The Impact of the 2020 U.S. Elections on International Tax

David Stewart: 0:02

Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: going international. As the states certify the results of the 2020 U.S. presidential election, the world is anticipating how a Joe Biden presidency will affect international relations and foreign policy. A change in administration could also result in a shift in U.S. international tax policy, just as the international community is working to overhaul the global tax system for the digital age. Later on, we'll talk to Tax Notes contributing editor Robert Golder about what the incoming Biden administration means for the OECD's digital economy project. But first, here's Tax Notes reporter Andrew Velarde to discuss the impact of President-elect Biden's policies on U.S. international taxation. Andrew, welcome back to the podcast.

Andrew Verlarde: 1:43

Hi, Dave. Good to be talking with you.

David Stewart: 1:45

Let's start off from what policies have we seen from Joe Biden as he was running for president?

Andrew Verlarde: 1:51

Sure, Dave. Joe Biden's main theme here— he has a plan touted as a way to get multinationals to pay their fair share. We've seen some details out there, although it leaves a lot to be fully fleshed out. There's calls to raise the corporate rate to 28 percent from its current 21 percent. On top of that, he's proposed an offshoring penalty surtax of 10 percent. So that that sort of income would face a rate at 30.8 percent. Then there's a provision for a 15 percent corporate minimum tax on book income. It's unclear how that would be defined. That's applicable to companies making at least$100 million in profits. So, you can kind of think of this as a type of alternative minimum tax. There's also a provision for tax credit to bring production back to the U.S., and some rather vague statements about tightening inversion rules. The theme of this generally is that, and you're going to hear this from me a lot during this talk, there's a lot of details missing from this. I mean, a lot of the details, the details we do have, came from a campaign document in September. It's a campaign document. It's not in-the-weeds tax policy, but it's a jumping off point.

David Stewart: 3:02

All right, so, one of the biggest changes we've seen in the last several years has been the Tax Cuts and Jobs Act. In that, we ended up with this new concept of GITLI, the global intangible low-taxed income provision. Democrats have talked about getting rid of the TCJA. Do you expect that Biden will try to undo or drastically change any of the international provisions?

Andrew Verlarde: 3:21

So, I think you're going to see some substantial modifications at the very least. You mentioned GITLI. GILTI is actually where we have some of the most detail from the Biden— well, it had been the Biden campaign, but now the Biden upcoming administration. So, let's just level set a little bit here. Under section 951A, each U.S. shareholder of a CFC is subject to tax on GITLI, which is defined as the excess of its pro-rata share of tested CFC income over a 10 percent return on its pro-rata share of the depreciable tangible property of each CFC. That last element known as qualified business asset investment, or QBAI. Now, there's a tension between whether to start from scratch or substantially modify the TCJA. And we've gotten more details on these GILTI changes by the Biden administration. There are several prongs to these changes. One, for a while now, Biden has talked about modifying the rate on GILTI to go from 10.5 percent to 21 percent, a doubling of the rate. GILTI is taxed at a lower rate than the general corporate rate of 21 percent currently. Biden wants to double that. He wants to move to a country-by-country determination when examining the rate. As well as in these most recent campaign documents, he has language in there that would seem to suggest eliminating the exemption for the deemed returns under 10 percent, the QBAI that I referred to earlier. The effects of these changes could be huge, but the exact amount is hard to pin down. We have the Tax Policy Center has modified their estimates of these changes substantially as more details have come out, and it started estimating back in March around$300 billion. It's jumped up to$705 billion when they estimated it in October. The Tax Foundation's been a little more consistent with their estimates on how much revenue this will raise: around$290 billion. All these numbers are over the course of 10 years. Regardless though, it is probably slated to be one of the biggest revenue generators. With these GILTI modifications that are put into place, another thing to consider as many multinationals may not face the minimum book tax I talked about earlier. And a final element I'd like to point out is that this was a campaign document. They've oversimplified GITLI. They've just called GITLI a doubling the rate from 10.5 percent to 21 percent. Well, GITLI is more complicated than that. It starts with a 10.5 percent rate. Sure, but there's a foreign tax credit haircut. They only allow 80 percent of your FTCs, which means incomes could be taxed at 13.125 percent. On top of that, there are expense allocation rules, which could further reduce the cap for foreign tax credits. We don't know how Biden will address this. It's not in anything public that's come out, but there's possibility for change there as well.

