The BEPS Project: 5 Years Later

David Stewart: 0:01

Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: BEPS, five years later. On October 5, 2015, the OECD released the final reports for its base erosion and profit-shifting project. The project had been a two-year sprint to update international tax rules to better align taxing rights with value creation. It included 15 action items dealing with issues such as treaty rules, hybrid mismatches, information sharing, and transfer pricing. The project represented the most fundamental rethink of international taxation in decades and produced important new concepts such as the multilateral instrument and country-by-country reporting. However, the BEPS project did leave some work unfinished. Action 1 called for changes to the taxation of the digital economy. And while a final report was produced that made some recommendations, discussions have continued through the OECD inclusive framework, which recently released its blueprint for a two-pillar approach. So to look back, I reached out to someone who was closely involved in the BEPS negotiations for his perspective on how the OECD did and what's happening now. Joining me now is Robert Stack. He's a managing director at the national tax practice of Deloitte Tax LLP and served as U.S. Treasury Deputy Assistant Secretary for International Tax Affairs during the BEPS project. Bob, welcome to the podcast.

Robert Stack: 1:20

Hey. Thanks so much for having me, Dave.

David Stewart: 1:22

Now, it's been five years since the BEPS final reports were issued. First off, can you tell our audience about the role you played in the BEPS project?

Robert Stack: 1:29

Sure. As the deputy assistant Treasury secretary of International Tax Affairs, I was the lead U.S. representative at the OECD with respect to the entire BEPS project. All 15 action items. I also served on the bureau of the BEPS project, which is kind of like a board of directors, so a smaller group of countries doing that. I was also the co-chair of the Digital Economy Task Force since digital was so important for everybody. I co- chaired that along with my French colleague. And then other members of my Treasury team kind of sat on the individual working groups for the individual action items, but then we all coordinated together to kind of advance the U.S. positions during BEPS.

David Stewart: 2:07

Now, how much of your time was devoted to the project?

Robert Stack: 2:10

That's a cool question. It varied a lot. I'm going to guesstimate something like a third of my time. Those Treasury jobs, you've got the regs, the OECD, you've got treaties, and then you have all sorts of other things across your desk, like the prime minister of Singapore is coming in and the Treasury secretary wants to get briefed on tax issues in Singapore or something like that. So, I never really charted it, but something like a third of my time sounds about right.

David Stewart: 2:34

So, looking at how the BEPS project proceeded, and as the U.S. negotiator there, do you feel like you met your goals for the outcome of the BEPS project?

Robert Stack: 2:42

In some respects, yes. I think in some respects, maybe less fully than I would have wanted. If you look at something like our goals going in, there were some broad things where there was a lot of government agreement. Like, can we do better with interest limitations? Can we do better in hybrids? So, some of the meat and potatoes issues of BEPS. They were the less sexy ones, but they were kind of important from a government policy point. Can we design better CFC rules? And so, in that respect, there was a lot of collaboration and I think that work went reasonably well in a sense of governmental work. In transfer pricing, our big goal was to kind of stay as close as possible to the arm's-length standard. Not withstanding transfer pricing was under a lot of attack, mostly because it had suffered with its politically because of the perception that the transfer pricing rules would be used to put income and tax havens and the like. And I thought— again here working with my colleagues Mike McDonald, Brian Jenn, and the IRS folks, like Chris Bello— we really worked hard. It was over three action items to keep it as close as possible to arm's-length. And I felt very good about that. Other people wanted to turn them into mushy or anti-abuse rules and subjective things and the like. So, in that sense, I'd say yes. But in a second sense, I think we would have wished— if you look at something like the principal purpose test in the MLI, we were never big fans of very loose, subjective standards because we think it hurts certainty and administrability for taxpayers. And so things like that, and the new PE standard that were done, were probably looser than I thought was probably good tax policy. But again, in a big consensus organization for variety of reasons there wasn't much we could do about that. I wouldn't— a third point, which is at the end of the day, we all agreed on four minimum standards. And another one of our objectives was to agree to things at the OECD that we could actually implement as a Treasury department. So, minimum standards were country-by-country reporting, the work on harmful tax practices and exchange of rulings among governments, treaty anti-abuse rules, kind of like our LLB, and improvements to the MAP, the Mutual Agreement Process. And on that last one, I would just add, again, it's kind of behind the scenes. It was a great need for improvement in how governments solve controversies among themselves. And I think a lot of very good work was done there, including things like peer review. And that was a big goal of the U.S. government, as well as a big chunk of the business community.

