No area of tax has escaped the influence of the global pandemic, and that certainly includes international tax, the theme of this issue of Tax Executive. But what exactly has the impact of COVID-19 been, and what is likely to be its impact throughout 2021? To take a deeper dive into this and other issues in international tax, we assembled a roundtable of international tax experts, including Doug Poms, principal in the international tax practice of KPMG’s Washington National Tax office; Jason Weinstein, director, tax planning and policy, at Amazon; and Joan Arnold, partner at Troutman Pepper Hamilton Sanders LLP and chair of its tax and benefits practice. Tax Executive’s senior editor, Michael Levin-Epstein, moderated the discussion.
Michael Levin-Epstein: What are the most important issues from your perspective in the international tax space?
Doug Poms: I see that the top priority in international tax policy for the Biden administration is to determine what recommendations would be made for changing or updating the international tax rules, and particularly the new rules that were brought in with the Tax Cuts and Jobs Act [TCJA] just over three years ago, and whether to propose statutory changes to those rules, through the Treasury Green Book or otherwise, because of course Congress has to enact them. Particularly, there’s been a lot of talk about the GILTI [global intangible low-taxed income] regime and the design of the GILTI regime, whether to change it to a country-by-country approach, whether to raise the rate, and whether to allow a deduction for ten percent of QBAI [qualified business asset investment], or perhaps reduce it. It has been noted by commentators, including new personnel and leadership at Treasury, that QBAI can result in an incentive to move tangible assets offshore, and that is problematic from a policy standpoint. So, I think we’ll see proposals to address those concerns as well as concerns with the BEAT [base-erosion and anti-abuse tax] and the FDII [foreign-derived intangible income] regimes. There’ll be attention to that at the legislative level and then to the extent things are not able to be handled at the legislative level, perhaps certain limited proposed changes at the regulatory level. The other big effort this year, of course, is the OECD [Organisation for Economic Co-operation and Development] work, and we know Secretary [Janet] Yellen has expressed that Treasury will be engaged in those discussions and is supportive of those discussions. So, the OECD has a goal to come to a consensus on Pillar One and Pillar Two by the middle of this year. That’s ambitious, but certainly there will be a lot of effort put into that work by the Biden Treasury folks, and so that would be another priority this year. I’ll leave it there.
Jason Weinstein: I think Doug certainly covered the the two big issues. Those would have been the two top of my list with a pretty strong emphasis as well. I think that maybe following on Doug’s thoughts on OECD actions is seeing what’s happening unilaterally in advance of or instead of OECD consensus, because we’re certainly seeing countries move, be it with digital services taxes or other unilateral measures or rules more along the lines of GILTI- or BEAT-type regimes than strictly BEPS 1.0. Those unilateral movements, as well, are another thing that we’re certainly looking at on the international stage.
Joan Arnold: From my perspective, I think that in 2021 it is going to be incredibly interesting to see how the United States starts to fit or not fit with the rest of the world. Jason mentioned the digital taxes. I think it’s a whole lot more than that. We are finally going to have to decide if we are going to play in the sandbox with the rest of the countries around the world on how to allocate tax globally for our multinational corporations. To the public’s view, we have been relatively insular in the past four years and haven’t seemed to be engaged in a way that would make a meaningful change to our tax system. I do think that we’re expecting to see a public engagement at a level that we haven’t had in the past. It makes it a very uncertain time for multinationals who are attempting to do planning in the international arena. We still have the unfinished rules from the 2017 act layered on top of that. We have the potential for significant changes in how those rules apply if the Biden administration’s proposals are adopted. And then you put on top of all of that the OECD’s work and how we will interact with them. So, unfortunately, I think it’s a time period of significant uncertainty for taxpayers and that, to me, is the most important element for the taxpayers to understand in the international arena this year.
Levin-Epstein: How do you think the pandemic changed the international tax space?
