This Congressional House Subcommittee hearing on OECD Pillar 1 focused on the Biden Administration's negotiation of the agreement, which aims to reallocate corporate profits to market jurisdictions and eliminate discriminatory digital services taxes (DSTs). Witnesses from various industries and think tanks expressed concerns about potential revenue losses for the U.S., lack of transparency in the negotiation process, and the potential for loopholes that could allow foreign countries to continue imposing discriminatory taxes. They also highlighted the importance of a mandatory amount B (a simplified transfer pricing framework) to ensure tax certainty and reduce compliance costs for U.S. businesses. However, there was a general consensus that the U.S. should remain engaged in the OECD negotiations to prevent a trade war and protect American businesses from the proliferation of DSTs.

Lack of Congressional Engagement

Multiple witnesses expressed frustration that the Biden Administration did not fully engage Congress in the OECD Pillar 1 negotiations. They argued that Congress should have been involved in the process to ensure that U.S. interests are protected and that the final agreement is beneficial to American companies and taxpayers.

Importance of a Mandatory Amount B

Witnesses from various industries emphasized the importance of a mandatory amount B to ensure tax certainty, reduce compliance costs, and provide stability to the international tax system. They argued that the current optional approach would undermine the agreement's effectiveness and potentially lead to further uncertainty and disputes.

Congress's Role in the Process

Witnesses highlighted the importance of Congress's involvement in the negotiations and the implementation of the agreement. They argued that the House of Representatives should play a more active role in shaping the agreement and ensuring that it is in the best interests of American companies and taxpayers.

Concerns about U.S. Tax Revenue Loss

The Joint Committee on Taxation (JCT) estimated that enacting Pillar 1 would have resulted in a revenue loss of $1.4 billion for the U.S. in 2021. Witnesses expressed concern that this loss could be even greater if the global minimum tax and Pillar 1 are considered in tandem, as these policies could incentivize multinationals to relocate high-value assets and activities outside the U.S., potentially further exposing the U.S. tax base to reallocation under Pillar 1.

Concerns about Loopholes in the Agreement

Witnesses raised concerns that the current draft of Pillar 1 does not effectively eliminate all discriminatory taxes. They pointed to the optionality of amount B, which allows countries to opt out of the simplified transfer pricing framework, and the possibility for new discriminatory tax measures to be implemented under the agreement. Witnesses also highlighted the potential for governments to manipulate the formulaic system under amount A to maintain DSTs.

The Importance of Continued Negotiations

Despite concerns about the current draft of the agreement, most witnesses agreed that the U.S. should remain engaged in the OECD negotiations to avoid a trade war, protect U.S. businesses, and work towards a more stable international tax system.

Concerns about Data Confidentiality

The Business Roundtable and U.S. Council for International Business (USCIB) expressed concerns about the confidentiality risks associated with Pillar 1, as it would require companies to file sensitive financial and tax information. They urged for stronger confidentiality protections and clear consequences for breaches.

Concerns about Data Localization Measures

Witnesses noted that the Biden Administration's withdrawal of support for the World Trade Organization's moratorium on customs duties on electronic transmissions could lead to the proliferation of data localization requirements, potentially forcing U.S. companies to establish physical presence in foreign markets and further expose them to taxation. They argued that this undermines the goals of Pillar 1, which aims to reallocate profits without requiring physical presence.

Concerns about Continued Implementation of Discriminatory Taxes

Witnesses highlighted the fact that countries such as Canada, Australia, and Denmark are continuing to implement DSTs and other discriminatory tax measures, even as the OECD negotiations are underway. They cautioned that Pillar 1 in its current form may not be sufficient to put a stop to these efforts.

Potential for Trade War

Multiple witnesses cautioned that abandoning the OECD process and withdrawing from the negotiations would likely lead to a trade war, as countries would be free to impose discriminatory DSTs without facing any multilateral pressure to desist. They argued that the U.S. has more leverage to influence the agreement and protect its interests by remaining engaged.

Bipartisan Support for the Goals of Pillar 1

Despite their critiques of the Biden Administration's negotiation process, many Republican members of the subcommittee expressed support for the underlying goals of Pillar 1, including the elimination of DSTs and the creation of a stable international tax system that protects U.S. businesses.

Need for Stronger U.S. Position in Negotiations

Witnesses urged the Biden Administration to adopt a stronger stance in the negotiations and insist on provisions that protect U.S. interests, including a mandatory amount B and a more comprehensive definition of prohibited discriminatory taxes. They emphasized the need for the Administration to be more assertive and leverage the U.S.'s position to ensure that the final agreement is beneficial to the U.S.

U.S. House Committee: Ways and Means

Title:Tax Subcommittee Hearing on OECD Pillar 1: Ensuring the Biden Administration Puts Americans First