DEATH & TAXES, OR LACK THEREOF: CONFLICTING VIEWS OF MULTINATIONAL CORPORATE DIGITAL TAX BETWEEN THE UNITED STATES AND EUROPEAN UNION.

• Author: Beaudoin, Sarah

1. INTRODUCTION

   Base erosion and profit shifting (BEPS) is a familiar component of the international tax world, but it has become increasingly difficult to deter in the face of an evolving digital economy. (1) BEPS occurs when multinational corporations take advantage of disconnected international tax laws in order to shift income and profits to low-to-no tax jurisdictions, thus reducing overall tax liability. (2) This aggressive tax planning technique results in governments around the world losing millions of dollars in tax revenue. (3) In 2013, the Organization for Economic Cooperation and Development (OECD) created a fifteen-step

   Action Item One of the BEPS project, which is specifically designed to address the tax challenges of the digital economy, has been ineffective when compared to the other fourteen action items, owing to a lack of consensus on how to tax digital services. (6) Specifically, two of the world's largest economies, the United States and the European Union, declared completely different approaches on how they plan to address the tax challenges of digitalization. (7) The United States opposes any type of special tax on digital services, while the European Union recently launched a short-term and long-term plan to expressly tax such services. (8) The United States and European Union, however, will need to engage in coordinated efforts with the support of the OECD and G-7 leaders in order to prevent corporations from engaging in BEPS strategies. (9)

   This Note will evaluate both the United States and European Union's approaches to taxing the digital economy. (10) Part II will explore the historical background of both globalization and international tax principles, the evolution of the digital economy and such evolution's effect on BEPS." Part III will explore the European Union and United States' differing viewpoints on a digital tax. (12) Part IV will analyze whether the European Union's strategies are effective as an international strategy for digital tax and will ultimately critique the European Union's digital tax proposal. (13) Lastly, Part V will conclude that, rather than hastily implementing unilateral measures, the United States and the other 113 OECD member countries should continue to work with the OECD to address the tax challenges of the digital economy and reach a consensus-based resolution to BEPS. (14)

2. HISTORY

   In the early 1900s, most businesses were isolated to a single country and only subject to the tax of the country where the business was incorporated or headquartered. (15) As the result of multiple technological advances, globalization has evolved, allowing corporations to easily communicate and conduct business on a global scale. (16) Although globalization has had a positive impact on economies worldwide, it has also opened the door for corporations to avoid taxes and negatively affect tax administrations. (17) Governments now struggle to balance two goals: preventing double taxation of a multinational corporation's profits and allocating each country's fair share of tax revenue from those profits. (18)

   The international tax laws of the past are ill equipped to handle an increasingly globalized and digitalized world. (l9) Moreover, corporate tax avoidance strategies often depend on the manipulation of outdated and uncoordinated tax laws. (20) In order to comprehend the necessity for cohesive international tax laws in such a globalized and digitalized world, and how the OECD is pivotal in facilitating it, it is important to address the historical context of international taxation principles. (21)

   1. Historical Framework of International Tax Principles

      1. Mitigating Double Taxation

         The history of international taxation dates back to the early 1900s. (22) In the aftermath of World War I many governments were concerned that international trade, which was vital for generating revenue in a postwar period, would cease because of "double taxation." (23) Double taxation occurs when more than one country levies a tax on the same item of income from a single taxpayer. (24) In order to prevent double taxation and encourage cross-border transactions, governments entered into bilateral tax treaties and enacted unilateral relief mechanisms, such as foreign tax credits, exemptions, and deductions. (25)

         Countries began to defining taxable income differently and imposing inconsistent tax rates, which became problematic for the prevention of multinational corporate tax avoidance. (26) For example, some countries adopted a territorial tax system, where tax is imposed solely on the income derived within its borders, while other countries, such as the United States, adopted a worldwide tax system, where tax is imposed on its citizens and residents regardless of where the income was derived. (27) Corporations have used the divergence in the two different tax systems in order to shift their profits from one country to another and then classify those profits as foreign-sourced income. (28) As a resuit, corporations take advantage of the relief mechanisms put in place to mitigate double taxation of foreign-sourced income and are able to reduce overall tax liabilities. (29)

