The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.
Robert Stack, who left his post as deputy assistant Treasury secretary for international tax affairs Jan. 20, speaks with Bloomberg BNA reporters about the U.S. role in the OECD's rewrite of the global tax rules, the European Commission's probe of U.S. companies' tax agreements with EU governments—and what most surprised him about government service during his four years at Treasury.
By Kevin A. Bell, Alison Bennett and Alex M. Parker
Was the OECD's Action Plan on Base Erosion and Profit Shifting a success in the U.S.?
I think the BEPS project was a success for the U.S. in the sense that a lot of pressure had grown up around the world in connection with the issue of multinational tax avoidance. We had hearings in this country by Senator [Carl] Levin (D-Mich.), there were hearings in the U.K., there have been hearings in Australia.
These issues became headline news around the world, and so it was clearly the case that we needed to engage. I measure success by saying that there were four minimum standards that came out of the BEPS project. The United States, right out of the box, can meet them all. We have implemented country-by-country reporting; we don’t have harmful tax practices; and we’ve agreed to exchange rulings. We have some of the toughest anti-treaty-shopping rules in the world, and we are leading the effort at the [OECD] Forum on Tax Administration to improve the mutual agreement procedures around the world. Those are four key things.
I would put next the fact that we, very successfully, through the efforts largely of Mike McDonald [financial economist in Treasury's Office of Tax Analysis] and Brian Jenn [attorney-adviser in Treasury’s Office of International Tax Counsel], got the transfer pricing work to a good place, or a better place, than where it was headed.
But I will add that the pressures on transfer pricing globally are extraordinary, and a lot of that pressure was reflected in the work. First, the mobility of capital and of intangible property income is a problem for all countries including the United States, if you look at our own transfer pricing litigation. And, second, the fact that there’s a perception in the world that the transfer pricing rules are used to shift money into tax havens has really caused the rest of the world to pause over the arm's-length standard, and we believe that the alternatives to the arm's-length standard were far more vague and uncertain than reinforcing the arm's-length standard.
If you look at things like the work on interest deductibility and hybrids, these are very mechanical rules that countries can use to limit their base erosion in their countries. Everyone around the table had a similar interest in coming up with a technical solution that they could then use.
So, while it was a very challenging project, because with respect to some of the action items, the U.S. interests and the interests of other countries diverged, I think we were able to coalesce around shared solutions and address something that the whole world was asking us to address.
Would it be fair to describe the U.S. as a reluctant participant in the project?
It’s a funny question for me, because I started on March 11, 2013, and the United States had already agreed to enter BEPS. One of my first jobs was to help draft the action plan. I came up with the 15 items, and I was literally thrown into a meeting where we were coming up with these 15 items, and I was pretty green at that point. So I never got to ask myself, were we reluctant? We were, at that time, fully signed on and fully willing to participate. I think where people began to sense reluctance was in action items where the interest of the U.S. and the interests of other jurisdictions were greatly divergent. Here, for example, the digital work always stuck out for me.
And you were the chair of that task force?
I was the chair of the task force, and it quickly became clear to me that other countries wanted to write the rules in such a way to get more income from our companies who had high revenues in their jurisdictions, and ultimately, that was the U.S. tax base. I think that got some perception of reluctance.
The second reason I think the U.S. was perceived as reluctant is we were very stridently opposed to loose and vague rules like a permanent establishment standard that no taxpayer could really interpret or a ‘main purpose' test in treaties that seemed to the U.S. tax administration like they were going to invite more conflict and potential overreaching on the part of countries.
Once we became vocal about that, I think people had the perception that the U.S. was a reluctant participant. I don’t think we were. I think we were a full player, but I think we were very demanding that the results be high quality.
Do you have any comments regarding the work on controlled foreign corporations?
First—and there were some Twitter exchanges on this last week—the work on CFCs is important. A lot of people were critical of the U.S. check-the-box rules as we went into BEPS. Because of check-the-box, U.S. multinationals are able to achieve lower foreign effective rates for a variety of reasons. Well, when I first got to BEPS, and another country would say, ‘The U.S. check the box rules are a problem,' I would say, ‘You mean we need stronger CFC rules?' And then people were a little less interested necessarily in having stronger CFC rules—particularly the U.K. The Obama administration was always clear that it wanted stronger CFC rules.