David Stewart: 6:05

Are there any hints at what the incoming administration might do about other provisions, such as BEAT, the base erosion anti-abuse tax, or FDII, the foreign-derived intangible income provision?

Andrew Verlarde: 6:15

Sure. Those are two of the other main provisions, the main new provisions, that came out of the TCJA. And the plan is silent on those. A little interesting, I think, especially since FDII is closely tied with GILTI. FDII is the carrot to the GITLI stick. FDII's designed to attract intangibles with a deduction, encouraging intangibles to be brought back to the U.S. They're both tied to the same section 250 when calculating their deduction. But there are arguments out there though from some economists, some prominent economists, against keeping FDII because it encourages the offshoring of physical assets in the way it's calculated. Those arguments could potentially be in keeping with Biden's general philosophy of trying to encourage onshoring of jobs, of assets, of things like that. So it's something that bears watching, but we have no hints at what the administration actually will be considering with FDII. Another provision, you mentioned BEAT, the base erosion and anti-abuse tax. Also no discussion about what will happen with BEAT. BEAT's interesting because it's one of the few provisions from the TCJA that actually goes after foreign multinationals as well. It's not just U.S. multinationals. Before the TCJA, U.S. multinationals would often complain that they're at a competitive disadvantage when compared to their foreign counterparts. One could envision them making similar complaints if the rate goes up again and if GILTI gets more harsh. Well, the potential response to that could be to strengthen BEAT since that also applies to foreign multinationals. I'm sure a lot of companies would not be happy about that, but that is a potential response.

David Stewart: 7:51

So, what are you hearing from people in the international tax community? Any reactions?

Andrew Verlarde: 7:56

It's a bit too early for planning. As I said before, there's a lot of the details missing from these things. However, it's not too early for companies, for executives, to start putting this on their radar and even to start modeling. If executives, if practitioners are really looking for where this plan might go and have more details, I've talked to several folks that have recommended looking back to the old Obama Treasury green books. These are the details that came out in conjunction with the Obama budgets every year. The most recent year was fiscal year 2017. And there's a lot of details there and the amount of overlap potentially could be significant. I say, potentially, we don't know for sure. But for example, in the fiscal year 2017 budget and in previous years as well, there is a proposal for a minimum tax on CFCs and branches at 19 percent, minus 85 percent of a per country foreign tax rate. Albeit reduced for an allowance for corporate equity representing risk-free return invested in active assets. Now let's take a step back. Well, that last part sounds an awful lot like QBAI, and speaking more generally, it sounds a little similar to GILTI. Now we have Biden reversing course and calling seemingly for the elimination of the QBAI exemption. It's something worth watching because it's obviously not going to come out of the ether here, whatever gets chosen, whatever path they move in. Those green books also called for inversion rule tightening. I mean, we have a one throwaway line in that campaign document. We have a lot more detail in those Treasury green books. Broad brush strokes, those green books called for tightening of those inversions by lowering the continued ownership threshold for what qualifies as an inversion. When a bigger U.S. company acquires a smaller competitor and redomiciles to another foreign country, currently to be an inversion and miss out on a lot of the tax benefits of that, it's 80 percent or higher continued ownership threshold for the owners of the U.S. company. The green book proposed to lower that to 50 percent, so a substantial drop. And that would be key because a lot of those inversions would have an ownership threshold of U.S. owners somewhere between the 50 and 80 percent threshold.

David Stewart: 10:07

As we're recording this, we know that the Senate is at least 50 Republicans and 48 Democrats, and there'll be a runoff election in January. So, we're looking at the possibility of a Republican-controlled Senate and Democratic-controlled White House and House. That seems like it might make it difficult to get legislative changes through. Are there any sort of regulatory changes that could be made?