David Stewart: 4:59

Now, to look more generally at the goals that the BEPS project started out with, so the project itself. Did it meet its goals? What sort of successes would you say to the project overall had?

Robert Stack: 5:08

The way I like to think about the BEPS project for the world was first off, many of these action items were about shoring up what you might think of as all the tax arbitrage opportunities that are out there in the world. And that's where things like interest in hybrids come in, and CFC rules, and the like. So, a lot of best practices that I think OECD felt good about afterwards because much of it got enacted in Europe through ATAD and various ways around the world. There were other things, as I said, like the transfer pricing— but there you hear often Pascal[ Saint-Amans] will say, or others would say,"Well, we really weren't that satisfied with how the transfer pricing came out." But there we were struggling with really difficult issues around allocation of capital and risk and intangibles to jurisdictions. Very, very tough issues. Again, as I say, we were really trying to keep it close to the arm's-length standard, but I think other countries I've heard said since BEPS were not as satisfied with that. Obviously the digital economy was action 1 and we did a bunch of things in action one. Other countries obviously were not satisfied that we had done enough. And then here we are today back in the digital debate. But I'll just point out there that the interest of the U.S. in that debate were really very different from other countries. Because a lot of that perception was other countries wanted to tax our national champions more. And that was one of the more awkward positions we were in, in terms of, in a sense telling the world that we were not really ready to go there yet. And as you now know, the work has expanded beyond just the focus on digital companies.

David Stewart: 6:36

On that point, the digital economy project that's ongoing, could more have been done under action 1 or was that just not possible?

Robert Stack: 6:43

I don't think so at the time. If you look at the proposals at the time for the digital economy, what was largely a debate around something like a digital permanent establishment. And what I'm about to say next is a little tax weedy and nerdy, and I apologize in advance, but—

David Stewart: 6:57

Oh, that's fine.

Robert Stack: 6:58

But the problem is, everybody knows you can find the revenue. You might be able to find the revenue from a jurisdiction as the base of putting in an income tax. But getting countries to agree on how to attribute the profits, the deductions to each jurisdiction, is really very challenging. And if you don't get that right, you're going to have double tax everywhere. And if you go back a hundred years of international tax policy, it's really all about avoiding double tax on the same income. We try to push forward the VAT solution and tell countries,"Look, if you need more revenue in the market, the VAT rules are kind of set up to be gross income oriented." And even on the digital permanent establishment, by the way, there really wasn't an enormous amount of support among countries for that. And that's why the report didn't come out with more. But we did push VAT. We did study the industries and say,"Look, if you think you know who the digital economy players are, you don't really know it because look at every company is doing something now digitally." And so, we came up with this concept that you can't ring-fence digital and that has gone more into the future. And the direction the work took of course was very different, if you think of pillar 1 and 2, to anything that was really on the table back when we were doing digital.

David Stewart: 8:06

Now, as you mentioned, the principle is that you can't ring-fence the digital economy. Now, is that still the principle that should be going forward?

Robert Stack: 8:14

It is for a couple of reasons. First, when you get into one of these multilateral meetings, it's really difficult to have 138 countries around the table with one country being perceived as the country that's going to give its taxing rights to other countries. And so politically, even in our administration, and that has continued in the Trump administration, it's difficult for the United States to simply show up and say,"OK, the rest of the world can tax our companies more and we get nothing for it." And so politically, of course, it's enlarged now to take into account more than just tech companies. So, that's kind of point number one on the political side. But also as a business matter and a conceptual matter, everybody listening here today knows that golly, every company is somehow engaged through digital means with the market. And so, to pick one type of business out as opposed to another is intellectually difficult. And that leads you to the third point, which is something I think they're still struggling with, which is what's the principle here that we're trying to enshrine? What's the drive? Is it just companies that make a lot of money? Is it just digital companies that make a lot of money? Is it a marketing intangible approach? And I think that's been a struggle in this debate really from the inception of when I was back at Treasury.

