Former U.S. Official: No Policy Solution to Taxing Digital Economy

The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.

By Kevin A. Bell

The OECD Committee on Fiscal Affairs would likely provide greater tax certainty to tax administrations, and multinational companies, by working on issues involving private equity and access to treaty benefits than on taxing the digital economy, a former U.S. Treasury official said.

The world is entering a new phase of uncertainty due to the recent treaty changes enacted through the Organization for Economic Cooperation and Development’s multilateral instrument (MLI), Robert Stack, the former deputy assistant secretary for international tax affairs, said June 8. This is largely due to the unique issues surrounding how the principal purpose test will be applied in the case of non-collective investment vehicle funds.

The issues revolve around the desire to achieve a single level of tax on passive investors through private equity vehicles, while balancing the needs of countries to ensure at least a single level of tax is paid and opportunities for evasion and avoidance are minimized, Stack said.

“I confess that our team did not come up with a magic bullet solution while I was in Treasury,” Stack said. But it is important work of the sort that the OECD can excel at “because of its own technical experts and those of the countries around the table, and what should be a shared interest in a positive outcome that promotes investment.”

However, the OECD isn’t currently equipped “to advance the ball much in terms of proposing concrete solutions to the taxation of the digital economy,” Stack said.

Stack made his remarks at a transfer pricing conference co-sponsored by Bloomberg BNA and Baker McKenzie LLP in Washington.

Forum on Tax Administration

The OECD works in a broad range of areas where the U.S. is a full partner and fully engaged in its efforts, Stack said. These, he said, are “areas that are I think non-controversial and almost certain to continue.”

He gave the example of the Forum on Tax Administration, which brings together tax administrations from all over the world to cooperate on a range of issues. “Indeed it is the MAP Forum of the FTA, that is coordinating responses to BEPS Action Item 14—work on improving MAP, that I will think will pay true dividends down the road.”

MAP refers to the mutual agreement procedure in treaties, one of the subjects of the OECD’s Action Plan on Base Erosion and Profit Shifting (BEPS), an extensive rewrite of the global tax rules that mostly concluded in late 2015.

BEPS Minimum Standards

Stack, the former U.S. representative to the OECD Committee on Fiscal Affairs, said there are items on the CFA agenda that can succeed “because they represent efforts from which all participants can benefit, and in which all participants have more or less equal stakes.”

The implementation of the BEPS minimum standards and the related peer reviews are an area where the countries have come together to limit base erosion and profit shifting, he said. Those areas, which aren’t particularly controversial, include country-by-country reporting; avoidance of treaty abuse; the avoidance of harmful tax practices and the exchange of tax rulings that affect cross border tax; and the improvement of MAP.

“All of this work can and will, I strongly suspect, continue, as it should,” he said.

Transfer Pricing

Stack said a particular challenge that relates to the BEPS inclusive framework—the effort to get more countries, especially developing countries, to adopt measures from the BEPS project—involves the degree to which the countries subscribe to some of the core principles that hold the OECD together. One of those core principles, he said, is the arm’s-length standard.

“The OECD might endeavor to have all inclusive framework members, whether OECD members or not, for example, announce their agreement to—and or specific reservations to—the OECD transfer pricing guidelines by, for example, the end of 2018,” Stack said.

Digital Economy

Stack said searching for specific policy solutions around the taxation of the digital economy “is hardly likely to lead to a successful outcome.” That work is now squarely on the agenda with more political potency than ever before.

The recent Group of Seven Finance Ministers’ Communique dated May 12-13 resulting from their meeting in Bari, Italy, says: “We recognize the importance of monitoring and evaluating the developments related to the digitalization of the economy and, depending on the conclusions of the work by the OECD Task Force on the Digital Economy (TFDE), developing policy options, as appropriate, to address related tax challenges with a consistent approach. In this context, we look forward to the interim report of the OECD TFDE in 2018.”

Stack said this language suggests that the pressure is on from the G-7 to develop a consistent approach to policy options through the digital economy task force, which remains co-chaired by a U.S. Treasury official.

U.S. Multinationals

Stack said that during his time in government he had little doubt that the digital economy work was almost exclusively aimed at “our national champions, and consequently—at least in income tax terms—at the U.S. tax base.”

“I find it hard to imagine that any U.S. administration is going to agree to a new income tax regime that targets ‘the digital economy’ of which we appear to be the leaders,” Stack said.

None of this is to denigrate the intellectual basis for arguments to the contrary, Stack said. “Although I have had my doubts about what the basis is—but rather to state in very practical terms, that it is hard to see this work bearing fruit.”

Cost of Blocking Consensus

Stack said the U.S. government and the U.S. business community will have to weigh the cost of blocking consensus on consistent approaches against the likelihood that countries will all go their own way and companies will face a multiplicity of regimes around the world.

Similarly, the business community will need to assess whether putting “something” on the table might sate the European and broader appetite for action in this space, he said.

Those are fair points and important questions for discussion in the U.S. tax community and beyond that could even lead to greater constructive engagement on a global level, he said.

To contact the reporter on this story: Kevin A. Bell in Washington at kbell@bna.com

To contact the editor responsible for this story: Molly Moses at mmoses@bna.com

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