Friday, September 17, 2021
Christine Kim (Utah; Google Scholar) presents A New Framework for Digital Taxation (with Reuven Avi-Yonah (Michigan; Google Scholar) & Karen Sam)) virtually at Boston College today as part of its Tax Policy Collaborative:
The international tax regime has wide implications for business, trade, and the international political economy. Under current law, multinational enterprises do not pay their fair share of taxes to market countries where profits are generated because market countries are only allowed to tax companies with a physical presence there. Digital companies, like Google and Amazon, can operate entirely online, thereby avoiding market country taxes. Multinationals can also exploit existing tax rules by shifting their profits to low-tax jurisdictions, thereby avoiding taxes in the residence country where their headquarters are located.
Recently, a proposal to tackle these issues was announced, endorsed by more than 130 countries. This “Inclusive Framework” proposal sets forth two Pillars to reform the outdated international tax regimes by addressing digital taxation (Pillar One) and global minimum tax (Pillar Two). However, it is doubtful that the Inclusive Framework will reach a consensus, especially on Pillar One. As the details of Pillar One have become increasingly complex and degraded by political compromises and carve-outs, it risks being a framework without substance. Also, countries are unlikely to repeal an established tax instrument, Digital Services Taxes (DSTs), which is an adamant requirement of the United States in adopting Pillar One.
This Article offers the first comprehensive critique of the proposed Inclusive Framework and assesses its prospects and problems. It evaluates the current U.S. response to the proposed global deal and DSTs against core American values such as free trade and fair competition. Separating the two Pillars during negotiation may preserve the global minimum tax. Regarding DSTs, the Article conducts several empirical studies to demonstrate the harm caused by retaliatory tariffs and the challenges that stem from hastily transplanting DSTs in state and local tax systems. Finally, it endorses the UN digital taxation proposal and proposes a new Data Excise Tax as normative alternatives based on criteria of updated nexus and profit allocation, administrability, and political feasibility.