A Blow to Pillar 1

June 17, 2020

Today it was reported that Treasury Secretary Steven Mnuchin sent a letter to the finance ministers in the United Kingdom, France, Italy, and Spain communicating concerns the U.S. government has with ongoing OECD negotiations on international tax rules. Those concerns have led the U.S. to suggest a pause in the negotiations.

U.S. Trade Representative (USTR) Robert Lighthizer, in a hearing at the House Ways and Means Committee, echoed that position, saying, “We were making no headway and the Secretary made the decision that rather than have them go off on their own he would just say we’re no longer involved in the negotiations.”

Lighthizer commented further on the scope of the OECD project that focuses on large, highly profitable multinationals in the digital industry and in consumer brands. Contrary to that approach, he suggested, “The answer is that we need an international regime that not only focuses on certain size and certain industries but where we generally agree as to how we’re going to tax people internationally.”

Countries at the OECD have been working to change international tax rules, but those negotiations have recently stalled. At the same time, individual countries have been adopting digital services taxes that tax the revenues (rather than profits) of certain large, digital companies. U.S. businesses are expected to bear the brunt of those policies. Earlier this month, the USTR opened investigations into recent unilateral digital tax measures, increasing the potential for a harmful tax and trade war.

The OECD’s project has been focusing on tax policies associated with two pillars. Pillar 1 is about redefining where large, profitable multinationals pay taxes, and Pillar 2 is about implementing a global minimum tax for corporations.

However, the U.S. has been concerned that U.S. companies will shoulder the lion’s share of the tax and compliance costs from the OECD program, particularly Pillar 1. In December, Secretary Mnuchin sent a letter to the OECD outlining concerns with Pillar 1 while pointing out that the U.S. would be comfortable with a Pillar 2 approach that works similar to the U.S. Global Intangible Low Tax Income (GILTI) policy.

The December letter identified a potential option on Pillar 1 that would allow businesses to opt into the new rules as a safe harbor and allow them to avoid conflicts over digital services taxes. That approach has not been taken, and the U.S. is now disengaging from the multilateral talks.

What happens next could be very harmful for the global economy. In December, the U.S. threatened France with tariff rates up to 100 percent in response to the French digital services tax. That action resulted in a delayed implementation of the French policy. If the U.S. takes a similar approach and implements significant tariffs on trade with the UK and EU countries, the economic impact would be negative and would come at a moment when the global economy has been suffering due to the ongoing pandemic.

Instead of moving further towards a harmful tax and trade war, countries should work together to promote stability and growth in the international economy. Currently, digital services tax policies being pursued and the potential for retaliation from the U.S. work against those objectives.

Lighthizer’s remarks about finding ways to change international rules without singling out certain industries or developing rules based on business size should inform future discussions on international taxes. Instead of building a complex system designed around a certain set of business models, countries should build tax policies that are broadly neutral and stable over time.

Unfortunately, the window for building that sort of policy agreement in 2020 seems to be closed.

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