by Julie Martin, MNE Tax
The US is seeking worldwide agreement on proposals that would significantly alter the international tax system, aiming to preempt a threatened EU digital services tax and bring stability to the international tax system, Treasury officials said at the 31st Annual Institute on Current Issues in International Taxation, held December 13–14 in Washington, DC.
Treasury Deputy Assistant Secretary for International Tax Policy L.G. “Chip” Harter said the US seeks to obtain a mandate from the 124-nation “Inclusive Framework on BEPS” to allow an OECD working group to develop and approve a package of international tax reform measures.
The US seeks global uptake of minimum tax rules similar to the US’s global intangible low-taxed income (GILTI) regime, Harter said. Thus, the US is calling for nations to adopt controlled foreign company (CFC) regimes where the parent jurisdiction is obligated to impose a top-up tax to the extent that foreign subsidiaries are not subject to an agreed minimum tax rate. This CFC proposal would probably be paired with additional defensive measures, Harter said.
The second component of the US proposal is for modest adjustments to the amount of income that can be allocated to market jurisdictions. These rules would not be limited to just digital business models, Harter said.
Brian H. Jenn, Deputy International Tax Counsel, (ITC), US Department of Treasury, explained during a separate conference session that different approaches are being considered for the profit allocation component of the US proposal.
Brian H. Jenn, Deputy International Tax Counsel, (ITC), US Department of Treasury, explained during a separate conference session that different approaches are being considered for the profit allocation component of the US proposal.
Jenn said that one possibility would be to consider where activities with respect marketing intangibles occur or add value. There is a reasonable case that marketing intangibles could be associated with a particular jurisdiction and that more income could then be attributed to that jurisdiction, Jenn said.
An approach could be to borrow from the UK’s recent digital permanent establishment proposal, Jenn said. This would involve determining group income, determining what the non-routine portion of the income is, and then determining the portion of non-routine income attributable to marketing intangibles.
“For that last step of determining how much is attributable to marketing intangibles, you could think about anything, from a pure facts and circumstances determination, which seems very difficult in a multilateral environment, to much more mechanical or formulaic approaches,” he said.
Jenn said discussions at a Task Force on the Digital Economy (TFDE) meeting last week emphasized the need to identify simpler and more administrable approaches. Thus, the objective is to determine if there is anything simpler than what is essentially a unitary worldwide profit split, he said.
With respect to the other prong of the US proposal, Jenn said that exporting the GILTI rules to the rest of the world would be “very positive.” He said that the US is interested in pairing this proposal with defensive measures like the German royalties barrier.
Both Jenn and Harter said that a goal of the US international tax effort is to ward off European nations’ threats to impose a digital services tax on the revenue of large multinationals. The US also seeks to halt to the continuing stream unilateral measures adopted by countries thus bringing stability to the international tax system, the officials said.
Harter said that the latest US proposals are indicative of changes made to the US Treasury’s negotiating position following US tax reform.
The US previously mostly played “defense” in international tax arenas, attempting to stop countries from deviating from international tax norms on the allocation of taxing jurisdiction and the arm’s length principle, Harter explained.
All that has changed though, Harter said, because Congress showed during tax reform negotiations that it was not limiting itself to classical norms. Rather, Congress contemplated radical departures from the current international tax standards, like border adjusted cash flow taxes, and ultimately adopted the base erosion anti-abuse tax (BEAT) and various anti-BEPS provisions, including the GILTI provisions.
All this gives the government the green light to “play offense” in international tax negotiations, according to Harter. Thus, the US can challenge the OECD to address broader issues rather than merely focusing on the subset of issues presented by digital models, he said.
Julie Martin
Julie Martin is the founder of MNE Tax. She edits the publication and regularly contributes articles on new developments in cross-border business taxation.
Julie has worked as a tax journalist and editor for more than 13 years. Prior to that, she worked as an in-house tax attorney in New York. She also holds an LLM in taxation from New York University School of Law.
Julie can be reached at [email protected].
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