Andrew Verlarde: 10:30

Certainly. So, Dave, you're referring to the runoff elections in Georgia. If the Democrats take both of those seats, then it'll be a 50-50 Senate and the Biden administration would have the tie breaker. That doesn't happen, you're right. There's significant roadblocks potentially. On top of that, there's also concerns over raising taxes during economic struggles with COVID-19 going on, the pandemic. There's also needs for COVID-19 relief. So, a lot of this means that tax legislation may not rise to the top of the to-do list, at least not when they first come in. So, that leaves the regulatory action. We've seen a lot of international guidance in the last few months with the promise of more to come. So, just to get a small selection of that. So, the all-important foreign tax credit regs came out just a few months ago. The BEAT waiver, this would be a provision that would allow taxpayers to waive deductions in order to avoid the BEAT altogether. The BEAT would be inapplicable to them. And then we saw a few months before that, regs on the GILTI and subpart F high-tax exclusion high-tax exception. Just to level set a little there, the high-tax exclusion would permit an exclusion from tested income of amounts taxed at 90 percent of the U.S. rate. Now, that would change. Right now, it's 18.9 percent. With the corporate rate goes up 28 percent, that would go up as well. The regs that we see now, they move to conform the subpart F high-tax exception with the GILTI high-tax exclusion. I draw particular attention to this one because I have talked to a few experts that think that this one in particular could bear watching. The Democrats, back in February, Democrats Ron Wyden and Sherrod Brown introduced a bill called the"Blocking New Corporate Tax Giveaways Act," which would, it's looking to do away with the high-tax exclusion on GILTI. So, and that is in the regulations now. So, I think we should keep a close eye on that under the new Biden administration. Another regulation that might bear watching as well as the section 385 equity documentation rules. Those were done away with. Those could possibly be reinstated as well. And finally, just something to keep an eye out for would be the possibility of a temporary regulatory freeze when the Biden administration comes in in January. This is when the new administration comes in. They're putting in their people. They want to review everything that's currently being worked on before actually pushing out more guidance. These are temporary stops of what's getting pushed out in the federal register. This was done by both Obama and Trump when they came in. I would not be surprising if Biden did the same.

David Stewart: 13:10

All right, well, Andrew, this has been great. And I'm sure we'll have you back when we see how this all plays out. Thank you for being here.

Andrew Verlarde: 13:15

Thank you, Dave. It's been good talking with you.

David Stewart: 13:19

And now, we'll turn to the election's potential impact on the OECD's digital economy project. I'm joined by Tax Notes contributing editor Robert Golder. Bob, welcome back to the podcast.

Robert Goulder: 14:20

Thank you for having me, David.

David Stewart: 14:22

All right, so before we really get into it, could you tell us where the digital economy project currently stands?