The minimum tax proposal of the Obama administration would have shifted a lot more towards current inclusion of income under various circumstances, which is the goal of CFC rules. Other countries who want to see themselves as happy destinations for headquarter companies are less interested in CFC rules, because one of their selling points is ‘Come put your headquarters here, and you can strip out of the rest of the world with impunity.'
So why are CFC rules important? For two reasons. One, if somebody headquartered in your jurisdiction can lower their effective rate all over the rest of the world without concern that the income will flow back into their resident’s country, they’re going to seek to shift more income out of the U.S. into those jurisdictions, so it protects our base.
Second, if you’re a developing country, the parent entity that’s investing in you doesn’t have CFC rules. It’s easier to strip out of those poorer countries as well, which is something we should care about as we try to help developing countries develop their own domestic resources. So CFC rules were important, but the result in BEPS was pretty weak simply because some countries put their self-interest—not wanting CFC rules so they can become a tax haven—over the health of the overall system, and that’s why we wound up where we did.
You mentioned the U.K. in regard to CFCs. I think it’s fair to say that one of your disappointments in the project was when the U.K. enacted its diverted profits tax and then Australia enacted a similar measure. Given those unilateral actions, do you still think that a balance of the BEPS project was successful in achieving a coherent policy?
I do not think it achieved a coherent policy. Earlier I said I think it had successes, but I don’t think one of the successes was achieving a coherent policy. It did not achieve coherent policy because countries were never willing to put aside their own sovereignty and their own self-interest in favor of a more stable homogenized system.
Was this because of political pressures?
It’s political pressures, but also it was interesting in my experience—I don’t mean to sound too Pollyanna-ish, but I think when Americans approach these situations, we were not necessarily always thinking of our own national interests. We were trying to think of the system that would help multinationals and help countries get the revenue that they needed. Other countries took a much more focused interest [what they could gain]. I came to understand that over time, and I think it undercuts the efficacy of the OECD because it leads to a situation where countries will come to the OECD to kind of take what they can get and then go do whatever they want in their own domestic tax, which raises the question of why one would invest extraordinary resources or hope in a system like that.
When the BEPS report on the digital economy came out, it was much more general than the other reports, and the thought was that some of the other action items were getting covered as issues. Do you foresee there being a lot more coming out on the digital economy?
Yes, unfortunately. I think that there is an enormous hunger to do something globally to take up economy space, and it’s a hunger that I’m not sure is going to be sated anytime soon. It’s driven by the omnipresence of our big digital’s enormous revenues, and actually in my last digital economy task force meeting, and there was this air of, ‘We must do something, and it’s inevitable to do something in this space.' And I have no idea what it’s going to be. There will be lots of pressure from governments to do something in the digital space.
Regarding the equalization levy in India, it was an issue that, in retrospect, we had a tough judgment to make: should we let the document have options?
Even if we’re not endorsing the options—or should we insist that this document not even breathe about options?—we got that document to be pretty good for us, and so it’s just a question of how much you can push and say ‘No,'—as an American no less—‘we think even mentioning options is just absolutely impossible.'
We could say we got burned because we put in an option, and India took it. If you make something an option and spell it out, it’s easy for these strapped governments to pick it up and just enact it. You’ve got to watch that phenomenon.
Just after we’ve done all this work on BEPS and, as you said, preserving the arm's-length standard, we’re at a point where we’re considering a tax reform that would—if not change the arm's-length standard, at least change the way it works from the U.S. standpoint. Are you concerned that all this work that you’ve put in at BEPS is going to be made either less important or irrelevant by changes that Congress is considering?
No. You always want to be looking at the best policy and the best ideas, and I don’t think, as a former policy maker, you want to put yourself in a position of saying, ‘Gee, all my hard work, you know, went down the tubes; therefore, we should never look at some new thing.' You know, the people that have put forth the destination base cash flow tax are serious people with serious ideas, and as we’re seeing in the debate, you know they’re being taken seriously in this country. I would not subordinate the goal of getting to a better tax policy to some kind of investment in other work we’ve done at the OECD.
Are you worried that a change like some of those being considered in the U.S. could jeopardize sort of the international consensus at the OECD for things like the arm's-length standard and the OECD as a sort of standard setter for taxes globally?