Poms: The effects of the pandemic I would characterize as twofold: one is just some of the practical issues that come up from the fact that individuals are being discouraged from traveling in many cases. Many people are working from home, many people are working from different locations where they want to be with their loved ones or maybe take care of loved ones, and therefore that can trigger some tax implications. For instance, if you have individuals that are conducting business activities in the US that are foreign individuals, they could meet residency standards to be a bona fide resident of the United States when they otherwise would not be met, or it can trigger a US trade or business for either the individual or the company the individual works for if they’re a foreign company, so there’s a lot of inbound consequences to that scenario. And then there’s also outbound consequences for individuals that normally would work overseas and get a Section 911 exclusion. That may prove to be challenging. And some dual consolidated loss implications—all these were identified early on by Treasury, and some limited guidance was provided back last spring relative to these items. But the pandemic went on a lot longer than expected, so there’s questions about whether further relief is appropriate. The OECD also has weighed in on some of these issues because they’re global, universal issues. The other kind of big-picture implication of the pandemic is the economic effects. A number of companies depending on the industry suffered losses this past year, or just unusual financial performance. So, that also has tax implications and resulted in some of the tax relief provisions in the CARES Act and subsequent legislation, so that has had implications this year.
Weinstein: I agree again with everything Doug pointed out. I think I would add that the economic effects at the local jurisdictional plus national level, in terms of revenue, for governments has a humongous effect, I think, on tax policy. What comes to mind is recently a lot of activity at the US state level, but obviously internationally as well. I think we hear a lot of rhetoric from OECD participants that the importance of Pillar One has now increased because of the pandemic and revenue needs. I think Pillar One, that may be a little bit of misplaced hope, in that Pillar One, at least originally, was not supposed to be a gross revenue raiser as opposed to a reallocation provision. But certainly it would put wind in the sails of the countries that are market jurisdictions, as well as Pillar Two revenue on minimum tax agreements. So, I think that the effects of the pandemic in terms of revenue loss is to put more pressure on the OECD process or, again, on unilateral changes if the OECD process were to fail, or even in the interim.
Arnold: Along the lines of what Doug had been talking about, I think that what’s really interesting is that we have been working with a set of rules as to who has nexus to tax for a long period of time that were already being stressed by the change in the way businesses run their operations. The nexus to tax used to be based on—is based on—where people are performing their services, where the company is located, and over the past fifteen years, as we’ve seen the globalization of the workforce, the existing rules were already not working particularly well. But now you have a situation where the basis for the existing rules—that is, the expectation of people working and living in the same jurisdiction—is simply not true. And trying to figure out how the jurisdictions are going to deal with that, be it international or be it state and local, which is actually where we’re seeing it very significantly, is something that we’re going to have to deal with. I think that’s going to be a challenge. I also think we lost some forward momentum because of the inability to have in-person meetings. The OECD did yeoman’s work to get out their consultancy papers, but it just seems to me that the inability to debate them and digest them in person causes less robust production. But perhaps the fact that the Biden administration appears to have a different approach to engaging with the OECD will make up for that.
The Biden Administration
Levin-Epstein: Could you talk a little bit more about the changes that the Biden administration might make in terms of its attitude toward OECD, its attitude toward digital taxes, and its attitude toward the timetable for Pillar One and Pillar Two?
Arnold: I think you have to focus on what the prior administration’s approach to the OECD work appears to have been. While Treasury was engaged in the OECD work—and Doug can certainly speak to this—to decide what we would bring to the table, the US at one point in time very abruptly sent in a one-page letter that said that, “Well, we don’t really like Pillar One, and we think you should make it optional.” That was a pretty stunning event to have occurred, because in my mind it was a significant factor to deal with and derailed conversations. In my mind, it evidenced a lack of commitment to really join in the globalization of corporate tax. From what I hear from Secretary Yellen and from people at Treasury, I’m not suggesting that I think that tomorrow we’re going to accept Pillar One. I’ve no idea where we’ll get to on it. But I do think that we will have a more productive exchange and interaction with the OECD. And Doug might have comments on that.
Poms: Yes, Joan. I think to your point about the last administration wanting to make Pillar One optional, or maybe presented as that it should be a safe harbor, I think the concern in the last administration was, “Well, the United States doesn’t want to sign up to something where it has to be approved legislatively.” The last administration assessed what is the likelihood that Congress would agree to these changes made by Pillar One, however they came out, and if the United States was committed to make those changes, Treasury felt awkward to make that commitment when it was really Congress that needed to enact those rules. The new administration hasn’t specifically addressed that point, but maybe they’re more optimistic that what’s agreed to in Pillar One could possibly be something that Congress would enact and are operating under that hope and assumption in negotiating with more robust involvement.