Robert Goulder: 14:26

Yes. It stands at a very interesting point because they were supposed to be wrapping things up by the end of this calendar year. And they realized,"Well, we're going to have to push it a little bit down the road, but not too far." And that is not the worst thing. I think, regardless of what you think of pillar 1 and pillar 2 and the economic assessments and so forth, you'd need to give them a heck of a lot of credit for just keeping on the timeframe. I mean, it's such an ambitious project here. Just that they've come this far remarkable. But we've learned now, with the blueprint that came out in October, we know a little bit more about pillar 1 and pillar 2. For those who don't know, pillar 1 is about new taxing rights and profit allocations for market jurisdictions. It's really kind of radical stuff, I think, because we're talking overtly here about formulary apportionment concepts. You have your amount A and your amount B, and we learned that amount C went away, but it was never really much of an amount anyways. There's still a whole lot of questions that people are asking about amount A. I mean, I have issues with this scope. Lots of people have issues with the quantum. All that still has to be worked out over, you know, the next coming months until they finally say,"OK, here it is. BEPS 2.0 is finished. This is the thing you're looking at." What they have to do between now and then is figure out what is this residual amount? Because when you, when you've got a big multinational corporation and money is fungible, and you're looking at the accounting statements or the tax returns, and you're going to have to distinguish between normal returns and residual returns. And I think these are things that are going to maybe be an awkward fit for the tax scenario. They seem like rubber numbers to me. So, you're going to need some really tight rules to pin down,"What is this quantum?" Because people are going to want to game it. If you don't like what happens with amount A, then you're just going to play games with this quantum and say,"OK, this thing we don't like is going to be happening to an ever decreasing pot of money, because we're just going to say,'There's not much of the residual return left. It's all normal return.'" So, that's out there. Then, pillar 2, I'm going to think is a little bit less sensitive. It's a global minimum tax. Again, that is kind of radical in the sense that 20 years ago nobody was doing it and nobody was even talking about doing it. But here we are. The global minimum tax is somehow the least controversial of the two pillars. You've got these four interlocking rules. We've all been reading about the income inclusion rule, the under tax payment rule, subject to tax rule, a switch over rule. Again, with the blueprint, we know a little bit more about them. The switchover rule has kind of been incorporated into the subject to tax rule because you're looking at the treaty context there. And I mean, what I'm hearing about when I talk to people about what is still out there that's getting people to scratch their heads with pillar 2, is this reliance on a common tax base for the multinational group using financial accounts. Like, wow, what are we doing with that? Imagine a scenario where you have a huge corporation and they want to communicate to Wall Street and investors and institutional investors and say,"Come invest in us because we're great. Buy our stock. Here are financial accounts to show you how profitable we are." And then people from the tax department are going to say,"Whoa, whoa, whoa. Put on the brake. Don't release those things. We need to fiddle with these numbers a lot. We don't want to be declaring too much profit in our statements because we're going to be taxed on that under pillar 2." And the question you get at, that I think is fascinating and I don't know if there's a firm answer there. But this is what people are going to be thinking about between now and when this gets wrapped up is which is a more malleable number: your taxable income calculated under the internal revenue code and regulations, or what goes into your financial statements? Because sure. There's international standards out there like IFRS or here in the U.S. we have a different standard, GAP. And you kind of start to wish that this project 10 years ago to converge the two had maybe gone a little bit further. But OK, we've got two different accounting standards. That's better than having three or four or five international accounting standards. At least you have some kind of standards. But if you're a firm and you want to play games, which is more susceptible to that? And I used to think, before BEPS 2.0, that there was sort of a more objectivity with financial accounts, and that would be a great source for corporate tax base or maybe a corporate AMT if you based it on financial accounts. Yeah, that would be great because it's more objective and less prone to manipulation. Now I'm thinking,"Well, wait a minute. Not really. Maybe the financial accounts are actually the more malleable of the two." So, that's got a lot of people scratching their heads. And then, is any of this really going to happen? You still have, again, this is under Secretary Mnuchin, this idea of this whole thing being a safe harbor, or at least pillar 1 being a safe harbor. Because we don't have to worry too much, if you're an American, you don't have to worry too much about pillar 2 being a safe harbor because isn't that first rule, the income inclusion rule, a whole lot like GILTI under TCJA? Because it addresses the outbound opportunity for profit shifting. And then isn't the undertaxed payment rule kind of like the BEAT that came in under TCJA? Because it addresses the inbound opportunity for profit stripping. So, maybe pillar 2 is not a safe harbor, but under Secretary Mnuchin, U.S. Treasury department, absolutely. They want pillar 1 to be a safe harbor, meaning you can opt into it, meaning maybe nobody ever opts into it.

David Stewart: 19:55

Well, OK. So, the current administration's position on this is somewhat clear. Joe Biden will be moving into the White House on January 20. What, if anything, do you expect to change in the U.S. position as the new administration takes over?