Going back to the DPT [diverted profits tax], I did not think that countries showed up at the OECD and announced that they were stopped from looking at other policy ideas. You see the DPT in Australia and the U.K., you see the equalization levy in India, which came out of the OECD. You see various laws around the world where people are going beyond BEPS so I actually don’t link U.S. considerations of new policy to the OECD. For example, the whole crux of the DPT is that you are a company that doesn’t otherwise have a permanent establishment in the country, or they’re going to reach for the profits outside the country outside of national norms. Well, no one has criticized the U.K. except us for that.
I think U.S. policy should just follow the course of U.S. policy—the best policy, however it turns out to be.
Do you think the U.S. changes such as the destination-based cash flow tax, if enacted, will have an impact on the U.S. treaty network and the general bilateral nature of tax enforcement?
It’s a great question. As I’m studying the DBCFT [destination-based cash flow tax] from the outside, I think the really interesting intellectual question is whether the tax will be imposed on individuals who purchase from companies outside the jurisdiction.
So for example, a U.S. person buys a vacuum cleaner through Alibaba, and if we’re going to call that an income tax on Alibaba, I think we have work to do to square that both from a treaty perspective and, let’s say, a foreign tax credit perspective. On the other hand, if we’re not, and we’re saying that this is the U.S. income tax on its companies imposed only on business entities, I think you’d get a different set of issues and a different set of questions.
We approach the question fundamentally differently in the income tax area and in the VAT [value-added tax] area. We think nothing of imposing a tax on an imported good of a company that is not physically present in the country of the consumer. That’s what a VAT is. For an income tax, we think it’s important that you have a physical presence.
If we’re going to call the destination cash flow tax an income tax, I think we’ve just opened up the door, and we’re going to tax the Alibaba person, we may have opened up the door to taxing our companies that have revenue from other countries on an income tax basis without a PE, which is the treaty issue. They'll say, ‘Oh, wait a second. Google has all this money flowing out of our country.'
When you were talking about BEPS, you talked about check-the-box rules and how they cause a lot of international controversy, and your position was that you would like to see stronger standards for CFC rules. The situation people refer to when they talk about check-the-box is a situation that was created by regulation. Did your administration ever consider reversing that, and if so, why was that never a policy that was carried out?
We did not deal directly with check-the-box because the President’s business framework for tax reform dealt through the minimum tax with the very same issues that check-the-box were exacerbating. That is to say, if you’re earning income in a place where you’re not paying a certain minimum tax, the minimum tax would top you up. And, therefore, since that was done on a per-country basis, the check-the-box benefits simply largely disappeared.
We have these executive orders in the U.S. which essentially have turned off most of the tax regulations that are being worked on at the IRS. At the same time, in Congress we have some lawmakers that are already using congressional review action on non-tax regulations. Understanding that your area is policy, do you see the landscape for tax regulation kind of changing?
I don’t see a big change in the regulatory landscape. I had an occasion recently to look over the circumstances in which the government does regulations, and I was struck by the fact that there are some statues like Section 1411, which is the U.S. net investment tax income tax, that, while it's detailed, doesn’t necessarily give a lot of regulatory thought, and there needed to be regulations to flesh out a lot of the details of that statute and how it would operate. There are other statutes, such as Section 871(m), where the question of what is a divided equivalent payment is defined to some degree by the statute, but then, Congress said, ‘In order to carry out the purpose of this statute, if you, [Treasury] secretary, see other circumstances, feel free to regulate it.' And I believe it’s in that statute that Congress gave the right to the secretary to give exceptions under certain circumstances. For example, to avoid cascading withholding taxes in needs of any one context.
I was thinking also about circumstances in which—and I think our inversion work fits largely into this—the IRS and policy makers see statutes that are being used maybe not as they were intended to be used, and so you use your regulatory authority to protect the fisc, and you put out regulations to make sure we collect money. It’s a process where you have a lot of stakeholder consultation with companies, with NGOs, with the IRS, within Treasury.
I think that basic contour will remain in terms of how we do regulations going forward. It doesn’t mean everyone is going to agree with every regulation. I’ve also had occasion to examine the executive order on regulations with respect to the notion that you have to repeal two regulations for every one, and I would simply note that I think there’s a lot more to be developed in that regard with how that will play out with Treasury and the IRS. I do not think one could conclude, as we sit here today, that the end result will be that for every one new regulation, there will be two withdrawn. I think there’s more work to be done, just observing as an outsider.
