Reuven S. Avi-Yonah (Michigan; Google Scholar) has posted three international tax papers on SSRN:
Unitary Taxation After Pillar One:
Pillar One of the G20/OECD/IF BEPS 2.0 effort is unlikely to succeed for three reasons. First, it requires a multilateral tax convention (MTC) to be implemented because Amount A requires overriding Articles 5 (Permanent Establishment, PE), 7 (Business Profits) and 9 (Associated Enterprises) of every tax treaty to abolish the PE and Arm’s Length Principle (ALP) limits enshrined therein.
But negotiating an MTC is hard, especially when over 100 countries are involved and there are fundamental disagreements among them.
Second, because Pillar One (despite its October 2021 expansion) is still aimed primarily at taxing the US digital giants (Big Tech), it is hard to envisage it being implemented without the United States. But despite the support of the Biden administration, since the Republicans are adamantly opposed, an MTC implementing Pillar One cannot be ratified by the Senate (which requires 67 votes) or enacted as a Congressional Executive Agreement (which requires passage in the Republican controlled House).
Third, Pillar One is premised on all the countries that have adopted Digital Services Taxes (DSTs) repealing them. But DSTs are popular politically and, in some cases (e.g., the UK), brought in significant revenue. The only reason countries agreed to suspend DSTs was US pressure, and now that the US cannot ratify an MTC, there is no reason for those countries not to implement their DSTs as scheduled in January 2024.
What will happen then? This chapter discusses what options countries have to tax large multinationals without Pillar One, and then addresses the US response. It argues that the best US response would be to adopt unitary taxation unilaterally along the lines long espoused by Sol Picciotto.
Pillar One is unlikely to succeed for three reasons. First, it requires an MTC to be implemented. But negotiating an MTC is hard, especially when over 100 countries are involved and there are fundamental disagreements among them.
Second, because Pillar One is still aimed primarily at taxing the US digital giants (Big Tech), it is hard to envisage it being implemented without the United States. But despite the support of the Biden administration, since the Republicans are adamantly opposed, an MTC implementing Pillar One cannot be ratified by the Senate.
Third, Pillar One is premised on all the countries that have adopted DSTs repealing them. But DSTs are popular politically and, in some cases brought in significant revenue. The only reason countries agreed to suspend DSTs was US pressure, and now that the US cannot ratify an MTC, there is no reason for those countries not to implement their DSTs as scheduled in January 2024.
What will happen then?
This article first discusses what options countries have to tax Big Tech without Pillar One, and then addresses the US response (Part I). But since “only fools and babies may prophesy” , the article also discusses the alternative of what may happen if Pillar One does come into force without the US (like many other multilateral treaties including recently the MLI and the MAATM/CRS) (Part II).
Nothing New Under the Sun? The Historical Origins of the Benefits Principle:
The benefits principle (that the source jurisdiction should tax active (business) income and the residence jurisdiction should tax passive (investment) income) is fundamental to the international tax regime. The four economists in 1923 based it on economic theory but also on the pre-1914 treaties. But where did the pre-1914 treaties derive the benefits principle from? The answer is not the theoretical considerations that influenced the four economists. In this case a page of history is worth a volume of economics. In the medieval and early modern tradition, a distinction was made between in personam and in rem taxes. In personam taxes could only be levied by the sovereign that an individual was subject to. The implication was that an individual could only be subject to in personam taxation by his country of citizenship, but that unlike modern residence-based taxation this tax could be applied wherever the citizen resided (like the modern US rule). In rem taxes, on the other hand, were imposed on the property itself, not on the individual, and therefore could be levied by the source jurisdiction.
This tradition would have been familiar to the drafters of the pre-World War I treaties because they were reflected in 19th century German and Swiss rules designed to prevent intra-federal double taxation. So, it is plausible to attribute the origins of the benefits principle to a much older tradition than the Austria-Prussia treaty of 1899. In fact, Andreas Thier has shown that the Swiss constitutional prohibition of inter-cantonal double taxation (1874) stems directly from the medieval and early modern tradition.