Robert Goulder: 20:06

Dave, here is my hot take for this podcast. I love a hot take. And this one is sizzling. Everything in the known universe is going to change when you go from the Trump Treasury to the Biden Treasury, except the views on BEPS. Because the fundamental nature of corporate America and lobbyists and defending your national champions, I just think this isn't going to change that much. And I was thinking, I actually went back and listened to a podcast you recorded with Bob Stack. Which if you haven't heard it go back and listen to it. It's in the archive. It's brilliant. Bob Stack, of course, was the U.S. Treasury Department's point man on BEPS version 1.0, which was Obama years. And what struck me is that he was saying things that just sound point for point parallel to what Chip Harter, the point man for the Treasury now under Trump, has to say. And the lack of sort of conceptual differentials between what you would hear from Mr. Stack and what you would hear from Mr. Harter really makes me think that that's just going to continue. There's going to be a third guy or gal. We don't know who it's going to be. But they're going to be basically maintaining the same positions that we heard from Chip Harter or that we heard from Bob Stack. So, there you have it. I think when all the dust settles, nothing's really going to change. It might not be at some flashy news conference. It might be buried in a footnote. But you will hear at some point, U.S. Treasury Department under Biden say,"Yeah, it needs to be a safe harbor."

David Stewart: 21:34

So that also brings me to another question I have. We are currently in a transition period. There is going to be a successor to Chip Harter at some point. But the current administration is not cooperating in the transition period. Does that have a potential for delay or just messing up the changeover to whoever the new point person is going to be?

Robert Goulder: 21:52

I am reminded of that old adage: Never let a good crisis go to waste. So, what we have here, maybe it doesn't rise to the level of a constitutional crisis, but it's a big problem. And all sorts of parallels are being drawn to the 9/11 report, which said that there were issues because of the whole Bush v. Gore thing. And when you don't have a smooth transition, there's ripple effects that we can't even anticipate. Yeah, I think you are going to have that. Where people are going to come into Treasury and they're going to be delayed. They can't hit the ground rolling because of these transition issues. To the extent that is a crisis, it can and should and will be used to push things back even further. So, I'm thinking-- here's a second hot take. All this stuff about the final, absolutely final BEPS 2.0 determinations and consensus documents coming out mid-2021. Push that back to the end of the calendar year 2021. One, because it feeds into what I said before. The U.S. still doesn't like this. Still the U.S. doesn't like this. They're not going to like this. Silicon Valley, our tech firms, they're not going to like this. You can't help but look at all this stuff about the digital economy and say,"It really feels like a new tax on American multinationals." And, you know, try to figure out the scope of who this applies to. Right? It's the automated digital service sector, plus consumer-facing businesses. OK. Consumer-facing businesses. What isn't a consumer-facing business? But then there's these carveouts like,"Oh, it's not going to apply to the financial sector and so forth." Yeah. What do you do about cloud computing? I mean, that's sort of business to business. That's not really business to consumer, you know. There's enough raw material there that just still needs to be worked out that I think you use the excuse of the transition to buy yourself some more time. Because delay's almost inevitable because there's really, I think still, fundamental disagreements.

David Stewart: 23:49

All right. So, if you had some advice to give the OECD and the inclusive framework on how they should be preparing for the new administration, what would you tell them?

Robert Goulder: 23:56

Well, there's two levels of advice. There's the kind that I would give them formally on the record with, you know, my tie done up and speaking proper English and everything like that. And then there's the more frank, you know, salt of the earth advice that I would give them. The salt of the earth advice that I would give them is take some of the resources that you're putting into the whole digital economy exercise and instead, try to develop guidelines on what a model DST should look like. Because that's where we're headed. We're going to have DSTs, they're not going to go away. They're going to get bigger. The rates are going to go up. If a country doesn't have a DST, what are they doing? What are they waiting for? Get with it, guys. These are going to have lasting power. Because even if by some quirk, you've got the U.S. signing onto this, isn't it going to take years for it to be implemented? To get stuff through Congress? I mean, we just had TCJA and now we have to have all these other changes? And with congressional gridlock, you think all that's going to happen? And does it get done through another MLI? Well, what if the U.S. doesn't sign the next MLI? We didn't sign the first one. During all that time, these other countries are going to be getting DSTs. Now, maybe the EU will wait, because there's been a statement from the EU. They're going to respect the OECD timeline. So, maybe you don't get the EU directive. But countries are going to be doing it on their own. France is going to start collecting in December. U.K.'s collecting in December. Spain, I think, starts in January. They're just going to get bigger and bolder. Africa, now the African Tax Administration Forum has been releasing guidelines for how African nations should start doing this. Everyone is jumping on the bandwagon. It's going to be like VAT where every country in the world, except for the U.S. has a VAT. I can see a scenario where every country in the world has a DST, except for America. There's a parallel there. So, how about encouraging those countries to enact DSTs that are less disruptive and are better designed. And maybe allow DST payments to be creditable against the corporate income tax? Who knows. There's a range of what we're going to see are good DSTs and bad DSTs. Why not push governments to enact good ones? Nobody's doing that. That's a void. It's a vacuum that needs to be filled. That's what I think the OECD should be doing. Now, the formal advice as what should they do for preparing themselves for the next administration? Well, they need to understand the American mindset. Because we're an economic superpower, there's this tendency for us to want to push everything into a tariff box. If somebody enacts a tax that we don't like, and it looks like a tariff, we want to respond by putting tariffs on them. Now, that's a very Trumpian thing to do, but it does follow from being an economic superpower, which is where we are. So I would tell the OECD: Be prepared to explain to the Biden Treasury why these taxes aren't discriminatory. Why DSTs are not really looking like tariffs because they kind of do. Explain to them why this isn't a case of the whole world ganging up on us.