Arnold: I didn’t mean to say that I thought that we could get it through. I just meant to say that I think that there’s a more embracing atmosphere.
Weinstein: Certainly, I completely agree, Joan, from the perspective of just reading the same public comments that you all are reading. There’s a more embracing attitude. I will say that the public comments that I’ve seen, at least particularly Secretary Yellen’s testimony at her confirmation hearings, really focused on Pillar Two. I think it seems that there seems to be a connection between that focus on Pillar Two and the political goals of changes to GILTI, having kind of a min tax that makes GILTI competitive with the rest of the world. In that sense, while I completely agree that I think the administration is coming to it with potentially a new open mind, the public rhetoric has been along the same lines of Pillar Two. We see potential for a deal, and I haven’t read anything publicly or heard anything otherwise that there’s a lot of room on Pillar One. I think we’re still in wait-and-see on Pillar One, which makes me echo Doug’s point, which is the administration has changed, and maybe they’ll bring a different attitude, but Congress—obviously, the Senate changed hands, as we all know, and that’s a razor-thin margin. Implementation in the United States is . . . thinking about not just the laws that need to be passed, but I would expect treaty changes to be part of implementation, the difficulty of that is hard to wrap your head around.
Poms: One observation might be that certain strands that have carried through, even going back to the Obama administration, regarding which there has been continuity at least—for instance, the view of not going with a digital-only solution goes back to the Obama administration, was also a hallmark in the Trump administration, and it is expected, though yet to be seen, that the Biden administration will continue to be of that view. That of course is a point of contention still with a lot of the other jurisdictions. So, it will be interesting to see what happens there. Jason, to your point about Secretary Yellen kind of focusing on Pillar Two, the big issue there is what’s going to happen with GILTI. In the last administration, it was a big deal to have a GILTI grandfather, and now there’s talks of this administration making changes to GILTI. Are those changes going to be in tandem with what’s happening at the OECD? Some of the changes directionally look to be similar, like a country-by-country-type approach could be the way that both things happen, legislatively here perhaps, and also at the OECD, though that’s not clear. But then there’s QBAI, or something like QBAI that represents a return in tangible assets. That’s something that’s part of the Pillar Two approach that is being proposed to be rethought by the Biden administration as a design feature for GILTI. So that’ll be interesting to see how that plays out.
Weinstein: Yeah. I just want to add on the difficulty of legislative and treaty fixes that would be necessary. I will say that, certainly, the hope is higher now that the maze can be navigated, and it seems like you can see a path. It just remains difficult. But I think six months ago it was even more difficult to see a path. I think we certainly have a lot of positive energy towards seeing an international, coordinated solution to both the Pillar One and Pillar Two issues.
Pillars One and Two
Levin-Epstein: Thank you. I want to go back to a point that was made earlier by Joan that there really hasn’t been much movement on Pillar One or Pillar Two. Are we going to start to see actual meetings dealing with Pillar One and Pillar Two, or at least greater movement?
Poms: Just a point of clarity—the meetings have continued, but they were virtual meetings. So, it’s not like the work has been absent, and I know Joan and Jason both know that. I think Joan’s point really is that isn’t the ideal way to reach such an important agreement. A lot of the agreements are really done on the side when you’re at the meetings and during the coffee breaks. You’re not able to do that so easily virtually, and so it really does slow up the process. I just wanted to make that point.
Weinstein: Yeah. I think the 500 pages of Blueprint that I read [laughs] are certainly proof that certainly some kind of progress has been made. But I don’t disagree with Joan and Doug. I’m certain that the political is more difficult without meeting in person.
Levin-Epstein: Do you think that there will be actual non-virtual meetings in 2021?
Arnold: I won’t choose to try and speak for the OECD. I know that certainly for other organizations, we’re still in the virtual mode, and I think that many of us will be in the virtual mode, planning for at least the first half, and maybe for longer, in 2021, for any large-scale meetings and travel. I think it might be challenging. And I didn’t mean to say that there wasn’t anything that had gone on, by any means, but like Doug said, I think it’s hard to do something that is as large in scope as what OECD is trying to do and do it all virtually, when you just can’t have the same type of conversations. So Doug, I don’t know. Do you think they’re going to meet in person? Or do you think that we’ve just gotten so much better with virtual that it’s become less of an issue?