IRS and Treasury officials have said in the last couple of weeks that for now everything is mostly turned off, but they indicated, in a roundabout way, that they’re waiting for the Treasury Department to be staffed up and that there was some hope that regulations might move forward. What do you think?
First, a lot of the IRS priority guidance plan was drawn down towards the end of the administration as we were finishing things up, like the [Section] 987 regulations. Second, I fully agree that in the absence of the assistant secretary job being fulfilled, it will be difficult to imagine a heavy agenda. Third, with tax reform being so central to the work of the Congress and the Executive at this point, and looking at the limited resources of Treasury and IRS, it would seem natural that there’d be a little bit of a hiatus. But at some point, I would expect the government to do what the government does, which is write the regulations that Congress expects it to write enacting the statues that they passed.
There is the thought that tax regulations don’t really fit into what the administration might have been thinking about in limiting regulations because many tax regulators aren’t considered to have a cost. On the other hand, there are those who say there should be a cost-benefit analysis.
At a high level, I would agree that tax regulations, which are aimed at plugging holes in statutes using authority that is delegated by the Congress to collect revenue and enforce the income tax laws, are not, in my own mind, the same as some new environmental regulation that requires a business to do X, Y or Z. My first thinking is that this is not the kind of thing that the executive order was aimed at.
In terms of cost-benefit analysis, there are legitimate issues about the cost of various regulations versus the benefits and tax raised. Those are fair issues to be thought about going forward.
To follow up from the talk about tax reform, as someone who was involved in crafting the Obama administration’s proposal on the minimum tax, that was a tax that was described as strengthening the worldwide system of taxation because it removed deferral for some profits, and it also raised new revenue. In retrospect, do you think that is a proposal that could have worked?
First of all, for the record, I think the president's tax proposals came out in February 2012, and I started Treasury in March 2013. I obviously fully supported it, and I think it had a lot going for it.
Let me make one critical point on any tax reform proposal, which I learned at Treasury, which is the first thing you need to understand is how much revenue it collects and how that revenue fits into the overall budget picture. That is a piece that is driven largely by the economists both at the White House and the Treasury. Obviously CBO [the Congressional Budget Office] plays a role. JTC [the Joint Committee on Taxation] plays a role when you get it to legislation. It’s a very important function, and it surprised me—naively I think—how that is really the first question tax reformers ask: Does it raise the revenue we need it to raise in the matter we need to raise it?
My approach as the U.S. representative abroad in tax reform showed me that if you leave a bunch of deferred, untaxed income offshore, that other countries are going to figure that out and try to get it. And even if you look at proposed territorial approaches—and by the way, I think we all know that there really are very few pure territorial suggestions—the U.S. multinational community has got to ask itself this: If U.S. tax reform continues to permit large buckets of untaxed income to exist in the world, is that really a victory for the multinational community if it increases the appetite and rules around the world to simply chase after all that income that is left untaxed through the U.S. territorial system? I don’t know the answer, but I think it’s a question that policy makers in the government and companies ought to be asking themselves as they step back and evaluate tax reform. I had a unique perspective on that issue, because I was the person sitting in the room pretty regularly with other countries very anxious to have at income that they perceived as not being taxed well enough.
Turning to country-by-country reporting—the most widely adopted BEPS measure, set forth in Action 13—do you think the OECD peer review process on that action item will be successful in putting the brakes on Chinese and Indian tax auditors from using U.S. companies' reports to pull more profit into their respective jurisdictions?
One of the things the OECD can do extremely well is to work together on rules that we can all agree to, and then through peer review processes, ensure that the countries are living up to implementing the rule in the way we had all agreed to it. Country-by-country is a very good example of that. Part of the review process is going to be simply, ‘Did you put country-by-country in to begin with, and did you do it in the way that we all agreed like the United States has done?'
There are two checks on the misuse of the information. First will be peer review, but second, I don’t think I could have been more clear as the U.S. representative, that the minute that the United States government—I don’t speak for it anymore, but I expect my successor and the folks at IRS will feel the same way—perceives that countries are abusing and not standing by the agreement to use the CBC information as a risk assessment tool, the United States will suspend sending the information, and it's fully within our rights to do that.