      2. The Permanent Establishment Rule

         The longstanding concept of "permanent establishment" (PE) has become problematic in a world of globalization. (30) The

         PE concept originally surfaced as a tool to resolve double taxation, specifically conflicts between one country claiming tax jurisdiction based on the income derived within its borders and another country claiming tax jurisdiction based on the residence of the taxpayer. (31) A PE is universally defined as, "a fixed place of business through which the business of an enterprise is wholly or partly carried on." (32) A corporation's income and profits will generally only be taxed in the country or countries where the corporation maintains a PE. (33)

         The PE concept, however, was developed long before the evolution of the internet and e-commerce. (34) As a result, digital corporations today may generate profits in more than one country but can avoid paying taxes in one or more of those countries because they do not maintain a PE or physical presence there. (35 ) In other words, a country often does not have the requisite jurisdiction to impose taxes on internet-based corporations because a website or internet server is not categorically a "fixed place of business." (36)

   2. The Development of the OECD and the Birth of the BEPS Project

      Although every country has sovereignty to impose its own taxes, it may have an adverse impact when domestic tax laws fail to consider the effects of other countries' tax laws. (37) Due to such uncoordinated governmental efforts to reduce double taxation, countries developing their own systems of international tax laws, and the rise of internet-based companies, the potential for BEPS was cultivated and the need for a cohesive international tax framework arose. (38)

      Recognizing the need for an international tax framework to replace outdated and disconnected tax laws worldwide, the OECD created a model tax treaty in 1963. (39) Although the model tax treaty has reduced potential for double taxation, corporations continued to manipulate the tax laws of different countries through the legal, but harmful, strategy known as BEPS. (40)

      BEPS is the erosion of a corporation's tax base, which is used to determine tax liability, and it is accomplished through a mechanism called profit shifting. (41) Profit shifting occurs when corporations use sophisticated tax planning schemes to transfer income earned in one country to a different country that has little to no corporate income tax. (42) BEPS is technically legal, but it has severe consequences for tax administrations worldwide. (43)

      At the G20 summit in 2012, the G20 leaders and policymakers recognized a growing need to prevent BEPS and expressed support for the OECD's work in this field. (44) The G20 leaders recognized the OECD through its various platforms aimed at promoting economic efficiency and cooperation. (4?) In response to the G20 summit, the OECD released its first report in 2013, reiterating the need for a cohesive international tax framework and addressing many of the issues related to BEPS. (46) In 2015, the OECD finalized the BEPS project and identified fifteen "action items," which addressed many of the issues in international tax law giving rise to BEPS. (47) The fifteen action items, including Action Item One, which specifically addressed the tax challenges of the digital economy, strived to provide governments around the world with coordinated solutions to corporate tax avoidance in an increasingly globalized and digitalized world. (48)

      At the G20 summit in Antalya, Turkey, in November 2015, the G-20 leaders endorsed the final reports of the BEPS project. (49 ) Since 2015, the OECD has concentrated on implementation of the fifteen action items in participating countries and any nonmember countries with an interest in the BEPS project. (50)

      The final report in 2015 regarding Action Item One of the OECD's BEPS project concluded internet-based companies and digital business models overtly intensify the risk for BEPS. (51 ) The OECD asserted that the digital economy is becoming an economy itself and would attack tax avoidance through incorporating the other fourteen action items into Action Item One. (52 ) In March 2018, the OECD released an interim report on Action Item One, concluding that the participating member countries, including the European Union and United States, could not reach an agreement on the most effective way to handle taxation in the digital economy. (53) The OECD plans to continuously monitor the progress of the digital economy and international tax policies, and expects to reach a consensus-based resolution among its participating member countries by the end of 2020. (54)

3. FACTS

   1. The European Union and Taxation of the Digital

      Economy

      The European...