Poms: I think that’s hard to predict because there’s so many unknown variables with what the success of the vaccines are going to be, the new variants and such, that makes it really hard to predict when big organizations like the OECD would be willing to host in-person meetings. I think they’ve articulated—I’m not sure—but I think I saw that they’re going to try to transition back to in-person meetings later in the year. Certainly, I think, to Joan’s point, that’s not going to happen right away for sure. And the goal was to reach some kind of consensus by midyear, so I don’t think we’re going to see any in-person meetings before then.
Weinstein: Maybe an interesting question for Doug is, Does it matter if they meet in person?
Poms: Yes. Good question.
Weinstein: If the new administration is walking away from the safe harbor and bringing a more collaborative posture to the process, will the lack of in-person meetings matter? Not having been at the OECD myself, I can’t say I know, but I would certainly hold out a strong hope that the lack of in-person meetings won’t matter. It will matter a lot more what the new administration brings in terms of negotiating posture than whether it’s on Zoom or in person.
Poms: That’s fair, Jason. I think even with the US being more engaged and open-minded to more options on consensus, there are still a number of issues that are far from being resolved, at least that’s been disclosed publicly. It’s going to be challenging, I think, to reach that consensus, the goal of consensus, by June or the middle of the year, even with the US engagement. But nonetheless, I think it’s going to help in terms of momentum and forward movement that the new administration is coming in with a mentality to really engage more and being open to options and solutions that other countries have been keener on.
Levin-Epstein: I want to go back to the digital tax issue. Could you explain where the digital tax issue stands right now? And what are the options for revising it?
Arnold: Jason, you want to start that one?
Weinstein: Oh, boy. Not really. Doug, do you want to start? [laughter]
Arnold: Maybe I can start. What Michael said was people may not understand what the digital tax is. And the digital tax, sometimes people say, “Well, it just means that you’re selling product into a country via the internet.” That’s not what the digital tax is about. The digital tax is about companies reaping economic benefit from people in a jurisdiction, but without having the traditional nexus in that jurisdiction for the country to impose a tax. So, for example, if a service reaches people in . . . I’m going to use France because they have been at the forefront of this . . . and gets information from those customers and is able to provide ads to those customers and can take that customer information and monetize it in their business, the concern has been that although the company—and it’s traditionally US companies—doesn’t have a traditional nexus in France because it doesn’t have a fixed place of business or other permanent establishment, it is nonetheless benefiting from the economics or the economy of France. And therefore, France should have a right to tax the company. Rather than trying to go through the traditional nexus test, because it wouldn’t have been complied with, the countries that have imposed digital taxes have said, “If you are benefiting from our economy by the way you are doing business, we have a right to tax you. And if we can’t get an agreement in the global community as to how to collect that tax, we will impose our own tax on that.” So, a number of jurisdictions have adopted and imposed digital taxes that are independent of their income tax. They’re not covered under most of our treaties; generally speaking, the proposed regs that have come out for foreign tax credits have said that the digital taxes would not be a creditable tax. So, we would have foreign tax credit issues there. Most of the ones that I’m aware of are being held in abeyance until we see what happens with the OECD proposals, but there are jurisdictions that are saying that if we don’t get OECD resolution and people signing up to it, then they will impose their digital taxes. Doug, do you want to add to that?
Levin-Epstein: That was a great answer.
Weinstein: Could I jump in? I totally agree with everything Joan said, but for members unfamiliar, I would want to add that while I agree that, theoretically, the taxes are an imposition of tax on operations that don’t have traditional nexus within a country, practically speaking, they’re not an either/or. Members shouldn’t think, “Oh, if I’m operating in the country and I have nexus, that somehow the digital services taxes don’t apply to me.” They are certainly operating on top of that entire system. So, theoretically, they’re created as a response to the sense that there’s this “scale without mass,” as the OECD has said, but practically speaking, DSTs are a system that operates on top of the traditional income tax system but on a gross revenue rather than net profit basis.