David Stewart: 9:23

Now the OECD and the inclusive framework are pursuing this two-pillar method to tax the digital economy. Is there a principle that one can arrive at underlying this? Pillar 1 is a new nexus concept and pillar 2 is this minimum tax concept. Is there an underlying principle that you can arrive at for these two pillars?

Robert Stack: 9:43

In pillar one, there was a time— it was just following on our time at Treasury, right? When Chip Harter, my successor, came in, they kind of were really where we were, which was,"We're not going to do this just for digital companies." But they made this link. And they said, you know,"You, the rest of the world, seemed concerned that the digital companies have access to the market in a way that in their business model creates value, not just the fact of them. Some connection to the market, like a marketing intangible." And so the current administration took that broader and said,"Hey, this will work better if we actually bring into scope for pillar 1 amount A, consumer-facing businesses. Not just digital, but all businesses that are making some investment in access to the market that creates a marketing intangible." But the problem became, if you look at where the work moved, once they said that they were going to have two tracks of in-scope businesses, automated digital services and consumer-facing, they brought in the cloud business from sales, which everybody knows is more or less a business-to-business type project. So, now you do start asking yourself,"Well, wait a second. What happened to the marketing intangible principle? Because that aimed at individual consumers." But if big company A is selling cloud services to big company B, you don't have that anymore. And so, I think they've gotten a little bit lost in those principles. And I think it's one of the things weighing down on the project. That, plus the principles behind some of the consumer-facing carveouts that they've got. So, what often happens is the search for a political consensus can often kind of harm, let's say the principal purity of the project. And I think that's a good explanation of where they are.

David Stewart: 11:15

So, speaking of where things are today, right now we're watching a bunch of countries going forward with digital services taxes that are based on a revenue basis. Is that evidence that not enough was done yet, or just a perception that not enough was done?

Robert Stack: 11:29

Well, I think it's evidence of a few things. First, enormous needs for revenue in these jurisdictions. A lot of this started, again, back in our time after, I don't mean the DSTs, but this need that governments have for revenue. And that will increase during COVID. Number two, there are, and I always used to say most notably in Europe, you know, enormous pressure that grows up politically in their domestic politics to tax digital companies as people perceive who they are. So I think, and number three, I think there was frustration in the rest of the world that U.S. did not come to some agreement on how to tax digital companies. And the Europeans were very plain in saying this. The DSTs took off as in effect a way to say,"Well, we'll do this as an interim measure until we get a more global solution with a goal of bringing the U.S. government and the U.S. business community back to the table to seek a better solution based on income tax principles as opposed to gross income principle."

David Stewart: 12:25

Now that they're out there, is it possible to get the DST genie back in the bottle?

Speaker 3: 12:29

I'm not sure, actually. I might unpack that question a little differently, which is if you look at pillar 1 and 2, by a lot of people, best case scenario, even if like next month they miraculously came to a political agreement, we're looking at years of writing the laws that the parliaments would pass. Writing the treaty provisions that might get put into an MLI. And so, sometimes when I speak in public, I talk about: is it 2024 or 2025 when finally, if we had agreement, these things would be in place?

Robert Stack: 13:00

In the meantime, as you pointed out, the DSTs are rolling down the road very quickly. Just a week or so ago, the Spaniards announced they were going to do one. They put it in their gazette and it will be effective in January. And so, in that sense, the DSTs are coming at us well in advance of any practical solution that can be implemented in law in countries. And therefore they need to be thought about on a separate track. So, the current administration has done that for three investigations and the like. And people can have that debate about, are they like tariffs? You know, should they battled separately? But the fact of the matter is that that is a battle that's before us. Now, the harder question is: will countries then agree to give that up when and if the international consensus is reached? But, look, there's a lot of skepticism that if a country puts in place some type of a system that's collecting revenue and it's successful from their point of view in collecting revenue, whether they would walk away from it. But from a U.S. perspective, there'll be no deal internationally unless we can define the relevant unilateral measures that countries will have to walk back from. But big questions mark this. And no one's going to walk back from the DSTs until we implement pillars 1 and 2 in these several years out, so very tricky. And we'll just have to see how that plays out.

