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1 1 (July 12, 2021)

handle is hein.crs/govedzf0001 and id is 1 raw text is: July 12, 2021 International Tax Proposals Addressing Profit Shifting: Pillars 1 and 2 On June 5, 2021, finance ministers of the G7 countries, including the United States, agreed in a communique to two proposals addressing globalprofit shifting. They agreed to Pillar 1, allocating rights of taxation ofresidualprofits to market countries of at least20% forcertain digitalservices for large profitable multinationals while eliminating digital services taxes. They also agreed to Pillar 2, imposing a global minimum tax of at least 15%. These proposals were developed in OECD/G20 blueprints for addressing profit shifting and base erosion, which involved participationby 139 countries. The G7 agreement is a general agreement and does not address the detail in thes e blueprints. This G7 communique is a first step in the process ofreaching a multilateral agreement and is not binding. Some aspects might require legislative changes. The OECD reportedon July 1, 2021, that 130 countries have joined the framework. On July 10, the G20 endorsed the plan. The agreement does not mention a specific revenue threshold, but the OECD in another initiative had proposed a threshold for country-by-country reporting ofE750 million. The next two sections discuss thetwo pillars as outlined in the OECD/G20 blueprints. Pillar I The standard international agreements historically have allocated the first right of taxation of profits to the country where the as setis located. This location may be where the as s et is created (e.g., frominves tment in buildings, equipment, orresearch) or where the rights to the assethave been purchased, which may happeneasily with intangible assets, such as drug formulas or search algorithms. Many U.S. multinationals have sold the rights to intangible assets to affiliates in other countries to serve the foreign market. This systemallocates profits between related parties on the basis of arm's -length prices (i.e., the price upon which a willing buyer and a willing unrelated seller would agree to trans act), although true arms -length prices often are difficult to determine. With the advent of companies providing digital services that are often free services to consumers (such as search engines, online market places, and sites for social networking), an argument has been made that the country where the users reside should have a right to taxsome of the profits of these companies because the users create value. Advocates also arguethat these companies escape taxes on some oftheirprofits by locating as sets in tax havens. Several countries have imposed digital services taxes, although generally in the formof excise taxes (such as taxes on advertising revenues, digital sales of goods and services, or sales of data), while proposed changes in the taxation of profits are being discussed. The United Kingdom(UK) enacted a divertedprofits taxwith a similar objective. The United States has decided to impose tariffs against sevencountries that imposeddigitalexcise taxes: France, Austria, India, Italy, Spain, Turkey, and the UK, although these tariffs were temporarily suspended until November 29, 2021, to allow time for further negotiations. Pillar 1 would allocate some rights to market countries to taxprofits of digitalized firms (and countries would eliminate their digital services taxes). In 2020, then- Secretary of the Treasury Steven Mnuchin signaled the U.S. position thatnegotiations overPillar 1 were at an impasse. The G7 agreement reversed that position. The Pillar 1 blueprint would allow market countries a share of 20% of the residualprofits (defmed as profits after a 10% margin formarketing and distribution services) of large multinational companies. As noted earlier, this agreement does nothave force oflaw and is viewed as a first step. The proposal would allocate the residual share based onrevenues (suchas sales of advertising) andthe location of the user or viewer for an array of digital services and split the residual share 50:50 between thelocation of the purchaser and seller for online markets. The OECD/G20 blueprint provides a positive list of the businesses covered: sale or other alienation ofus er data; online search engines; social media platforms; online intermediation platforms; digital content services; online gaming; standardized online teaching services; and cloud computing services, as well as online marketplaces. This agreement is viewed as a fundamental departure from the traditional allocation of the first right of taxation to the owner of the asset, which is consistent with the economic concept of profits as a returnto the investor and not to the consumer. Although the Pillar 1 proposal does not conformto the traditional framework, it could serve thepurpose-if agreement is reached-ofheading off unilateral action, as has developed with the digital s ervices taxes. Fromthe viewpoint of the United States, which has large multinational digital firms (e.g., Google and Facebook), the arrangement couldbe costly. The excise taxes that wouldbe eliminated are borne largely by the customers; that is, an advertising taxdecreases thenet price froms ales and would lead to higher prices to advertisers, which would in turn be reflected in higher product prices to customers who are largely in the country imposing the excise tax. Were countries unilaterally to impose taxes that are tied to profits without an agreement, under proposedregulations, U.S. .conress.ov

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