Tax News & Views International Weekly: Pivoting to Digital

Now that the finalized global agreement has put the Pillar Two global minimum tax issue to bed—or at least, kept it off the headlines—the international tax world is slowly turning its gaze to the next high-stakes standoff: digital services taxes, and how to tax the online economy.

When the Organization for Economic Cooperation and Development was first tasked by the G-7 with tackling this issue nearly a decade ago, it grew into a two-pronged effort to capture both untaxed online transactions and low-taxed intangible profits. While the latter project turned into Pillar Two, the first project—Pillar One—dwindled and died on the vine. The OECD produced a multilateral convention to implement a new regime to tax a portion of all transactions in a market—whether they be online or in-person—the mega-treaty was never approved by the United States and never reached full consensus.

In the absence of a resolution, countries have gone ahead with DSTs—typically, taxes on revenue from certain online transactions such as e-retail, social media and data collection. The U.S. has strongly opposed these levies, claiming they are targeting the American tech industry. In his first term, President Trump initiated the process to enact retaliatory tariffs against countries with DSTs, but that was suspended while they sought an agreement at the OECD. Poland is the latest country to propose a DST, sparking more threats of retaliation.

Officials with the U.S. Treasury Department have said they want to pivot to the “digital economy,” but it’s clear that any effort to revive the specifics of Pillar One would be dead on arrival, and negotiators will need to essentially start over from scratch.

One significant wild card is that while Pillar Two was seen as disconnected from trade issues, there’s more overlap with DSTs. As taxes on revenue, not income, they bear more resemblance to tariffs. And the Trump Administration has sought to include a prohibition on DSTs in trade agreements at the European Union and elsewhere.

Given how controversial Trump’s trade moves have been around the world, any tax discussion near that sphere faces an extra level of complication and tension.

Noteworthy Items This Week

Concerns Emerge Over U.N. Tax Convention Treaty Renegotiation – Sarah Paez, Tax Notes ($):

Germany, India, Korea, Norway, Saudi Arabia, and Sweden were among the countries that said February 2-3 that they had major concerns with the language in article 5 of the draft U.N. framework convention on international tax cooperation that proposes the renegotiation of existing tax agreements inconsistent with the principles of fair allocation of taxing rights.

U.N. member states are meeting in New York through February 13 to negotiate a framework convention and two protocols, which they will need to present to the U.N. General Assembly by the second half of 2027. The General Assembly approved the terms of reference for the convention in December 2024.

Volkswagen Move to Vacate Onshoring Shows US Tariff Policy Flaws – Andrew Leahey, Bloomberg Tax:

In the last year, tariffs have been used as the trade policy equivalent to a sin tax. The idea is familiar. If you tax a disfavored thing—cigarettes, sugary drinks, or foreign assembled German vehicles—you discourage consumption of it.

This theoretically reorients the market by yanking on both the supply and demand levers until behavior shifts. Because such taxes are imposed to eradicate harmful behaviors, you’ll ostensibly be content if consumption falls to zero or close to it.

But trade tariffs are imposed to extract value, whether in the form of jobs, investment, or competitive pricing. Tariffs pretend to be corrective taxes, but they risk choking off the very economic relationships they’re supposed to leverage.

The Shadowy World of Foreign Tax Audits – Mindy Herzfeld, Tax Notes ($):

For many U.S. companies doing business abroad, relationships with foreign tax authorities are characterized by two realities. One is the formal law, including both domestic laws and international treaties. The second — rarely public — is what happens on the ground when U.S. companies face foreign tax audits. Here, a variety of mechanisms operate to often result in a form of legalized extortion. There is widespread acknowledgment among multinationals (and the IRS) that a sort of “pay-to-play” exists in many foreign jurisdictions, where companies know they will have to pay additional amounts on audit, in excess of amounts that can be justified under the law and the transfer pricing positions taken in multiple jurisdictions, and inconsistent with the commitments made in treaty agreements with the U.S. government.

Although Treasury officials can appear in Paris to negotiate compromises to revise laws under which countries seek to assert additional taxes on U.S. multinationals, the solutions for the gray areas in which many foreign tax authorities operate are less obvious.

Pillar 2 Side-by-Side Safe Harbor: A Slightly Choppy Period – Lee A. Sheppard, Tax Notes ($):

The pillar 2 side-by-side safe harbor announced January 5 is not optimal for the United States, but Europeans still see it as a defeat and a competitive advantage for U.S. multinationals. Europeans maintain that their grand scheme for a global minimum tax will survive U.S. withdrawal. This article looks at the mess the U.S. negotiators agreed to, including the all-important book treatment of the changes. It necessarily assumes some familiarity with the contours and concepts of pillar 2, which has been renamed the global minimum tax.

The side-by-side safe harbor is awkward, as is the whole pillar 2 package. To fully understand what is going on, users need to look at the OECD consolidated commentary, in which the OECD drafters incorporated Business at OECD (BIAC) suggestions, but which, like the model rules, is not legally binding. Some jurisdictions have incorporated the model rules and commentary into law or as a reference, but in most countries these documents are meaningless. Beyond that, the whole premise of using book income as a foundation while rejecting its basic tenets to design an entirely new corporate income tax base is misguided.

UK, EU Must Grapple With Implications of OECD Side-by-Side Deal – Gregory Price and Elvira Colomer Fatjó, Bloomberg Tax:

In a sense, the side-by-side deal is a classic compromise: It allows the Organization for Economic Cooperation and Development to continue its Pillar Two project, reducing risk of US retaliation and sparing US multinationals—who already file under a 15% domestic book minimum tax and assess low tax income of foreign subsidiaries—from complying with a different set of rules that look to ensure profits are taxed at a minimum 15% rate worldwide.

Given that pragmatism has overtaken principle in reaching this deal, we see several policy and practical challenges for the UK and other European jurisdictions.

Public Domain Superhero of the Week

Every week, a new character from the Golden Age of Comics, who’s fallen out of use.

This week’s entry: Miss Masque

Debut Year:1946

Debut Publication: Exciting Comics #51

Origin Story: A socialite who dons a mask and costume to fight crime and injustice.

Superpowers: Aside from twin pistols, she uses her intelligence and athleticism to beat the bad guys.

Eide Bailly's International Tax Team and our affiliates at HLB, The Global Advisory and Accounting Network, stand ready to assist with your worldwide tax needs.

Tax News & Views International Weekly: Pivoting to Digital

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Alex Parker