David Stewart: 26:51

We have seen the Trump administration threatening tariffs against all of these countries that are imposing DSTs. Do you expect any sort of softening in that position under a Biden administration?

Robert Goulder: 27:00

Yes. There will be some softening, but I don't know if when push comes to shove, they won't be willing to make that threat. So, it's a type of softening that may be a bit superficial. And here's what I mean. I don't think that the Biden administration is anything like what the Trump administration was with its fondness for tariffs. You got the sense that the Trump administration took some visceral pleasure from applying tariffs to imports. Like"There! We got you. We're hitting you with a tariff." It gave them a sense of gratification. You're not going to have that, but it is still a tool. And it's never going to be off the table, especially when you have a consumer market the size of the U.S. market. So, it's still going to factor in. It's just not going to be the first thing that comes out of our officials' mouths."Do what we want or there'll be tariffs." I mean, one thing I think we can expect the Biden administration to do is lift the steel and aluminum tariffs under the new U.S. trade representative that comes in. And that's not to appease people in other countries. It has nothing to do with American first. The people who want those tariffs lifted are U.S. companies who depend on the steel and aluminum for their own supply chain. So, lifting the tariffs is not a case of being nice to some foreigner. It helps U.S. businesses grow and be competitive. So, you're going to see tariffs used less and the threat of tariffs bandied about less. But they still have to be on the table. It would be an exercise in self-defeat if Biden just said,"We're never going to have any more tariffs because you know, we're nice guys. And we like all you foreign exporters." No. You're not going to have that. So yeah, there'll be some softening.

David Stewart: 28:35

In addition to the steel tariffs, do you see any sort of unwinding of the tariffs that we have in place at this point? There's been a lot of back and forth about the Boeing-Airbus dispute. Is there room for a Biden administration to pull back on a lot of the tariffs that we've seen over the last few years?

Robert Goulder: 28:51

Absolutely. What you want to do is get rid of them, assuming that there's going to be reciprocity there. Because our exports to foreign markets are being punished and made uncompetitive as well. There's lots of folks in the U.S. farm belt that would like to see other countries like China lower their tariffs that were imposed in retaliation to ours. So, again, I don't want to sound like I'm beating a dead horse, but when you have this pulling back of tariffs, it's not to appease some foreigners. It's helping U.S. farmers. It's helping U.S. manufacturers. Arguably, you could say it's helping create U.S. jobs because it makes these U.S. firms that depend on the foreign imports more competitive. You're definitely going to see that.

David Stewart: 29:31

To another point that you made, you discussed that you want to see the OECD come up with a model DST. Is there a world where the U.S. can accept a more general use of DSTs around the world?

