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1 1 (October 13, 2021)

handle is hein.crs/govefzp0001 and id is 1 raw text is: Updated October 13,2021 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 communiqu6 to two proposals addressing globalprofit shifting. They agreed to Pillar 1, allocating rights of taxation ofresidualprofits to market countries ofat 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 generalagreement and does not address the detailin thes e blueprints. This G7 communiqu6 is a first step in the process ofreaching a multilateral agreement andis not binding. On July 10, the G20 endorsed theplan. Some aspects might require legislative changes. The OECD reported on October 8 that 136 out of 140 countries participating have joined the framework. 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 the two pillars as outlined in the OECD/G20 blueprints. Pilar I The standard international agreements historically have allocated the first right of taxation of profits to the country where the as set is located. This location may be where the as s et is created (e.g., frominves tment in buildings, equipment, orresearch) orwhere 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 digitalservices 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 argue that these companies escape taxes on some oftheirprofits by locating as sets in tax havens. Several countries haveimposed 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 seven countries that imposed digital excise 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 StevenMnuchin signaledtheU.S. position thatnegotiations over Pillar 1 were at an impas se. The G7 agreement reversed that position. The Pillar 1 blueprint would allow market countries a share of 25% of the residualprofits (defined as profits after a 10% margin formarketing and distribution services) of large multinational companies. It would apply to companies with global revenue turnover of more than $20 billion and apply to market countries thatprovide at least $1 million in revenue. As noted earlier, this agreement does nothave force of law and is viewed as a first step. The proposal would allocate the residual share based onrevenues (such as sales of advertising) and the location ofthe user or viewer for an array ofdigital 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 ofthe businesses covered: sale or other alienation of user data; online search engines; social media platforms; online intermediationplatforms;digital content services; online gaming; standardized online teaching services; and cloud computing services, as wellas online market places. This agreement is viewed as a fundamentaldeparture from the traditional allocation of the first right of taxation to the owner of the asset, which is consistentwith the economic concept of profits as a return to the investor and not to the consumer. Althoughthe Pillar 1 proposal does not conformto the traditional framework, it could serve the purpose-if agreement is reached-ofheading off unilateral action, as has developedwith the digital services taxes. Fromthe viewpoint of the United States, which has large multinational digitalfirms (e.g., Google and Facebook), the arrangement couldbe costly. The excise taxes thatwouldbe 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

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