David Stewart: 14:13

Now, looking back at the BEPS project from the bigger picture, are there any parts of it that you wish you could go back and redo?

Robert Stack: 14:19

People used to give me grief for letting the option of the equalization levy into the digital task force document, for example, as item one. Because India turned right around and did an equalization levy. We were very careful not to recommend anything. And yet, at the same time, when you're writing one of these big documents with, then it wasn't 137 countries, then it was about 40 countries in the room, listing options can seem rather a benign thing to do, or at least it shows things that group was thinking about. Problem is in the OECD when you put anything in an OECD document, governments are ready there to pick it up. And, and in fairness to they picked it up in a way we said, they said,"We thought it was consistent with our international tax obligations." Whether it's true or not. But the point is, that's what we said. They said,"We'd done it in that way." And I don't know. I wouldn't say I would have done that differently necessarily, but that was one thing that stuck. On the digital itself overall. I really think we played the right hand at the time. And there's not much I would go b ack and do differently. I certainly wouldn't have reinvented the international tax system during action item one. You have to remember BEPS was a two-year project. We had 1 5 action items running like you couldn't believe. So, the idea that we could have come up with some really interesting novel approach to action 1 and gotten across the finish line in two years, I just think i t's not something practical.

David Stewart: 15:33

You mentioned earlier country-by-country reporting. We're now five years after that report came out. Is country-by-country reporting helping tax administration?

Robert Stack: 15:41

I don't really think we know yet. Because, if you think about it, when we did country-by-country reporting, there was a little kind of issue as we were moving through it. Some countries wanted a much more robust list of categories of information. And the U.S. worked very hard with our business community to kind of pare that down to seven chunks of information on a per country basis. But the fact is, and the tradeoff was, other countries said,"OK, we'll go along with a shorter list, but we want to revisit this in 2020." Well, to be fair, 2020 was never really a realistic timeframe to reexamine this. Why? They didn't begin to exchange country-by-country information until June of 2018. So, just think of government like,"OK, so the information's coming in. Is it any good? How are we going to integrate it into our audit procedures, et cetera, et cetera?" And so, I would have thought the countries don't have the data yet to really know is it helping them with risk assessments or not? And it more prudent thing might've been to let this project kind of roll on longer so you could really ask and answer the question you posed. So, I have no real visibility into its full effectiveness. They're doing some new reports on it now. But my gut is that governments just haven't had the time with it yet to really say this was helpful or not.

David Stewart: 16:55

Are you concerned at all about the continued push among some governments to make these public?

Robert Stack: 17:00

I'm concerned principally on one really important level about multilateral tax cooperation. If you go to the table and you make a deal with other countries in a multilateral setting, and then the next thing you know, you're kind of telling the world,"Well, that deal wasn't good enough for us. That deal only gave it to tax authorities. We want it to be generally publicly available and we're going to do that." I think the signal you send is that the multilateral process doesn't really result in a consensus that people will adhere to. And so, the concern about building confidence in multilateral approaches is just that. Are countries going to stick with the deal? And so I've always viewed it through that prism. As you know, the proposals to make it public tend to come out of the accounting side of the ledger, where people are saying,"Investors need this,: or whatever. Because there's really no tax information that is always confidential with tax authorities. I don't see anyone proposing to walk away so the tax authorities release tax information. Those proposals are coming from elsewhere. By that I mean, things like accounting standards, SEC-type approaches. But I will add, even in that space, that there's a lot of mismatching because of the design of country-by-country. If you know country-by-country in the weeds pretty well, you know that when it's designed for purposes of determining risk, it's not at all the same as some really accurate determination that might be useful to others. But having said all of that, there is a push for more transparency in the world. And the business community sees that. Whether it's country-by-country or other elements of transparency, folks have got to be watching for that and reacting to how it might hit their business.