Robert Goulder: 29:42

Well, it depends. I certainly can see that world. I actually think that DSTs get a bad rap. In the academic and intellectual scholarly community, DSTs get no love whatsoever. So, I feel a bit out on an island when I'm positioning myself as a guy who says nice things about DSTs. It is a tax on turnover. It is a gross receipts tax, and that is a terrible tax. Let me get that out of the way right now. Yeah, it is not a good proxy for taxing net income. It's a gross basis tax. That's a flaw. However, how flawed is the net basis tax that we have now called the corporate income tax? Why would you have BEPS 1.0 and BEPS 2.0 If there weren't issues with that? Also it's a tax that can actually be paid and collected and it responds to political pressures. I mean all tax is political. Right? We do not have tax codes and regulations that are brought together purely by academics who think,"Oh, this is the best policy. This is optimal policy. Let's do this." We get tax laws as a result of politicians who have to fundraise, and in the House are up for reelection every two years. Our tax laws are written by people who are perpetually campaigning. So, the pressure in Europe to have taxes that hit these companies and look like they're falling on capital income is really great. That pressure is not somehow novel or new or some aberration. All politics is sort of inherently motivated by these political desires. To dismiss a tax because it has political motivations just seems like a notion, some ivory tower notion, that like has what basis? Like what other tax isn't political? Isn't the wealth tax political? Aren't progressive tax code? Payroll taxes? Everything is political. So, you know, you need to remove that taint that say,"Oh, this is the populist taxation on the part of European politicians who want to enact the DSTs." You know, that scenario that you mentioned where the U.S. can accept this is as follows. If it really is a tariff— and let's say the economics of a DST mirror that of a tariff— you pass it onto the final consumer. OK. Who is consuming the digital services provided in France? Or the digital services provided in the U.K. or Germany or any country with a DST? You have to pass it on to the consumers. So if Netflix gets hit with a DST, and they're able to pass it all on to consumers, then the consumers in those countries, which is not the United States. Not our consumers, it's somebody else's consumers. If they can suck up the tax burden, then the U.S. companies don't care. It's like cost of goods sold. It's a cost that's passed on to somebody someplace else. It's not really translating to a tax on the shareholders. If that becomes firmly established, that the burden of the DST isn't falling on the shareholders of the U.S. tech sector, then maybe they're fine with this. It's just another cost that gets passed on. Of course, you know, probably where this is going, if that's really the case, why don't the other countries be intellectually honest about it and basically treat it with a VAT? Because if it does fall on the final consumer, there's no difference between a DST and a VAT in that case. But again, the political pressure is that the optics of having European consumers pay the European DSTs, is just unacceptable. They cannot live with those optics. They need the sort of fig leaf that it's a tax on a big rich corporation out there in Silicone Valley, that it's falling on capital income. So, there's that.

David Stewart: 33:08

All right. So, we've covered what you're hoping for. What do you actually expect? Over the next 12 months, what sort of changes do you expect to see from the U.S. in its international tax policy? And what sort of agreement do you think that the OECD can produce?

Robert Goulder: 33:22

Well, if my crystal ball was that good, I'd quit my day job and move to Vegas. I have a feeling that the U.S. still isn't going to go along with any of this. What I think is actually going to happen is that everything gets delayed to the end of the calendar year 2021. And we very politely say,"Yeah, we'll be OK with pillar 2, but we can't do pillar 1." Now that sounds like defeat because so much energy and resources has gone into this. I mean, the whole point of BEPS 2.0 was to give these new taxing rights to foreign jurisdictions and let them have some of these residual profits that are so desirable. And if pillar 1 falls by the wayside, are they really getting that? But again, let me say this: 20 years ago, a global minimum tax that in and of itself was radical. That's a bold thing. So, if you look, when all the dust settles and the world has pillar 2, but we just couldn't work it out on pillar 1, instead of saying,"That's a glass half empty," I'm going to say,"That's a glass half full." So, I think what we're going to have is just consolidation around the need for a global minimum tax.

David Stewart: 34:24

All right. Well, on that optimistic note, we'll leave it there. Bob, thanks for being here.

Robert Goulder: 34:28

My pleasure, Dave.

