Paul L. Caron

Tuesday, October 4, 2022

Sanchirico: Digital Services Taxes This Time Around

Chris William Sanchirico (Penn; Google Scholar), Digital Services Taxes This Time Around, 176 Tax Notes Fed. 2041 (Sept. 26, 2022):

Tax Notes Federal (2022)The United States currently has an effectively exclusive taxing right on the high-tech foreign profits of its multinationals — a right it leaves largely unexercised. This has been unacceptable to U.S. trading partners for some time. On the other hand, recent reform proposals from the OECD are unacceptable to a decisive faction of U.S. legislators. This article proposes a more modest resolution to the conflict that, although far from ideal, might actually have a chance of meeting the main concerns of both skeptical U.S. lawmakers and exasperated U.S. allies.

Under the current international tax regime — that is, sans pillar 1 and DSTs — the United States has an effectively exclusive taxing right on the intangibles-based foreign profits of its multinationals — a right it leaves largely unexercised, to the frustration of trading partners that are committed, for economic and political reasons, to fostering their own intangibles intensive industries. Under pillar 1, the United States would renounce its exclusive right and receive in return a secondary right while conceding the corresponding primary right to its trading partners. U.S. trading partners consider the current system insupportable, and a decisive U.S. voting bloc feels the same way about pillar 1.

Enter field-leveling, credited DSTs — individually instituted by demand-side nations and conditionally tolerated by supply-side nations. Their overall effect: a pattern of change in which supply-side nations’ exclusive right is downgraded to a primary, rather than a secondary, taxing right, while demand-side nations’ nonexistent right is upgraded to a secondary, rather than primary, right.

On the spectrum of potential bargains, the second-round DSTs sit somewhere between the current system and pillar 1 — between, that is, what cannot last and what will never be. They may be messy and unambitious, but they at least populate the zone of possible existence.

And that is not to be underestimated. Recent developments on the world stage make it clear that the United States and its closest allies need to settle all this well enough so that everyone, while perhaps not completely satisfied, can move on. Far more pressing challenges loom just over the horizon.

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