David Stewart: 18:35

One of the other major outcomes of the BEPS project was the multilateral instrument. Do you see this as a template for future international tax reform?

Robert Stack: 18:43

You know, it could be. The U.S. didn't sign it for a couple of reasons. I mean, one was a lot of what the MLI did were provisions that we already had in our treaties. And the only one we might've gotten was arbitration, but that's tricky for us given the fact that our Senate has approved certain types of arbitration provisions. And we weren't sure that you kind of would approve just anyone that would have shown up in MLI. So, as a theoretical matter, MLI as a way to get a lot of countries to agree to stuff is, from my perspective, a tool of international tax policy that is certainly acceptable. I think the cautioning note you have to draw, if you're in the United States government, is our State department basically handles in the first instance treaties. And it's very, very difficult in my experience to show up to the State department with kind of a pre-cooked language of an MLI and expect them to agree to it. And so, the only word of advice is if the U. S. were ever going to work on an MLI on whatever topic, you need to really have the state department at the table from day one so that whatever we would agree to pass muster with their legal team. I know that sounds weedy, but it's practically really important to have the U.S. presented with certain completed language and get the rest of our government to go along.

David Stewart: 19:53

So, do you see any possibility of the U.S. being a party to one of these agreements in the future?

Robert Stack: 19:57

Yes. In the right circumstance, if it was in the U.S. government interest, I think we could be and would be. And I know sometimes the press on us not joining the first MLI was there was some principle objection to multilateral tax agreement. That just simply was not the case. So yes, I think in the right circumstance, a U.S. administration might want to go forward with an MLI.

David Stewart: 20:15

Not long after the BEPS project, the U.S. drastically changed its international tax regime. Does that take some of the sting out of the things that the OECD was trying to correct?

Robert Stack: 20:25

Well, you know, it's a great question. It did in a lot of respects. I mean, if you look at, for example, this whole notion, one of the drivers of BEPS was clearly the fact that U.S. companies could defer tax on income that was not booked on shore in the United States. It was a bit of a myth that it meant that the income didn't come into the United States, but in fact, the money came in. It's just that the companies didn't have to book it here. I used to say that put like this big pot of money in this middle of the world and BEPS was in part about trying to get at that pot of deferred income that we left in the middle of the world. But once tax reform happened, you don't have that situation anymore because it's GILTI causes this income to come up real time, either through subpart F or through the GILTI. And so that issue is largely off the table. I think that also made the use of pure tax havens less palatable. And also, I think somewhat importantly about our tax reform is, in fact, that the economic analysis that just came out from the OECD. There's a lot of people talking about how it hasn't really waited for the effects of U.S. tax reform, to the very point of your question, to see what impact BEPS had and also what impact TCJA had on the issues that kind of drove BEPS. And I'll tell you in practice, I think you can see that a lot of the techniques that we used pre-TCJA are really not there. And so it's a really fair point. I wouldn't take that all the way. I wouldn't say nothing in BEPS should have been done because of TCJA. I mean, you still have things we did in TCJA like the interest limitations and hybrid rules. You could say they came out of BEPS, although the U.S. Treasury was working on those issues independently all along. So, I wouldn't take it all away and say, BEPS didn't need to be done because of TCJA. But I think it's taken a lot of the sting out of the things that caused the BEPS project to go rogue.

David Stewart: 22:11

Things seem a bit unsettled in international taxation these days. Do you see a potential to get back to more of an equilibrium where rules aren't changing as rapidly as they have been recently?