David Stewart: 34:31

And 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: 34:41

Thank you, Dave. In Tax Notes Federal, James Manzione explores issues that tax lawyers should be attuned to when reviewing real estate partnership agreements. Katherine Jordan and Doug Longhofer argue that when attacking conservation easements, the IRS should apply the sham entity doctrine. In Tax Notes International, Bruce Zagaris discusses a document release containing allegations that large banks processed illicit funds. Luis Vázquez and Luis Salinas discuss Mexican 2021 tax bill proposals that would strengthen the government’s audit, enforcement, and collection powers. And on the Opinions page, Joseph Thorndike argues against the notion that taxes can never be raised during a recession, pointing out a flaw in rigid adherence to a typical analysis of Keynesian economics. Marie Sapirie discusses the promise and peril of FAQs. And now, for a closer look at what's new and noteworthy in our magazines, here is Tax Notes State Editor in Chief Jéanne Rauch-Zender.

Jéanne Rauch-Zender: 35:40

Thank you, Faye. I'm here with Tram Le, a member of the SALT team at TaxOps and an adjunct professor at the University of Texas at Arlington. We're going to discuss her recent article in Tax Notes State titled,"Simplification Initiatives to Reduce Burdens for Remote Sellers." Tram is joining us by phone from her home in Texas. Welcome, Tram.

Tram Le: 35:58

Thank you, Jéanne. I'm happy to be here with you.

Jéanne Rauch-Zender: 36:01

It's great to have you. Would you provide our listeners with a preview of your article?

Tram Le: 36:05

Yes, absolutely. So my article discusses the various sales tax simplification efforts that are geared towards helping remote sellers. Since the late 1990s, states have really acknowledged that there's a need for simplification. And this started with the Streamlined Sales Tax Initiative, which this program aimed to standardize tax, create uniformity, reduce admin burdens and costs among the states. Because these state tax systems were really not designed for e-commerce and really they didn't account for how we transact business today. So, the article goes into a little bit of the Streamlined sales tax initiatives. And then it actually also discusses other initiatives that states are working on under Wayfair. So, you know, one thing I did want to bring up, and also I brought up in the article was that, you know, only about half of the states are members of the Streamlined Sales Tax Initiative. The other half who aren't members, you know, they're the largest states in America, including California, Texas, and New York. And then along those states, you know, that are not members are states that have the most complex tax systems because they have these local governments that administer and collect their own local sales tax. And these local governments are generally known as home-rule jurisdictions. And, you know, that really leaves remote sellers. It's really hard for them to address and tackle the local compliance because they're dealing with, aside from the state, they're dealing with different tax bases, different rates, taxability rules, separate filings in all these home-rule jurisdictions. And so, recognizing that simplification is really important, these states with more complex systems have worked towards coming to a more simplified tax collection system apart from the Streamlined Sales Tax Initiative. But, they understand the need for that. So, the article really highlights, the various and varying initiatives that these states are taking to simplify these compliance burdens for the remote sellers.

Jéanne Rauch-Zender: 38:17

Yes, I really enjoyed where you went with the article. What led you to write about this topic?

Tram Le: 38:22

So, the impetus was basically Wayfair. Right? Its impact on a lot of our small and medium-sized businesses where, you know, they have sales to customers in a state, and this now creates a sales tax collection obligation and creates exposure, right, if they're unaware of these new responsibilities. So, you know, highlighting this new collection responsibility. It's really important that practitioners and remote sellers really understand these various simplification initiatives and really what it means to their business in terms of really does it help? Or is this something that really doesn't make sense for them?

Jéanne Rauch-Zender: 39:03

Very interesting. Before we go, where can our listeners find you online?

Tram Le: 39:07

Well, they can reach me via email tle@taxops.com. They can also reach me via our website at www.saltivations.com or even LinkedIn or Twitter.

Jéanne Rauch-Zender: 39:21

Thank you so much for joining us today, Tram. You can find Tram's article online at taxnotes.com. And be sure to subscribe to our YouTube channel Tax Analysts for more in-depth discussions on what's new and noteworthy In Tax Notes. Again, that's Tax Analysts with an S. Back to you, Dave.

David Stewart: 39:37

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.