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Biden administration has positive outlook on digital tax negotiations

Secretary of the Treasury Janet Yellen will likely restart US negotiations with the OECD and other countries on finalising a multilateral tax approach to the digital economy in the coming weeks.

On January 22, Yellen was voted-in unanimously by the US Senate Finance Committee to replace Steven Mnuchin, who suspended OECD-led talks with other countries on the two-pillar digital tax approach in June 2020. Corporate confidence is high on Yellen restarting negotiations after she stressed that efficient taxation of multinational companies was a priority.

“Working in the context of the OECD negotiations on global taxation, we have much greater leverage to keep our American firms competitive if we avoid a race to the bottom in corporate taxation more globally,” said Yellen at the US Senate on January 19, showing her support for pillar two regarding a global minimum tax.

However, delayed negotiations on pillar one about reallocating profits from intangible assets to market jurisdictions have exacerbated transatlantic trade tensions over controversial digital service taxes (DSTs). Most recently, the US Trade Representative (USTR) suspended tariffs on French goods in the first week of January, even as the EU finalised its latest proposal for a bloc-wide digital levy. However, the USTR warned that such DSTs under its investigation warranted retaliation.

“I am certainly aware of the concerns US companies have raised about DSTs,” said Yellen at one Senate Finance Committee meeting. “While the details of DSTs differ across jurisdictions, many have been designed in a way that unfairly singles out a few large US digital platform companies. I look forward to consulting with the USTR and the Congress on these issues.”

Earlier pushback from the US on OECD-led negotiations was a key reason for delayed political agreement and more DSTs, and many in-house tax directors and advisors do not think a consensus on a multilateral solution from the OECD is likely by mid-2021 without significant technical changes.

For example, taxpayers said they were concerned about the interaction between the global intangible low-taxed income (GILTI) rules and global anti-base erosion proposal (GloBE) under pillar two without a safe-harbour. The OECD is working on simplifying its multilateral tax approach for the digital economy, which includes political and technical negotiations on scope, segmentation, nexus, and the allocation of losses.

“Early and sustained involvement of the Biden administration will play a key role in shaping these proposals,” said one head of tax at a pharmaceutical company. “The responses identified significant concerns in relation to the complexity, administrative burden, and in some cases the practical workability of the proposals,” she added about the OECD’s consultation on its two-pillar solution from January 14-15.

Cooperation from the US looks likely on both pillars, and most finance ministers prefer not to decouple pillars one and two for political purposes since they may lead to different winners and losers across countries. The big question is whether Yellen will endorse technical simplifications to the solution, including suggestions from Microsoft and other large businesses to ring-fence Amount A under pillar one.

Pascal Saint-Amans, director of the Centre of Tax Policy and Administration at the OECD, said there was still uncertainty, but the Biden administration pointed to “good factors” for a coming deal.

First steps from the Treasury

It may still take some time to advance negotiations on digital tax since Yellen added that her biggest priority is working on additional stimulus measures under the latest Coronavirus Response and Relief Supplemental Appropriations Act of 2021 before addressing other tax concerns.

In-house tax directors at large multinational businesses have been monitoring trade tensions over digital levies, but many are also keen to see stimulus and tax breaks from the US. Democratic majorities in the Senate and House of Representatives pave the way for the Biden administration to more easily enact tax law and spending legislation without a single Republican vote.

As a result, a potential $1.9 trillion federal stimulus package may offer regulations and implementations for extending state aid, such as changes to net operating losses and 163(j) rules on inbound financing. The latest $900 billion stimulus package finalised in December 2020 has extensions on payroll tax deferrals and federal business loan programmes.

“We did see some great gives to the taxpayers here… but… we need to be careful to make sure that we’re not causing ourselves another tax problem,” said Sara Beugelmans, managing director at Brookfield Asset Management, who recommends more in-house tax modelling to limit the risk of hidden costs from opting into certain government incentives.

“The US is experiencing its highest government-to-debt ratio since World War II,” said Kate Barton, global vice chair of tax at EY. “While countries are looking to sustain economic activity by keeping tax rates low, eventually, high debts and near-zero interest payments will see governments pivot from low rate, pro-growth policies to those that are revenue-raising.”

The most important changes to come from a Biden administration on cross-border tax planning are an increase in the corporate tax rate from 21% to 28%, a minimum tax of 15% on businesses with book income in excess of $100 million, a 10% surtax on corporations that move manufacturing or service jobs offshore to sell goods back into the US market, and an increase in the GILTI tax rate from 10.5% to 21%.

However, in terms of the digital tax agenda that will set long-term in-house tax strategies, the Biden administration needs to act quickly to appease other OECD countries. Many have only temporarily suspended their DST charges until mid-2021. With just six months left to reach a multilateral agreement, the next step to negotiations is the G20/Inclusive Framework meeting on January 27.

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