I think that countries understand this. I know, for example, from things that India has publicly said and within my discussions with India, they’re even looking at ways to ensure that the information is received by offices that can help do a risk assessment without necessarily having all this information go right down to the line auditor that’s in a particular country. Because India wants the information and wants very much to abide by the global agreement, so this is not, for me, a huge concern. But it will play out in practice.
Will IRS Form 8975, which is in draft, and its accompanying Schedule A help IRS agents triage transfer pricing audit targets?
That's the form that U.S. multinationals will fill out and will be exchanged with other tax authorities—and we’ll be receiving similar tax information from the other tax authorities. I think that the issue at the IRS will be, as it is often for them, how do we take information that we’re receiving and integrate it into things like audit plans? It’s not automatic that just because there’s a form, there is some immediate use for the information. But that’s the work that the IRS leadership does—to think about how to use it. They have said that it will help them assess risks for audits, and I take them at their word for that.
Why did the U.S. not sign the multilateral competent authority agreement to exchange country-by-country reports?
The reason is really quite simple. The multilateral competent authority agreement was kind of a ‘baked' document that all countries had to accept and execute as-is. We would have been delighted to sign the multilateral agreement, but all international agreements the Treasury works on go through our State Department legal offices, and for very archaic legal reasons, we were not able to execute the precise wording in the multilateral agreement. Therefore, we worked with State to come up with the bilateral form that we can sign, which will have the same effect as if we had signed the multilateral, and that work is ongoing.
I need to add here that, unlike things like the intergovernmental agreements on FATCA, these bilateral competent authority agreements are pretty much form documents that are between us and the other country. As I understand form discussions with IRS before leaving, we do not expect this to be a heavy negotiating lift with each country that we’re doing competent authority agreements with. Before I left, the IRS had expected to be able to put them in place in a timely manner to exchange the country-by-country information according to the agreed time lines.
It’s the IRS, not Treasury, that actually negotiates that work?
I’m pretty sure it’s the IRS that will be dealing with their counterparts to get those documents. Whether or not there’s a Treasury signature of state on there somewhere, I just don’t know.
During your government service, you were an advocate for Apple Inc. and the other U.S. multinationals under review by the European Commission. Did the U.S. Treasury bring the same level of political pressure that it brought in the state aid cases during the BEPS negotiations? Were they different dynamics?
The answer is yes, the were different dynamics. We’re a member of the OECD, and we’re a member of the CFA [Committee on Fiscal Affairs]. We had all these countries around the table; it’s a consensus organization, and frankly, we had a veto. For example, we were very, very clear, in the transfer pricing work, that we were not willing to just sign on to any document that was going to be put out. So in that process, we were a player.
In the state aid cases, we were coming from the outside. First of all, it was something run by their DG [directorate-general] competition unit, which purports to apply competition law, not tax law. We were a separate sovereign, and from their perspective they were engaged in a kind of a vanilla enforcement action, not unlike, let’s say, an FCC enforcement action in this country or a Department of Justice anti-trust enforcement action. It struck them, I think, as just bizarre that we would have a view about their own enforcement action of EU state aid law.
I think the general consensus is that the state aid cases will end up being decided by the European Court of Justice. I think most people think that. Are you aware of any mechanism for the United States to file its own grievance case?
I believe there are mechanisms. I am not an expert in EU law. Those judgments will be made by the next Treasury secretary.
One of my reactions to the whole state aid debate is that we have been criticized, and I’ve been criticized, for appearing to take the side of multinationals in defending structures that some people view as aggressive tax planning. And it occurred to me that we all are able to hold two thoughts in our head simultaneously: One, that companies engaged in aggressive tax planning, and two, the EU doesn’t get the money.
That, to me, is an important way to explain that this was never about defending multinationals in all circumstances. There’s much more about the kind of the rule of law and the tax system that countries in their sovereign capacity have agreed, to including EU and other states.
I was always of the view that these companies are extremely well represented, and they’ll have the best arguments in any [legal proceeding]. But you have to remember that the United States’ position was based, first and fundamentally, on the fairness of, in effect, announcing that companies were on notice that the EU might have its own view of, for example, attribution of profits to a branch in Ireland in the years in question. We were not sure that companies really were on notice, and therefore, that it was fair to come up out of the blue and put out these outsized bills.
