Age of international tax cooperation or global tax chaos? Views from the Pacific Rim Tax Conference

By Robert J. Kovacev, Steptoe and Johnson LLP                                  

Government officials, corporate tax executives, and tax professionals from around the world gathered last week at the Eighth Annual Pacific Rim Tax Conference, held in Redwood City, California. The meeting featured presentations by key OECD, UN, and other tax officials who discussed new developments in international tax and transfer pricing.

The following are some highlights from the two-day conference:

• Doug O’Donnell, Commissioner of the IRS Large Business & International Division (LB&I), said the IRS’s Industry Issue Resolution (IIR) on the research and experimentation credit had a “fantastic outcome,” but he also acknowledged that the IIR did not cover every industry. O’Donnell encouraged stakeholders with issues not addressed in the IIR to raise their concerns with the IRS. He also described LB&I’s movement toward “evidence-based” audits, which uses principles of continuous learning, data analytics, tailored treatment streams, and continual feedback. O’Donnell also praised the International Compliance Assurance Program (ICAP), a pilot program undertaken by eight countries —  Australia, Canada, Italy, Japan, the Netherlands, Spain, the UK, and the US — to jointly assess the tax and transfer pricing positions of multinational corporations.
• Michael Lennard, UN Chief of International Tax Cooperation in the Financing for Development Office, emphasized the importance of input from developing countries in formulating international tax policy and highlighted the UN’s role as a vehicle for those countries to express their views. He noted the reluctance of developing countries to agree to binding arbitration and called for greater transparency in the arbitration process and for an openness to alternatives, such as nonbinding mediation. Lennard also noted a global trend toward source taxation, predicting an eventual convergence of views between the UN and OECD on reducing or eliminating the requirement of a permanent establishment for the taxation of services.
• Jennifer Best, Director of the LB&I Treaty and Transfer Pricing Operations Practice Area, emphasized the role of data analytics in both identifying taxpayers for audit and setting IRS enforcement policy. Best also stated that the IRS is using data analysis as part of its holistic view of transfer pricing, including considering which issues the IRS should pursue in light of resource constraints.
• Grace Perez-Navarro, Deputy Director, OECD Centre for Tax Policy and Administration, discussed the OECD’s continuing work on the taxation of the digital economy in the context of unilateral proposals by the European Union and other jurisdictions. She indicated that tax reform in the United States has not slowed the momentum toward imposing some form of tax on digital companies. The concern is less about so-called “stateless income” than about a view among some countries that they are entitled to more tax from digital companies than they are able to collect under the existing tax system, she indicated. Perez-Navarro further stated that the OECD was working toward a consensus on this issue so as to avoid unilateral measures from individual countries.
• Carol Doran Klein, Vice President and International Tax Counsel at the United States Council for International Business, raised concerns about the increased willingness of some nations to press unilateral measures. Such uncoordinated action could lead to “global tax chaos,” she warned.
• Similarly, Steven Johnson, Vice President, Global Taxes, Silicon Valley Tax Directors Group, expressed concern that each tax authority would seek a bigger slice of the pie for itself, forcing taxpayers to deal with multiple tax claims over the same revenues.
• Many speakers noted the great uncertainty surrounding the implementation of tax reform in the international tax arena. Robert Stack, Managing Director at Deloitte Tax (and former Deputy Assistant Secretary for International Tax Affairs at Treasury), noted the challenges facing policymakers charged with issuing guidance to address that uncertainty and described the need for “ruthless prioritization” to triage issues.
• Transparency was also a theme at the conference, particularly concerning EU proposals to publicly disclose data from country-by-country (CBC) reports. Perez-Navarro noted that the OECD’s goal for CBC reporting was to provide a standardized basis of information for tax authorities, not to disclose CBC reports to the public. She emphasized that tax authorities are supposed to use CBC reports for high-level risk analysis, not as a substitute for transfer pricing analysis or as a basis for formulary apportionment.

The conference was sponsored by the International Fiscal Association, the Silicon Valley Tax Directors Group, Stanford Law School, the Silicon Valley chapter of the Tax Executives Institute, the United States Counsel for International Business, and the San Francisco Foreign Tax Club.

This article contains the personal views of the author and does not necessarily represent the views of Steptoe & Johnson.

 

—Robert J. Kovacev is a partner in the Washington and San Francisco offices of Steptoe & Johnson LLP, with a focus on tax controversy, international tax, and the taxation of AI and robotics. Before joining Steptoe, Kovacev was a Senior Litigation Counsel at the US Department of Justice, Tax Division.