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UNITED STATES: HOUSE WAYS AND MEANS COMMITTEE HOLDS HEARING ON THE ORGANIZATION
FOR ECONOMIC CO-OPERATION AND DEVELOPMENT PILLAR ONE

Baker McKenzie
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USA March 19 2024

In brief

On Thursday, 7 March 2024, the Tax Subcommittee of the House Committee on Ways
and Means held a hearing on the Organization for Economic Co-operation and
Development (OECD) inclusive framework's Pillar One project. The hearing marked
Congress' first public inquiry dedicated solely to Pillar One since the release
of the draft Multilateral Convention to Implement Amount A of Pillar One (MLC)
and the final Amount B report. The same Subcommittee examined both Pillar One
and Pillar Two in a July 2023 hearing that featured then-Deputy Assistant
Secretary for International Tax Affairs Michael Plowgian.

The hearing featured four witnesses: Megan Funkhouser, the Senior Director of
Policy, Tax and Trade, for the Information Technology Industry Council (ITI);
Rick Minor, Senior VP, International Tax Counsel for the United States Council
for International Business (USCIB); Gary Sprague, Partner at Baker McKenzie; and
Daniel Bunn, President and CEO of the Tax Foundation. The written witness
statements of each witness can be found here.

Contents

 1. Concerns raised regarding Pillar One
 2. Eliminating and Preventing DSTs, Trade Wars
 3. Deficiencies of Amount B
 4. Questions regarding other aspects of Amount A
 5. Impact of hearing on US progress toward ratification of the MLC

Concerns raised regarding Pillar One

Chair of the Tax Subcommittee Mike Kelly (R-PA) opened the hearing by noting his
concerns with respect to Pillar One, which were echoed by his Republican
colleagues throughout the hearing. Citing the Joint Committee on Taxation's
(JCT) report that concluded the United States would have lost USD 1.4 billion in
federal tax revenue had Amount A been in effect in 2021, Rep. Kelly questioned
why the burden of stabilizing the international tax framework should fall
disproportionately on American companies. Further, Rep. Kelly expressed concerns
that Pillar One could diminish US financial security, and allow foreign
countries to dictate US tax policy.

Rep. Kelly also raised concerns about the Biden administration's lack of
coordination with Congress during the course of the Pillar One negotiations. The
Biden administration has been responsible for all OECD negotiations, with
limited involvement from either chamber of Congress. Congressional Republicans
have criticized the Biden administration and Treasury for the lack of
communication with Congress during the OECD negotiation process, especially in
light of the important role of Congress in agreeing to and implementing Pillar
One. If the MLC were opened for signature and signed by the Biden
administration, the US Senate would be responsible for providing advice and
consent for ratifying the MLC. Further, both the House and the Senate would need
to pass domestic implementing legislation in order for the United States to be
able to claim taxing jurisdiction over any Amount A income allocated under
Pillar One.

All four witnesses at various points agreed that there should be more engagement
and coordination between the Treasury and Congress regarding Pillar One in order
to make necessary improvements to the MLC and Amount B of Pillar One.

Eliminating and Preventing DSTs, Trade Wars

Subcommittee members from both sides of the aisle acknowledged the importance of
the underlying intent of the Pillar One project to eliminate discriminatory
digital services taxes (DSTs) and other similar unilateral measures, as well as
to restore certainty and stability within the international tax framework.
However, several members questioned whether the current draft MLC would
adequately eliminate DSTs and prevent additional measures from being enacted in
the future.

Bunn, of the Tax Foundation, explained that the current MLC would only reach
some DSTs, and would leave the door open for new discriminatory measures. Bunn
noted that the current definition would not capture measures that apply to both
foreign and domestic businesses, leaving a loophole for further measures.
Funkhouser, of ITI, also noted the evolution of DSTs from the first wave of
European measures to more expansive provisions, in addition to more aggressive
ruling positions (citing the Australian Taxation Office's draft ruling on the
character of payments in respect of software and intellectual property rights).
Minor, of the USCIB, also noted that the exception within the definition of DSTs
for measures purportedly imposed for non-tax policy reasons creates a
significant loophole. Minor recommended that the United States advocate for the
elimination of these kinds of carve-outs in order to create a more "air-tight"
definition that prohibits potential future unilateral and discriminatory
measures.

Subcommittee members questioned whether there were alternative avenues for
eliminating DSTs. The witnesses agreed that a multilateral agreement, such as
the MLC, was the necessary mechanism to achieve this goal, and that it would be
difficult to completely eliminate DSTs otherwise. Witnesses also noted the
consequences of abandoning the Pillar One project, specifically that DSTs and
other unilateral measures would undoubtedly proliferate, potentially leading to
retaliatory trade wars. This risk was highlighted by witnesses as the main
reason for the United States to remain engaged in the OECD negotiations. Most,
if not all, Subcommittee members agreed. A common refrain was "If you're not at
the table, you're on the menu."

Rep. DelBene (D-WA) raised the DST currently under consideration by Canada,
noting that Canada believes it can proceed with its DST because the United
States has not retaliated against other jurisdictions that have enacted DSTs.
This was in reference to the United States' 2021 agreements with Austria,
France, Italy, Spain, and the United Kingdom to suspend retaliatory tariffs
(which were recently extended to June 2024). Funkhouser disagreed with Canada's
assertion, explaining that the Canadian DST was modeled after the French DST,
which the US Trade Representative found discriminatory. Funkhouser also
emphasized that, by moving forward with the proposed DST, Canada could hinder
the Pillar One negotiation process and inspire similar action amongst other
countries.

