International Tax Reform: Hearing Before the S. Comm. on Fin., 115th Cong., Oct. 3, 2017 (Statement of Itai Grinberg)

Lowering the corporate income tax rate and moving to a territorial system are important to maintain U.S. prosperity and improve growth prospects for our economy. The U.S. cannot stand apart from corporate tax competition in a globalized economy. To ensure that corporate income tax reform maximizes opportunity for well-paid employment for as many of our children and grandchildren as possible, the United States must also level the playing field between U.S. and foreign-headquartered MNCs. Leveling the playing field requires addressing the relative tax advantages available to foreign-owned U.S. corporations that represent one of the most senseless aspects of our current corporate tax code

Stabilizing “Pillar One”: Corporate Profit Reallocation in an Uncertain Environment

This paper is about how the world reestablishes international tax order. The paper focuses on the OECD’s work on profit reallocation and asks whether this multilateral effort can be successful in stabilizing the international tax system. The analysis centers on the current leading concepts for reallocating profit among jurisdictions under what is known as “Pillar One” of the OECD work programme. To analyze whether any Pillar One concept can be turned into a stable multilateral regime, it is necessary to specify certain elements of what a proposal to reallocate profits might entail. Accordingly, this paper sets out two strawman proposals. One strawman uses a “market intangibles” concept that explicitly separates routine and residual returns. The other strawman may reach a similar result, but does not explicitly attempt to separate routine and residual returns. Instead, in current OECD parlance, it might be described as a “distribution-based” approach. The paper asks whether either of the two strawmen could be agreed and stabilized multilaterally given the tools of modern international tax diplomacy. I conclude that the current procedural and institutional architecture for cementing international tax relations among states is inadequate to stabilize either of the strawmen. Nevertheless, with certain changes, reestablishing order may be possible. Moreover, I conclude that there are six key structural decisions that impact the ability to stabilize the international tax architecture in any Pillar One approach, and that these decisions are likely to be implicitly made in the course of choosing a political direction for Pillar One work in 2019. The choices made with regard to these decisions determine whether or not it will be possible to stabilize Pillar One. Even if good resolutions are reached along these six dimensions, there are only a couple paths to stabilize the system. One path would involve using every tool in the current OECD arsenal in new and more expansive ways, and then substantially depoliticize international tax matters and remove G20 involvement, such that logics of appropriateness developed among tax administrators isolated from political pressures and acting through transnational networks could lend stability to a new set of rules and principles. Even then, only a few Pillar One compromises could be stabilized this way. The alternative path, which could stabilize a broader range of proposals, requires formalizing the new regime in international law through a true multilateral treaty

User Participation in Value Creation

This article examines HM Treasury’s proposal to account for the active participation of users in value creation in certain digital platforms. The first key question is whether there is any reason to believe, as HM Treasury suggests, that users only meaningfully or actively contribute to value creation in the context of certain digital platforms. The article accordingly explores the factors HM Treasury sets out for the attribution of income to active user participation, including features such as network effects, multisided business models, and a lack of physical presence in the jurisdiction of the user. It concludes that if a user participation concept were adopted into international tax norms, it is unlikely to be limited to digital businesses or to the business models particularly highlighted in the proposal issued by HM Treasury. The analysis proceeds by considering the factors set out by HM Treasury for the attribution of income to active user participation in the context of pharmaceuticals and biologics, the financial sector, and the “internet of things”. For example, the article concludes that under HM Treasury’s user participation theory, returns from certain London-based financial intermediation businesses would need to be reallocated to other jurisdictions. Moreover, as the internet of things develops, one would expect the range of business affected by the active user participation concept to constantly expand

Formulating the International Tax Debate: Where Does Formulary Apportionment Fit?

