Ways and Means Questions If International Tax Talks Will Lift DSTs

House Ways and Means Subcommitee Chair Mike Kelly, R-Pa., warned that the committee would not "stand by idly and watch the Biden administration and Treasury Department sacrifice American tax dollars for political gain." Kelly, who was holding a hearing this week on the implications of international negotiations on extra-territorial taxes, including digital services taxes, said the draft deal at the Organization for Economic Cooperation and Development will disadvantage U.S. firms.

He asked in his opening statement, "Is the Biden administration going to sacrifice the financial success of U.S. businesses in our economy for international accounting bureaucrats’ approval or for Europe to benefit from our economic success?"

But while witnesses at the hearing agreed that the draft deal doesn't put the problem of discriminatory digital services taxes to rest, they also said Treasury Department officials can't just walk away from the table.

Megan Funkhouser, senior director of policy, tax and trade at the Information Technology Industry Council, the trade group that represents most DST targets, said there is no better alternative, and that there is potential in the draft, though she said it should be explicit that DSTs must be rolled back, with some sort of enforcement provision to ensure it happens.

"Last week during a parliamentary hearing, a Canadian government official reaffirmed interest in applying the DST retroactively to January 1, 2022. If Canada moves forward, we could see a potential resurgence of novel taxes targeted at U.S. and/or non-resident companies," she said, and the more countries begin DSTs, the harder it will be to reach a consensus to eliminate them.

Tax Foundation CEO Daniel Bunn said if an agreement isn't reached, "then DSTs will likely become even more common around the world. And the United Nations will likely seek to fill the gap in multilateral tax policymaking. Because the UN relies on a one-country-one-vote approach to decisions (while the OECD has aimed for consensus), and it has yet to set a clear policy agenda, its policy designs are difficult to predict."

He said DSTs not only hit the largest companies -- which are mostly American -- they also are directed at specific business lines, such as streaming services and digital advertising, which violates the neutrality principle in tax law.

"If a multilateral solution to remove the DSTs is not agreed to, then DSTs will continue to spread and mutate with negative impacts on some of the most innovative companies in the world. Multilateralism is better than multiple rounds of a tax and trade war," he said, reminding the committee that the Office of the U.S. Trade Representative had been ready to impose 25% tariffs on $1.3 billion worth of trade with the EU before the OECD process progressed.

Not only do the DSTs target American tech giants, they also tax revenues rather than profits, and, in some cases, tax small firms, too, such as in India and Kenya law.

The United States Council for International Business' international tax counsel, Rick Minor, said the deal must not have ambiguous language, which could allow withdrawn DSTs to be replaced by new discriminatory taxes.

"It must be clear, as USTR has done in the past with DST investigations, that countries who are found to act unilaterally, outside of an agreed upon framework of taxation rights, will be treated as inhibiting trade," he said. "We are disappointed that certain countries have been grandfathered -- that they are still allowed to collect DSTs from U.S. companies -- but we believe it is important to avoid the proliferation of new DSTs as we are working out the terms of their withdrawal." He, like Funkhouser, said Canada's moves toward a DST undermine the negotiations.

Kelly and several other Republicans on the subcommittee signaling their intention to block a deal -- Rep. Ron Estes, R-Kan., put the word deal in air quotes, and said that Congress "shouldn't accept a bad deal."

But when Democrats on the subcommittee asked the witnesses if their dissatisfaction with the product so far means the U.S. should withdraw, they said no.

Bunn said, "Maybe it won’t be a deal we can accept. But we need to keep negotiating."

Rep. Linda Sanchez, D-Calif., asked the witnesses what would happen if the agreement doesn't go forward? Funkhouser said that's a critical question, and that there would be a proliferation of DSTs. She said the IT strongly supports continued engagement in the talks. She also reminded members that while they may find it unappealing to compromise and share U.S. firms' tax revenue that currently goes to the IRS, they should keep in mind companies are already paying DSTs.

Rep. Kevin Hern, R-Okla., agreed that the U.S. has to stay at the table.

Bunn responded, "We have to have a way to figure these out rather than having a trade war."

Ranking Member Mike Thompson, D-Calif., said both parties are upset about DSTs, which he called a "politically convenient revenue grab for the governments who impose them."

He acknowledged that the Joint Committee on Taxation estimated that agreeing to extraterritorial corporate income tax could cost the Treasury more than $1 billion in the first year.

"For some, that might be the end of the discussion. 'Why give up revenue to other countries?', they’ll ask. My view is that we need to understand the benefits of the agreement, and not just look at the costs. What are the benefits of the international stability the agreement could potentially provide?"

"And perhaps more important, those who would look at the JCT report and say that we should pack our bags and go home, should ask themselves what’s the alternative. Are advocates for abandoning Pillar One then suggesting that the patchwork of Digital Services Taxes that will doubtlessly spring into place are preferable to the Pillar One proposal? And if not, how do you believe that the United States can stave off those taxes?"

He said he was "not arguing that the administration should sign just any agreement," but didn't think it was time to abandon the effort.