Secondly, we were concerned that these EU actions would undermine global collaboration on tax issues because it was an example of the EU sitting around one table at the OECD and trying to hash out agreement, and [separately] trying to [impose] retroactive penalties.
Would you like to see the current administration remain fully engaged in the tax work of the OECD?
U.S. bodies have to stay engaged around the world in every space we’re in even if it’s challenging to be there. I spoke to the OECD before I was leaving, and they agreed that my successor would be the new co-chair of the digital economy task force, which is continuing, because the United States has very important stakes on the work of digital economy. It would not be in our favor to step back from the work at the OECD. You have to engage fully, carefully, and very aggressively in defending your principles and defending the U.S. tax base in those situations in which other countries are trying to rewrite the rules and take money that belongs to the U.S.
Both you and IRS’s Doug O’Donnell [commissioner of the Large Business and International division] had spoken about the importance of the OECD Forum on Tax Administration’s work in ensuring that a lot of this BEPS work is implemented appropriately at the field level.
Yes, the Forum on Tax Administration, which is attended by [IRS] Commissioner [John] Koskinen and Doug O’Donnell, plays a big role. It's really the place where the rubber meets the road where the tax administrators are getting together to think about how can we do the administrative side of BEPS in more efficient and thoughtful ways. It’s a very, very important body, and we’re delighted that IRS has taken such a lead role among the countries in the FTA.
On a more granular transfer pricing level, do you have any comments regarding Working Party No. 6's work on profit splits and permanent establishment?
First of all, Mike McDonald is the chair of Working Party 6. Mike is very, very highly regarded by others at the OECD. He’s worked there a long time.
The work on profit attribution and profit split will be in the mainstream of long-time transfer pricing thinking. In other words, the profit split is a highly technical area about the circumstances in which a profit split might be appropriate in a particular transfer pricing case. What it is not is some back door to an easy way to move towards a formula or to just throw your hands up and say this is really hard, so let’s split the profit with the local country. WP6 is fully in tune with that, and I think the work product that comes out of WP6 on profit splits will similarly be in the vein of the traditional transfer pricing work on profit splits, and I think the U.S. tax community will be pleased as these drafts come out.
On profit attribution, frankly, that is challenging. But the folks are working hard at it. Again, I think that the technical folks at WP6, the technical folks at OECD, with Mike’s leadership, will do a solid job of putting out something on profit attribution. It’s harder because, if you think about a branch as opposed to two subsidiaries in Article 7, the questions about the circumstance in which you might contribute intangible income to a branch are just naturally harder than what happens when you’re having relationships with two legal entities with contracts. Everyone is trying to work through that—although, as I discovered at the very beginning of my work at OECD, this big, intangible pot of money hangs over everything, so certain countries want to attribute more income to themselves and their markets, and that creates a tension that will play through this work, and we’ll just have to see where it goes.
Some of the work on PEs produced new standards that have been criticized by some as vague and more difficult to apply. There is also the option of applying the old standard in some cases—and now you’ve got the profit attribution work, which is raising the issue that you might have situations where you have a PE established and there’s no profit there, so what’s the point? What do you think of the overall work on PEs?
We never thought the attribution work should have been divorced from the basic PE work. I objected a few times to that, and I was met with a kind of a simplistic answer that they’re two distinct questions. Why would you redo the PE rule if you don’t think you’re going to get more income from it?
The other new issue that’s floating out there is, when I started practice, you rarely had a real-world PE concern if you had a subsidiary in the foreign jurisdiction that was actually functioning there. The more typical PE concern was when you had a few people going around and doing business, or you actually had a branch or office. What we’ve seen now is a desire to take the local subsidiary and turn it into a PE of the parent, and the goal of that is obviously is to get some of that intangible profit that the parent has.
I think the work itself will go where you suggest, which is that there will be cases in which the finding of the PE—if there’s the right income in the subsidiary to begin with—does not find additional income for the local jurisdiction. And I think the technical work will probably bear that out. Why we went through all this to begin with is a fair question.