As the contributions in this volume are being written, the Inclusive Framework nations, a group drawn together by the Organisation for Economic Co-operation and Development (OECD) as part of its Base Erosion and Profit Shifting (BEPS) project, are in the midst of a consultation process intended to revise the international corporate tax profit allocation and nexus rules. At the end of May 2019, the OECD released its Programme of Work to Develop a Consensus Solution to the Tax Challenges Arising from the Digitalisation of the Economy. At the beginning of June 2019, this Programme was endorsed by the G20 Finance Ministers during their ministerial meeting in Fukuoka, Japan. To use the OECD’s terminology, the proposals under consideration to revise the current nexus and profit allocation rules would create a ‘new taxing right’ to be allocated to the ‘market jurisdiction’. The Programme of Work describes certain technical issues that must be considered when making such fundamental changes to the international tax architecture. The OECD’s work on these major revisions to international tax norms is being undertaken under the auspices of the Inclusive Framework. The Inclusive Framework arose out of a G20 request that the OECD create a body in which all interested countries – regardless of G20 or OECD membership – could participate in the BEPS project on an equal footing. The subsequently developed Inclusive Framework allows interested countries to work with the OECD/G20 on developing standards on BEPS-related issues. As of this writing, over 125 countries have joined the Inclusive Framework and committed to implementing the comprehensive BEPS package. It was clear from the outset that the Inclusive Framework could be used as a stand-in for a world tax organization. In the current OECD project on profit allocation, it is in effect being used in that manner for the first time. The Inclusive Framework is not currently considering a full move to formulary apportionment, as that term is understood in this volume. Yet evaluation of the proposals under consideration by the Inclusive Framework suggests that each and every one can be improved by reappraising formulary apportionment. Accordingly, the purpose of this chapter is to highlight the relationships between the options under consideration in the current OECD-led process and ‘formulary apportionment’, as that term is used elsewhere in this volume. Section 11.02 of the chapter briefly offers some background on the major developments – arguably, tectonic shifts – of the last few years in the international tax arena. Section 11.03 describes the proposals for revising the profit allocation rules that are currently under consideration by the Inclusive Framework. Section 11.04 fleshes out ‘straw men’ that develop these ideas in greater detail, with the purpose of highlighting that the proposals that are under consideration by the Inclusive Framework at the time of this writing are partially formulary approaches and that lessons from formulary apportionment likely carry over to any partially formulary system that may be developed multilaterally in the future

A Destination-Based Cash Flow Tax Can Be Structured to Comply with World Trade Organization Rules

This paper briefly outlines alternative approaches to enacting a destination-based cash flow tax that are more clearly compatible with the World Trade Organization rules than the approach that has previously been described in the literature. The first structural alternative involves expanding the universe of businesses subject to the tax by clearly defining both the base of the new U.S. business tax and its tax nexus requirement as domestic consumption, and thereafter treating foreign importers and other sellers equivalently, rather than imposing a deduction disallowance or an import tax. The second alternative involves adopting a business activities tax, and then enacting a business-level incentive for encouraging employment that is as a legal matter separate from the tax. Either approach avoids the key World Trade Organization concerns

A Constructive U.S. Counter to EU State Aid Cases

U.S. Treasury officials and members of Congress from both parties have expressed concern that the European Commission’s current state aid investigations are disproportionately targeting U.S.-based multinational enterprises. At the same time, a Treasury official recently suggested in congressional testimony that there are limits to what Treasury can do beyond strongly expressing its concerns to the commission. In that testimony, Treasury’s representative hinted at two specific pressure points: whether the state aid investigations could undermine U.S. tax treaties with EU member states; and whether any assessments paid by the foreign subsidiaries of U.S. MNEs as a result of state aid investigations would be creditable for U.S. income tax purposes

The New International Tax Diplomacy

International tax avoidance by multinational corporations is now frontpage news. At its core, the issue is simple: the tax regimes of different countries allow multinational corporations to book much of their income in low-tax or no-tax jurisdictions, and many of their expenses in high-tax jurisdictions, thereby significantly reducing their tax liabilities. In a time of public austerity, citizens and legislators around the world have been more focused on the resulting erosion of the corporate income tax base than ever before. In response, in 2012, the G-20—the gathering of the leaders of the world’s twenty largest economies—launched the Base Erosion and Profit Shifting (BEPS) project, the most extensive attempt to change international tax norms since the 1920s. In the course of the BEPS project, the field of international tax has adopted the institutional and procedural architecture for multilateral action used in international financial law. This Article is the first to ask whether that architecture will work in the international tax context. To answer that question, this Article first applies lessons from the international financial law literature to assess international tax agreements that are now being reached through soft-law instruments and procedures comparable to those that characterize international financial law. This initial analysis, which draws from the experience in international financial law, is largely pessimistic. However, this Article then describes how model tax treaty law—although also a form of soft law—is highly effective, and differentiates the political economy of international tax law from that of international financial law. As a result, a key theoretical point emerges: bifurcating analysis of multilateral efforts to change international tax norms into their Model Treaty-based and non-Model Treaty-based components is necessary in order to understand the new regime for international tax governance. At a more practical level, bifurcating the analysis highlights that observers should expect the Model Treaty-based parts of the BEPS project to be implemented, as well as most parts of the project focused on tax transparency. By contrast, sustained international coordination in implementing other dimensions of the project is doubtful. In reaching these conclusions, the Article contributes to the broader international economic governance literature by using a high-profile example from international tax diplomacy to show how underlying legal institutions affect the prospects for implementation of international regulatory agreements

