort of 1A, a 2A, and a 2B. And again, in that context, this is where the antiavoidance narrative comes back in. Because this is the bit which is being called BEPS 2.0 and the unfinished business that we need to deal with. And you do, at that point, want to stick your hand up and say, ‘Is there any data on that?’ Well, that's like asking a rude question in the middle of something where you're not meant to ask rude questions. Is there any data on that? No, not really. But is there a perception that something's wrong? Yes, there's a strong perception that something's wrong, and it's this antiavoidance narrative which carries it forward. Now, you know, obviously, as Lily said, we have our own GILTI. And this obviously has encouraged other countries who think a min tax would be a great idea. There are twists on it, to be sure. And, you know, going back to arguments that I dealt with 20 odd years ago at the Treasury involving, you know, should we be the world's tax policeman or not. You know, some of the issues around, OK, well, would we calculate this minimum tax on a country-by-country basis or on an aggregate basis, goes to your theory of the case. If you are protecting your own tax base, essentially you’d say, ‘Well, I’ll do it on an aggregate basis.’ But if you're protecting everybody else's tax base, you'll do it on a country-by-country basis. And, you know, you may want to think about that. There's a mathematical relationship between the two. And then this other thing, the denial of deductions which sort of cuts across the first one in a way. And I think a number of people had assumed, at least in the — to start off with, was only going to apply if the country to which you were making a payment hadn't adopted the first min tax rule. It now looks like we might get both. In fact, it looks like we're probably going to get bits of all of five of them. But maybe I should stop there.

David Stewart: Let's move on to — countries are not waiting for the OECD to finish its work. They are moving ahead. You have proposals in France, I believe Austria has one. Many are moving on with these digital services tax concepts. They're all a little bit different. What does that do to this whole process? Does this undermine the chance of consensus? Or does it push and put more pressure on the OECD to find a solution?

Lilian Faulhaber: I would argue that actually the unilateral measures that were proposed and multilateral, if you look at the EU measures that were proposed, actually forced a lot of countries to the table that might not otherwise have been having this conversation right now. So I think to follow up on what Will has said about the fact that we're still waiting for BEPS implementation. I think had there not been the threats of a lot of these unilateral proposals, you would have had countries saying we don't wanna discuss digital taxation for five years or however many years until we see if BEPS has solved this. And I think that option was taken away from them when the European Union proposed digital tax solutions, when you had a lot of individual countries even in 2014 and 2015 proposing things like diverted profits taxes and multinational antiavoidance laws. Those didn't explicitly target the digital economy and yet they were sort of a flag being thrown up by these countries saying, ‘We want to be able to tax income that otherwise wouldn't have been our income.’ I mean, the diverted profits tax essentially is saying, ‘This is income that should be ours — we think. We've decided to write a rule sort of imposing tax on that.’ And I think the fact that countries were doing this so early explains why we're having this conversation only a few years after BEPS instead of five or ten years after BEPS. That said, you know, I think the question with this is whether or not the countries are all going to wait or how this is going to interact as the discussion goes on. I think the OECD has been very conscious that this needs to be a fast discussion. They are promising consensus in 2020. We're about to discuss our thoughts on that, but that also is an acknowledgement that there are a lot of countries that are sort of chomping at the bit with their own proposals. And that if the OECD were just taking five years to discuss this, and this is a fundamental change to the international tax system. So it may be something that you actually would prefer to have discussed for five years. But if they were to take that long, these countries might just go forward and implement their own measures. And these countries include the EU, right? The EU has been very explicit and I think there's an interesting political story there of what the EU sees value to it as an institution in targeting U.S. companies and showing its value to the voters and the citizens of the individual member states of the European Union. And I think that the EU has a clear interest in sort of targeting the digital economy and sort of showing its value. And so the EU is sort of pushing forward the idea that if nothing is agreed, the EU will be out there with its own digital tax proposal very quickly.

Will Morris: I think that's right, I'm not gonna repeat all of that. But there's one thing which I think is worth bearing in mind, which is that I would love to believe that a comprehensive OECD agreement would lead to no further digital services taxes and the repeal of those which are now in place. Sadly, I don't think that's gonna happen. I think that the impetus which has carried France, the U.K., Spain, Italy, Austria forward already still seems to be spreading despite the fact that the OECD discussion now clearly is picking up speed and has a relatively firm end date, and the possibility of achieving something. So just in the past couple of weeks, you seen the Czech Republic come forward with an idea of DST. You've heard Poland talk about it. There will come a point at which there is a critical mass of European countries who have this. And the fact that it failed at the EU level will be totally irrelevant. Even more importantly than that, however, there will come a point in which countries outside of Europe say, ‘Hey, these guys are involved in those OECD discussion, these guys are leading members of the inclusive framework and they're doing this! So why the heck aren't we doing it?’ So, you know, I think that we're on a path to more and more DSTs, however, successfully the OECD conversation is.

David Stewart: All right so we're nearly out of time, but I just wanna end on: what do you see as the prospects for achieving consensus at the OECD?