I think the answer is countries wanted a shot at the intangible income—what the economists call rents—that huge multinationals get through exploiting their intangible property when it is not located in their country. I think all this supply chain reorganization stuff that’s gone on in the last 10 or 15 years has really exacerbated this, because I think that the technical U.S. tax lawyer—myself included—is very comfortable with the idea that I put a few little functions, a few little assets, a few people in that country, and they get a little bit of return on that, but that’s it.
When we moved to that [model], countries were very upset to lose the revenue from the more traditional supply chain, and that put even more pressure on finding that those are PEs of the parent, and they want to grab back in some of the IP income.
In the OECD projects on profit split and profit attribution under the OECD rules, each country has an effective veto over any new, final guidance, correct?
Yes. But I should add that it traditionally, it didn’t operate in a kind of a mechanical way where our country just put up its flag and simply objected. What’s happened is there’s been a lot of work around trying to get to consensus on tough issues in the transfer pricing work, and I think that is something Mike [McDonald] works hard to do. As a U.S. practitioner, when you read the papers that are done in transfer pricing, they don’t fit perfectly the U.S. transfer pricing lawyer’s view of exactly how the U.S. arm's-length standard works. And the reason for that is, it’s a horse—you know that expression, a camel is a horse built by a committee? You’ve got 80 or 90 countries around a table trying to parse and explain these things, so it would shock us all if the words came out exactly as the U.S. regs came out. But Mike is trying to get as close as we can to what we can all agree is the arm's-length standard.
Is the entry of the G-20 into the formation of international tax policy a good thing?
I think it’s an inevitable thing. As a matter of global economic policy, tax goes to the heart of a country’s ability to mobilize their resources to do what they need to do for their people, so it’s inevitable that the G-20 would want to be talking about tax issues. The person who occupies my seat needs to be highly vigilant because once you have something that’s recognized as some kind of a global agreement on a tax issue, or a direction, or a policy, it’s very hard to walk back from that, and other organizations will begin to develop policy around that.
I’ll give you some examples. We became very skeptical of repeated references to the digital economy in the communiques [from the G-20]. Not because the digital economy issues are not interesting issues, but we were not necessarily sure that that issue would benefit from the heightened focus it would get if it was referenced in a specific G-20 communique. We also did not want to see the communiques become a battle ground where every country is putting in its pet peeve with every other country. It's inevitable the G-20 will be involved, and it just has to be something that is managed and paid attention to.
What surprised you most about government service?
Two things surprised me most. One was the few resources that we have with the number of things that cross our plates every day. If you look at the size of the Treasury Office of Tax Policy in particular, it’s really a very small group of really talented people. And yet, literally, everything I have to say that hit international tax in the United States government came through me and Danielle Rolfes [international tax counsel]. So we were something like a two-person law firm before it went up to our boss. And so that surprised me.
The second thing where I got a big education was how coming out of a technical tax background, watching how policy and political matters took on a life of their own independent of technical rules. When the Panama Papers hit, it not only reverberated in the space of individual wealth tax evasion, but calls for public country-by-country reporting for multinationals. The Panama Papers frankly had nothing to do with multinationals. But it almost doesn’t matter what the reality is. What matters is you’re now managing a political reality that [says] transparency is always good in all settings. As a technical guy, we were taking a very different view of those issues.
The third example is when the multilateral instrument first came out, the United States said that we don’t really want to participate in that. And that was, in part, a resource issue, and we also didn’t really see that it was going to produce a document that we had so much interest in. But other countries in the world perceived that as the U.S. stepping back from BEPS—even though that wasn’t the minimum standard. We already have lots of things in our treaties that the [multilateral instrument] had, but the perception and the reported reality became the U.S. was stepping back from BEPS. So we did a U-turn and said, OK, we’ll participate.
That connection between the technical tax and the larger, political realities were something where I was constantly becoming educated and surprised.
What would you like to be most remembered for from your time at the Treasury?
The team that I led. We were always intensely focused on doing the right thing.
I also worked very, very hard to approach the job with a certain degree of candor and openness with all the stakeholders who came in to see me, and I did that because I thought that that’s what a public official should do, and so the integrity that you brought to the job in terms of trying to have honest discussion of people about issues is something I cared a lot about and tried to do.
I also tried to actually engage as a public official. I thought that I would be a better public official if I could explain clearly how I was thinking about something, because that gave the other side the opportunity to engage me and sometimes point me in a better direction.
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