Anonymous Withholding Agreements and the Future of International cooperation in Taxing Foreign Financial Accounts : Testimony before the Finance Committee of the German Bundestag, September 24, 2012 (Statement by Associate Professor Itai Grinberg, Geo. U. L. Center)

Chairwoman Reinemund and members of the Finance Committee, this testimony will make three key points: • Automatic information exchange is superior to anonymous withholding for the purpose of combating tax evasion involving the use of foreign financial accounts. • German ratification of the Swiss-German anonymous tax withholding agreement would stifle the emergence of a multilateral automatic information exchange system. As a result, Germany would be less able to address its own concerns with tax evasion through foreign accounts over the medium term. By ratifying this agreement, Germany would also slow the development of a multilateral system that would allow many other countries around the world to effectively address their concerns with tax evasion through foreign accounts. • Switzerland has in effect agreed to automatic information exchange with the United States. Germany could pressure Switzerland unilaterally, multilaterally, and through the EU for a similar agreement

International Taxation in an Era of Digital Disruption: Analyzing the Current Debate

The “taxation of the digital economy” is currently at the top of the global international tax policymaking agenda. A core claim some European governments are advancing is that user data or user participation in the digital economy justifies a gross tax on digital receipts, new profit attribution criteria, or a special formulary apportionment factor in a future formulary regime targeted specifically at the “digital economy.” Just a couple years ago the OECD undertook an evaluation of whether the digital economy can (or should) be “ring-fenced” as part of the BEPS project, and concluded that it neither can be nor should be. Importantly, concluding that there should be no special rules for the digital economy does not resolve the broader question of whether the international tax system requires reform. The practical reality appears to be that all the largest economies have come to agree either that a) there is something wrong with the taxation of the “digital economy,” or b) there is something more fundamentally wrong with the structure of the current international tax system given globalization and technological trends. This paper is intended as a limited exploration of the second (or third, or fourth) best. It analyzes three policy options that have been discussed in general terms in the current global debate. First, I consider whether “user participation” justifies changing profit allocation results in the digital economy alone. I conclude that applying the user participation concept in a manner that is limited to the digital economy is intellectually indefensible; at most it amounts to mercantilist ring-fencing. Moreover, at the technical level user participation faces all the same challenges as more comprehensive and principled proposals for reallocating excess returns among jurisdictions. Second, I consider one such comprehensive international tax reform idea, loosely referred to by the moniker “marketing intangibles.” This idea represents a compromise between the present transfer pricing system and sales or destination-based reforms to the transfer pricing regime. I conclude that splitting taxing rights over “excess” returns between the present transfer pricing system and a destination-based approach is complex, creates new sources of potential conflict, and requires relatively extensive tax harmonization. This conclusion applies equally to user participation and marketing intangibles. If such a mechanism were nevertheless pursued, I suggest that a formulary system for splitting the excess return is the most manageable approach. Third, I consider “minimum effective taxation” ideas. I conclude that, as compared to the other two policy options discussed herein, minimum effective taxation provides a preferable path for multilateral cooperation

Breaking BEPS: The New International Tax Diplomacy

International tax avoidance by multinational corporations is now front-page news. In a time of public austerity, citizens and legislators around the world have focused on the erosion of the corporate income tax base. In response, in 2012 the G-20 — the gathering of the leaders of the world’s twenty largest economies — launched the “Base Erosion and Profit Shifting” (BEPS) project, the most extensive attempt to change international tax norms since the 1920s. This article is the first to explain that in the course of the BEPS project, the field of international tax has adopted the institutional and procedural architecture for multilateral action used in international financial law. But will that architecture work in the international tax context? To answer that question, the article applies lessons from the international financial law literature to assess international tax agreements that are now being reached through soft law instruments and procedures comparable to those that characterize international financial law. This initial analysis is largely pessimistic. However, the article then describes how model tax treaty law — although also a form of soft law — is highly effective, and differentiates the political economy of international tax law from that of international financial law. As a result, a key theoretical point emerges: bifurcating analysis of multilateral efforts to change international tax norms into their Model Treaty–based and non-Model Treaty–based components is necessary in order to understand the new regime for international tax governance. At a more practical level, bifurcating the analysis highlights that observers should expect the Model Treaty–based parts of the BEPS project to be implemented, as well as most parts of the project focused on tax transparency. By contrast, sustained international coordination in implementing other dimensions of the project is doubtful. In reaching these conclusions, the Article contributes to the broader international economic governance literature by using a high-profile example from international tax diplomacy to show how underlying legal institutions affect the prospects for implementation of international regulatory agreements