Robert Stack: 22:21

I think of that through kind of two lenses. The first lens is as I reflected on my time at Treasury and thinking about the OECD, traditionally, the OECD's big areas were treaties and transfer pricing, when transfer pricing was really a part of treaties. And again, the OECD was used to be the group of the 35, you know, developed countries that happened to be members and, and everybody around the table kind of had an equal stake. Everybody understood that if I write a treaty rule one way, it's either going to be good for me or bad for me. But that's why I'll come up with a principle so that all of us around the table kind of feel like we should get to the right place, because there's really no clear winners or losers. And that element of an international negotiation was actually there for a big chunk of BEPS. Because as I mentioned, it was really around designing the rules so countries could kind of stop some of the arbitrage and things like that. And it wasn't there in the digital economy because as I mentioned, it seemed more one-sided in terms of the winner and the losers. And I think you need to return to that. I think you need to be able to get the multilateral stuff to work better by being sure that everybody around the table has a, maybe never an equal stake in the outcome, but a sufficient stake in a successful outcome that you can kind of get there. Sometimes I think of the difference between what we're doing now and let's say trade negotiations. I'm not a trade guy, but what you understand just from reading the papers and whatnot, is all the countries get together. And somebody throws in this type of a trade concession favor of somebody else throwing in a different one. And you get these big agreements that have to go through Congress and whatnot. So this, to get better at that, I think we need to create that kind of environment again. The second point I'd make is we're living in a time of austerity for these governments. COVID has exacerbated that greatly. And we're also living in a time of great nationalism around the world that we're seeing in a variety of places. And so, to bring it back, I think we're going to need a type of leadership that will build up the belief, not just in one country, but in many countries that this type of multilateral cooperation actually does good for everybody. And trade is a good parallel for that because it was a similar area where they struggle right now in a multilateral setting on trade. We're struggling in tax. So, I think we need to take the longer view and say,"Are we going to recreate the confidence in these approaches that countries will come together and kind of do the right thing?" That doesn't mean they'll never be self-interest. There's always self-interest around the table. But it needs to be kind of blended in with some mutual wins and losses and tradeoffs and a sense that the multilateral approach is better than a go-it-alone approach.

David Stewart: 24:49

I have one more question for you and it's kind of about the way the world is now. So, the BEPS project was basically a two-year race to the finish line on all these things that involved a lot of in-person meetings over the course of the project. These days, all meetings are being held virtually. Do you think the BEPS project could have been done under this new virtual meeting environment?

Robert Stack: 25:09

Oh, wow. I haven't had to participate. When I talked to my former colleagues at Treasury, I do understand that it's a very challenging environment in which to do things. For example, in a big meeting room, everybody can put up their flag and participate in the order the chair calls on you. You need different protocols in virtual. You've often heard it said that you don't have the time for the hallway conversations that are, that really are important in these negotiations. I can't say it couldn't have been done, but I think it would have been much harder. Just talking to the folks that are doing the virtual today.

David Stewart: 25:40

Bob, it has been fascinating talking to you. I thank you so much for being here.

Robert Stack: 25:43

Great. Thanks guys.

David Stewart: 25:46

Now, coming attractions. Each week we highlight new and interesting commentary in our magazines. Joining me now from her home is Acquisitions and Engagement Editor in Chief Faye McCray. Faye, what will you have for us?

Faye McCray: 25:56

Thank you, Dave. In Tax Notes Federal, Robert Kane considers when an S corporation should elect to be treated as a partnership for purposes of determining the tax on GILTI. Kristin Lebovic and Vince Farhat analyze trends in CARES Act compliance enforcement. In Tax Notes State, Jeffrey Friedman and Michele Borens review the application of marketplace collection regimes. Scott Roberti, Rebecca Bertothy, and David Sawyer examine the U.S. federal and state fiscal and economic landscape leading up to the November 3 election. In Tax Notes International, Andrew Lyon examines the 2018-2019 increase in cross-border mergers and acquisitions. Erik Kastrop discusses Dutch withholding taxes. And on the Opinions page, Robert Goulder examines why the United Kingdom’s richest man is leaving the country for Monaco. Marie Sapirie argues that bipartisan agreement about the child tax credit suggests that it might be a good candidate for temporary relief efforts and possibly a longer-term expansion. We are so excited to announce that the 2020-2021 student writing competition submission period opens November 1, 2020. For more details, visit www.taxnotes.com/students.

David Stewart: 27:13

You can read all that and a lot more in the pages of Tax Notes Federal, State, and International. That's it for this week. You can follow me online@TaxStew, that's S-T-E-W. And be sure to follow@TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.