... for the implementation of sound, long-term tax policies
that promote the global competitiveness of
the U.S. technology industry.
... for the implementation of sound, long-term tax policies that promote the global competitiveness of the U.S. high technology industry.
Tax Frameworks
Summary of Expanding Tax Frameworks
The global tax environment is rapidly changing and continues to increase in complexity. The risk of double taxation of cross-border transactions has never been higher. U.S. based companies face an ever-increasing list of potential tax frameworks to maintain. The taxation of foreign earnings and the complexity of U.S. international rules combine to create a high cost and complex tax environment and impact U.S. based companies’ ability to compete in a global economy.
Below is a Summary List of Expanding Tax Frameworks, including the newest additions, the Digital Services Tax (DST) and the OECD – Pillar One and Pillar Two regimes.
This Summary List of Expanding Tax Frameworks is intended to explain and illustrate the various tax frameworks that U.S. based companies must maintain and comply with to ensure financial and tax compliance.
Summary List of Expanding Tax Frameworks
Financial Statement Accounting (U.S. GAAP)
• Provision for Income Taxes
• Consistent with arm’s length standard, tax treaties, tax legislation and court rulings
• FASB Accounting Standards updates and disclosures
International Financial Reporting Standards (IFRS)
• Provision for Income Taxes
• Consistent with arm’s length standard, tax treaties, tax legislation and court rulings
• IFRS Accounting Standards updates and disclosures
Income Tax Returns in each Jurisdiction
• Taxable income calculated at local country income tax rates
• Consistent with arm’s length standard, tax treaties, tax legislation and court rulings
U.S. Corporate Alternative Minimum Tax (CAMT)
• Applicable to Corporations if:
• 3-year average annual adjusted financial statement income (AFSI) is greater than $1 billion
• CAMT is a 15% minimum tax (to the extent the 15% exceeds regular tax)
• Effective for taxable years beginning after December 31, 2022
Digital Services Tax (DST)
• Tax on gross revenues of certain types of activity (for example digital advertising, data usage, e-commerce, streaming/downloading, software as a service (SAAS), etc.)
• Based on the concept that “market” countries increase their taxing rights over the profits of multinational companies that sell into the local market and collect data from and target advertisements at local audiences, regardless of physical presence.
• A business tax expense that reduces operating income, i.e. it is not an income (profits) tax
• DSTs are:
• Outside of existing income tax frameworks historically based on physical presence, income tax on profits and tax treaties.
• Adding to compliance and reporting costs to comply with all jurisdictions worldwide.
OECD – Pillar One & Pillar Two
• The Organization for Economic Cooperation and Development (OECD) is an organization with 138 member countries including the United States, that collaborates to set forth policies which each individual country may enact.
• The OECD is working with member countries to create major reform of the international tax system. The reform will result in the enactment of Pillar One & Pillar Two. Per the OECD Statement dated 11 July 20231:
• Pillar One - Amount A will establish a taxing right for market jurisdictions with respect to its defined portion of the residual profits of the largest and most profitable multinational enterprises (MNE) operating in their markets, prevent the proliferation of Digital Services Taxes (DSTs) and relevant similar measures, avoid double taxation and excessive compliance burdens, and enhance the stability and certainty in the international tax system.2
• Pillar One - Amount B will provide a framework for the simplified and streamlined application of the arm’s length principle to in-country baseline marketing and distribution activities with a particular focus on the needs of low-capacity countries.3
• Pillar Two - the global minimum tax under Pillar Two establishes a floor on corporate tax competition which will ensure a MNE is subject to tax in each jurisdiction at a 15% effective minimum tax rate regardless of where it operates, thereby ensuring a level playing field. The global minimum tax framework under Pillar Two is already a reality, with Pillar Two becoming effective 1 January 2024 for EU countries and the U.K. and other jurisdictions taking steps toward implementation.
• Complications caused by the Pillar One and Two Framework
• These rules conflict with the plain language of existing income tax frameworks historically based on physical presence, income tax on profits and tax treaties.
• The OECD has provided limited guidance and no multi-country dispute mechanisms.
• These rules require substantial compliance reporting requirements (GLObE, Country by Country Reporting, Safe Harbors, etc.) and another layer of computations of tax attributes that must be harmonized with the already heavy domestic and foreign computations jurisdictions around the world required.
2. ibid
3. ibid
Disclaimer: Note that the global tax environment and rules are evolving and the SVTDG will continue to monitor these developments. All SVTDG comments are subject to change based on the latest developments.