Will Morris: OK, well, I'm gonna turn that question around. So, for me it is incredibly desirable that we reach consensus at the OECD because I do believe that the only other option is lots and lots of countries doing lots and lots of different things in lots and lots of different ways. This is where it comes down to, you know, the clichés about Pandora's box or the genie in the bottle or all the rest of those things. But, you know, all of these issues are well and truly out there at this point and countries are thinking very hard about them. They've told themselves stories about revenue being lost, they've told themselves stories about how they're not getting what they deserve, and they will follow through on that. So, I think that to try to reach an international consensus, hopefully with some depth to it so that there is enough to — to hold countries to a common set of rules as opposed to a common aspiration, which is what happened during BEPS sometimes. But, you know, enough of that. And also, strong dispute resolution procedures. You know, if they're changing a treaty, well, let's change the back end of the treaty as well. Let's look at 24 and 25 as well as 5, 7, and 9. Let's do that, let's try to move towards a situation where you do have binding arbitration in most cases. Then if you can do all of those things, you are in a much better situation even if you're paying more tax. You're in a much better situation than you would be if the whole thing collapsed on its face and countries said, ‘Ah, we knew it was never gonna work anyway, so we're gonna go and do something else.’

Lilian Faulhaber: I will point out that one concern with consensus is that one way of reaching consensus is to sort of choose all of the options. So choose a little different parts of pillar one and pillar two. And I think the danger with that is that might appear to be consensus. But, as Will pointed out, it's not clear how all of these different proposals would fit together. And it's also not clear how they would fit together if you also have unilateral proposals on top of them. And so if you look at the ways that the marketing intangibles proposal, for example, is being discussed, if this is a residual profits allocation question and then separately there's an inclusion rule that everybody else is applying and that inclusion rule applies only to a portion of the income above, for example, returns from tangible assets. Suddenly you're slicing and dicing income into very small amounts and you're having to identify all kinds of returns that this is just a sort of whole new world, and it's creating greater complexity. So I think what we don't want is consensus for consensus's sake, where everybody wins, but actually there's complexity sort of layered on top of complexity. I do think that, and from a positive perspective, I think this could be a really exciting moment when this is an opportunity to be reassessing the international tax system. And I hope that that's where these conversations go, that countries are using this as an opportunity to look at a system that has been around for about 100 years and that has — was designed for one type of economy and our economy has evolved in certain important ways. And I think that if countries used this as an opportunity to really respond to that and come up with a new but manageable and administrable model, that will be an exciting moment. I think if instead we're just reaching consensus so that we can say in 2020 we reached agreement, I think that might create concerns.

David Stewart: Lily, Will, this has been fascinating. Thank you for being here.

Will Morris: You're very welcome.

David Stewart: Thank you all.

Again, I'd like to thank my guests Lilian Faulhaber and Will Morris for joining me. And now, Coming Attractions. Each week we preview commentary that will be appearing in the next issue of the Tax Notes magazines. We're joined by executive editor for commentary, Jasper Smith. Jasper, what will you have for us?

Jasper Smith: In Tax Notes, Ramon Camacho and Priya White examine how taxpayers are affected by the taxes on GILTI and FDII. Also, Jasper Cummings explains how the national taxpayer advocate could use FOIA to make public program manager technical advice.

In State Tax Notes, Walter Hellerstein examines a recent article by Alysse McLoughlin and Kathleen Quinn and seeks to clear up the confusion surrounding the Supreme Court decision in International Harvester, while Brett Carter outlines the history of the taxation of software in Tennessee, noting the precedent of the Commerce Union decision and how the Department of Revenue may be taking a different approach. 

And in Tax Notes International, Oliver Hoor examines Luxembourg's amended definition of permanent establishment and considers whether it really represents a change in the tax law. And Frans Vanistendael considers the upcoming elections for the European Parliament and their potential impact on EU tax policy.

Again, we also want to remind listeners of the approaching June 30th deadline for our student writing competition. For more information, visit

David Stewart: You can read all that and our extensive coverage of the American Bar Association Tax Section meeting in the May 20th editions of Tax Notes, State Tax Notes, and Tax Notes International. That's it for this week. You can follow me on Twitter @TaxStew, that’s S-T-E-W.

If you have any comments, questions, or suggestions for a future episode, you can email us at And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.

Tax Analysts Inc. does not provide tax advice or tax preparation services. The information you have seen and heard today represents the views of the presenters, which may not be the same as those of Tax Analysts Inc. It may include information obtained from third parties, and Tax Analysts Inc. makes no warranties or representations of any kind, and is not responsible for any inaccuracies. Nothing in the podcast constitutes legal, accounting, or tax advice. The tax laws change frequently, and neither Tax Analysts Inc. nor the presenters, can guarantee that any information seen or heard is accurate. Also, due to changing tax laws, any information broadcast or downloaded after its original air date may no longer represent the current views of the presenters. If you have any specific questions about any legal or tax matter, you should always consult with your attorney or tax professional. 

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