The global tax policy process undertaken by the inclusive OECD / G20 BEPS framework took a big step forward on July 1, 2021, when the group issued a statement, to which 130 of the 139 members subscribed, outlining the revised features. of the first pillar. and the second pillar plans which have been under development for two and a half years. Two more members have since registered, bringing the total number of supporters to 132 jurisdictions. The remaining seven holdouts – Ireland, Hungary, Estonia, Kenya, Barbados, Nigeria and Sri Lanka – are not political or economic giants, but three of them are member states of the ‘EU, which raises the question of the ability of the EU to implement the agreed proposals on time.
In an interview with the International Fiscal Association, Pascal Saint-Amans, director of the OECD Center for Tax Policy and Administration, commended the United States for moving the process forward by presenting a revised proposal in April. 2021 on the first pillar, which deals with the reallocation of taxing rights on certain profits of certain multinational enterprises (MNEs). Calling the previous debate on the scope of the first pillar a “nightmare,” he said the success of the US proposal was due to limiting the scope to “globalization winners” in a “non-discriminatory” manner.
More specifically, the agreement provides that the first pillar will apply to multinational companies with an annual turnover (i.e. gross turnover) of at least 20 billion euros (23 , $ 8 billion) globally and a profit margin of at least 10% (presumably calculated on the basis of profit before tax on gross income). A portion of the aggregate profits of a multinational enterprise within the scope, in the order of 20-30% of their profits exceeding 10%, will be distributed for tax purposes among the countries from which the multinational enterprise derives at least 1 million euros ($ 1.19 million) in turnover (or, in the case of countries with a GDP of less than 40 billion euros ($ 47.5 billion), at least 250,000 euros ($ 297,000) in sales). The amounts allocated are referred to as “Amount A”.
In exchange for the new A-Amount tax link and profit distribution rules, the inclusive framework countries agreed to repeal existing digital service taxes (DSTs) and “other relevant similar measures”. It is generally believed that they also agreed not to adopt new ones, although this was not stated in the July 1 document. Currently, the European Commission says it will proceed with the implementation of a new ‘digital levy’ on the income of some highly digitized multinational companies, which raises the question of whether the agreement to ‘remove’ DST and other relevant similar measures include a commitment not to introduce further unilateral measures in the future.
Earlier this year, the Office of the United States Trade Representative (USTR) took action against countries with DSTs under Section 301 of the Commerce Act, arguing that DSTs are “unreasonable or discriminatory and hinder or restrict US trade. ” The reasoning behind this conclusion includes the following:
- DSTs are intended to, and by their structure and operation, discriminate against US digital businesses, particularly on the basis of the selection of services covered and revenue thresholds.
- The application of DST to turnover rather than net income contravenes current tax principles and is particularly burdensome for the American companies concerned.
- The application of DST to income not linked to a physical presence in the tax jurisdiction contravenes applicable international tax principles.
- Applying DST to a small group of companies contravenes international tax principles that advise against selectively targeting these groups for special and adverse tax treatment.
These findings were made by the USTR at the end of the Trump administration in mid-January 2021. However, in mid-March 2021, the newly appointed USTR, Katherine Tai, adopted the findings, and at in early June 2021, it announced the imposition of retaliatory tariffs that would be deferred pending the outcome of multilateral negotiations on pillars one and two.
U.S. Treasury Secretary Janet Yellen and other members of the Biden administration hailed the Inclusive Framework’s near-total agreement on the two pillars as a triumph of economic diplomacy. The USTR, however, has so far said nothing publicly about the deal’s effect on deferred trade sanctions against countries with DST. Presumably, the commitment to repeal existing DSTs will be sufficient reason for the USTR to abandon the deferred sanctions.
The more interesting question is whether the new link and the first pillar A-amount reallocation rules will be acceptable to the USTR. The fact that the new rules are seen as a replacement for DST and other relevant similar measures suggests that the reallocation of first pillar taxing rights could have a similar effect to these unilateral measures. If one examines the reasons given by the USTR for concluding that DSTs violate Section 301, one finds a significant degree of applicability to the new first pillar linkage and profit sharing system.
Although it is not yet clear exactly how the criteria for defining MNEs in the scope will be applied, it is generally accepted that their number will be limited to around 100, the majority of which will be based in the States. United States, and those US-based MNEs will be the source of the majority of the reallocated revenue. The new rules create taxing rights (i.e. a link) on the basis of gross income and do not require any physical presence in the taxing jurisdiction. In all of these respects, the new rules violate international tax principles and appear to be disproportionately prejudicial to US-based multinationals.
Many commentators and some representatives of foreign governments have noted that the approval by the US Congress of the rules in pillars one and two is far from certain. Maybe the USTR will have reservations on the first pillar scheme as well.
This column does not necessarily reflect the opinion of the Bureau of National Affairs, Inc. or its owners.
Jeff VanderWolk is a partner at Squire Patton Boggs (US) LLP. The opinions expressed are those of the author and do not necessarily reflect the views of the firm, its clients or any of its respective affiliates. This article is for general information purposes and is not intended to be and should not be construed as legal advice.
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