Deficiencies of Amount B

Witness Gary Sprague focused his opening statement on Amount B of Pillar One.
Sprague noted that the narrow scope of the regime would deprive the very
companies that are the targets of DSTs (i.e., major tech companies) of the
certainty and streamlined approach of Amount B. Sprague also highlighted that
the optional nature of Amount B reduces the predictability and certainty that
was expected to come from Amount B. Sprague noted that New Zealand's recent
decision to opt out of Amount B does not bode well in terms of consistent,
widespread application. Sprague also cautioned against the inclusion of an
additional qualitative scoping restriction for Amount B.

Sprague recommended that the United States continue negotiations on Amount B,
particularly to widen the scope of Amount B or obtain a commitment from the OECD
to establish a new work stream to include digital goods and services within the
scope of Amount B in the future. The other witnesses also echoed this
recommendation. In the absence of a multilateral agreement, Sprague recommended
that Amount B could be broadened on a bilateral or multilateral basis through
Competent Authority agreements.

Rep. Thompson (D-CA) asked Sprague about the historic monetary impact and
demands placed on the IRS due to the increase in Mutual Agreement Procedure
(MAP) cases relating to distribution transactions that would be within the scope
of Amount B. Sprague noted it was hard to quantify the impact because it will
vary by company or dispute, but that the costs are significant. He explained
that a MAP case is the last resort, and taxpayers seeking MAP assistance have
already completed fact-intensive audits and other stages of tax dispute
resolution that demand company and IRS resources, as well as external fees.
Sprague noted that Amount B might not completely eliminate MAP cases for routine
distribution activity, but would significantly narrow the issues that are taken
to MAP.

Questions regarding other aspects of Amount A

Rep. Schweikert (R-AZ) delved into the Amount A calculation, focusing on whether
the Amount A formula took into account expenses (i.e., that it was based on net
income, not gross income), the operation of the 10% operating profit threshold,
and whether the calculation could be manipulated by moving assets between
jurisdictions. Witnesses explained that the Amount A calculation is based on a
taxpayer's global pool of profits, and that the movement of assets would affect
income arising in a particular jurisdiction and the allocation of the obligation
to relieve Amount A double taxation among jurisdictions, but not the overall
Amount A income of the taxpayer's group. Rep. Schweikert also questioned whether
Amount A is designed to account for potential disruptions in the economy, such
as the rise of AI. Witness Gary Sprague explained that AI should not necessarily
have an impact on the Amount A allocation among countries, as the associated IP
will give rise to profits in the allocable pool just as current IP assets do.

Rep. Kustoff (R-TN) raised concerns regarding the confidentiality of taxpayer
information within the Pillar One framework. Rep. Kustoff noted that Pillar One
establishes a new process for filing Pillar One-specific returns and paying the
associated tax, and questioned whether this process contained sufficient
limitations on the sharing of taxpayer information among different tax
authorities. Minor stated that this was a valid concern and that the
administrative provisions of Pillar One needed to be strengthened in this
respect to include clear consequences for breaches of confidentiality.

Rep. Estes (R-KS) asserted that the marketing and distribution profits safe
harbor (MDSH) of Amount A does not adequately take into consideration taxes paid
by franchise or split-ownership structures, causing an over-allocation of
profits to market jurisdictions. Rep. Estes also criticized the Biden
administration's failure to obtain favorable treatment for US R&D credits in the
Amount A calculation.

In one of the final rounds of questions from the Subcommittee members, Rep.
Schneider (D-IL) asked each of the witnesses whether the US should walk away or
remain engaged on Pillar One. All four supported continued engagement.

Impact of hearing on US progress toward ratification of the MLC

Many Subcommittee members noted that they were still getting acquainted with
Pillar One and the details thereof, citing the lack of coordination with
Treasury regarding progress at the OECD. However, many members expressed their
desire to delve further into the finer details of Pillar One in order to place
pressure on the Treasury and the Biden administration to negotiate a better deal
for the United States. This could signal a period of increased collaboration
with, or pressure on, the Treasury, which could impact the United States'
approach to the closing stages of negotiations on Pillar One.

After the hearing, House Ways and Means Committee Chairman Jason Smith (R-MO)
and Senate Finance Committee Ranking Member Mike Crapo (R-ID) released a joint
statement opposing Pillar One and the draft MLC as it currently stands. The
release states that "JCT's analysis provides ample reasons why the
Administration should not sign on to the current version of the deal," and that,
though they oppose discriminatory DSTs targeting American companies, "the bad
behavior of foreign countries imposing them should not be rewarded by accepting
a deal that reduces US revenue, undermines our tax sovereignty, and fails to
provide more stability to boost American companies in the global marketplace."
The statement ends with a recommendation that the Biden administration negotiate
a better deal and do so with "robust congressional consultation".

Should the MLC be opened for signature and signed by the United States this
year, it remains unlikely that Congress would begin ratification proceedings or
consider domestic implementing legislation this year. Though the hearing
signaled increased interest on behalf of Congress, many competing political
demands and the pressures of an election year make swift action on major tax
issues improbable.



Content is provided for educational and informational purposes only and is not
intended and should not be construed as legal advice. This may qualify as
"Attorney Advertising" requiring notice in some jurisdictions. Prior results do
not guarantee similar outcomes. For more information, please
visit: www.bakermckenzie.com/en/client-resource-disclaimer.



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