Taxing Digital Activities Likely to be Discriminatory

A Conversation with Catherine Schultz, NFTC

As Vice President, Tax Policy with the National Foreign Trade Council, Catherine Schultz focuses on issues that will affect the fortunes of U.S. companies and the strength of the domestic economy. She offers her thoughts on global tax developments and how they’ll impact U.S. companies.

What do you think is the most effective and equitable structure in an international context for a corporate tax on digital activities?

I don’t think there should be a tax on digital activities. Since digitization is becoming universal, there is no way to ring-fence the digital economy. You can no longer separate digital from non-digital functions. The OECD is looking at proposals to change the international tax rules to give a share of corporate profits to market jurisdictions. These proposals affect all companies selling internationally. It will be hard to reach consensus with the 129 countries in the Inclusive Framework.

There are two Pillars of proposals currently on the table. The Pillar One proposals deal with the shifting of some profits to the market jurisdictions. Pillar Two deals with minimum tax proposals. There are several EU countries moving to adopt digital service taxes, but these taxes are discriminatory against large U.S. technology companies and violate the countries’ WTO obligations against discriminatory treatment.

In the current U.S. economic environment, what features could be built into the tax system that would draw the best balance between sustaining economic growth and gradually reducing the deficit?

I don’t think deficit reduction should be tied exclusively to the tax system. Much of the systemic deficit problem is because of entitlement programs and rampant government spending. I think there are ways to improve the entitlement systems, possibly with increased contributions from wealthier taxpayers, and reforms to make the systems work more effectively. We might also need additional taxes to help fund these systems.

The U.S. is the only OECD country without a VAT/GST system. A very small federal sales tax could be dedicated to deficit reduction and funding the entitlement programs.

What areas give you the most concern with respect to regulations emerging from the Tax Cuts and Jobs Act?

Several of the proposed regulations appear to go beyond what was intended by the underlying TCJA statute and I would like to see some of these problems corrected in the final regulations. I think the blended rate for fiscal year taxpayers under the base erosion and anti-abuse tax, and the expense allocation rules under the foreign tax credits are particularly difficult for taxpayers.

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