Arnold: Thanks. What I was alluding to, Jason, was how this arose, back when we had the BEPS project and people were identifying this as an issue and trying to figure out how to manage it. I didn’t mean to say that it was a binary approach.
Weinstein: Yeah. Yeah. No, I agree. Just for those unfamiliar. Now, for those unfamiliar, it’s also the case that most of the digital service taxes have a very high threshold of revenue or other qualifications, which has made them appear to be specifically targeted at certain companies. And the US Trade Representative has done a number of investigations under the last administration and found that a number of these taxes are, in fact, targeted at US companies and, because they’re gross revenue–based, are inconsistent with principles of international taxation. So, there are now those findings that the question is, Will they be acted upon and in what way by the new administration in terms of potential tariffs? As they’re in some ways looked at as an equivalent on a trade side, they’ve become more of a trade conversation, a trade and tariff conversation, than a pure tax conversation.
Poms: Yes, that’s a good point, Jason. That certainly was identified as a concern, that these digital service taxes unfavorably hit US multinationals versus other multinationals. Part of it is the scope, part of it is just the size of the businesses and the fact that the US has such a strong digital services presence globally.
Levin-Epstein: Could you give us a sense of how many countries have actually instituted a digital tax on US multinational companies, and how many are waiting for the OECD to act? [Editor’s note: Subsequent to the discussion, Poms provided this link to KPMG’s compilation of countries with DSTs, along with the tax rates for each: tax.kpmg.us/articles/2021/tracking-digital-services-taxes-developments.html.
Levin-Epstein: Any final thoughts?
Poms: Just a few closing items. On the legislative side, it will be interesting to see what’s proposed. But one thing we didn’t mention because it’s not just international is that the expectation is that corporate rates would go up, and that will have implications for taxpayers internationally as well, because it affects things like the incentive to shift profits offshore or invert. I think that the new administration is very aware of that. And so, in addition to some of these changes, such as those to GILTI, there’s going to be more attention perhaps paid than recently to anti-inversion rules and anti-earnings-stripping rules because there will be tax incentives, perhaps, if there are changes made in the directions we discussed, including higher rates, so those will be more pressing issues again. And then, at the OECD, we’ll just have to wait and see, but I think it is very ambitious to think that a solution can be reached by midyear, and perhaps the discussions will continue throughout the whole year, and we’ll see what happens there.
Weinstein: I would add as a final thought that I certainly am hopeful that the new administration is going to bring a more collaborative approach to the OECD and that we will find solutions. I’m hopeful that we’re able to find harmony across Pillars One and Two and see the elimination of the DSTs and other unilateral action in favor of OECD consensus. I agree with Doug that I think mid-2021 may be a really difficult timeframe and that countries probably will need to adjust their expectations to what’s realistic from a US timeframe perspective, given the new administration, but that doesn’t mean that some progress . . . and I think there’s already been some public notes that if the US administration brings a more collaborative attitude that countries are going to be more interested and more trusting in extending their rhetoric around timeframe. So, a lot to be seen this year on that front, but for now, hopeful.
Arnold: I’m going to move away from the OECD conversation for my final comments, because as Jason and Doug have said, the companies that are subject to the digital tax tend to be very large US corporations, and for those of us who are advising companies that are not engaged in the digital activities, we’re in the position of saying to clients when they say, “Well, tell me what to do,” the answer is, “I can tell you what the options will be, and I can tell you what might occur and how that might impact the decisions that you make for structuring your business and for your tax planning, but I can’t tell you with certainty what the answer will be,” because we are in a very uncertain time in terms of finalizing the rules under TCJA, although the government has done yeoman’s work to get us to a point where we can have a decent planning opportunity. But with the administration’s changes and the changes that would also be implemented depending upon what we do with OECD, the biggest challenge that I have and my clients have is lack of certainty these days and what I have referred to as the “whack-a-mole” problem, which is you can solve for one issue, but then the mole comes back up and you have to solve for a different issue, and you’re constantly trying to figure out what your best crystal ball is saying about what the tax world will look like a year from now and how you can plan for that with your clients.
Editor’s note: This roundtable was recorded in February and did not account for events that may have occurred subsequent to the recording.