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International Taxation & the Upcoming US Presidential Elections

International Taxation & the Upcoming US Presidential Elections

Find here the transcript for our webinar on international taxation and the upcoming US presidential elections. Happy reading!

Our panelists were:

  • John Richardson, Lawyer, Citizenship Solutions, Canada
  • Larry Stern, Partner, Aboulafia, Avital, Shrensky & Co., Israel
  • Elena Hanson, Managing Director, Hanson Crossborder Tax Inc., Canada
  • Stuart Gibson, Chief Editor, Global News and US, IBFD, USA

Introductory Remarks

Mateo Jarrin Cuvi: Welcome everyone to Taxlinked’s latest webinar. I organized this one quite in a rush because I thought it was actually something that we had to discuss given the US presidential elections that are coming up in a couple weeks. So I thought it'd be interesting to have a discussion centered on how the results of these elections can affect international taxation. We have a very esteemed group of experts and panelists with us here today. I won't be moderating today, that will be in John Richardson’s very capable hands, so I will say goodbye within the next two or three minutes.

Just let me get some admin issues out of the way. We are recording this webinar. We will have a full transcript available for this webinar. You should give us a couple weeks to get those two out but we'll make sure to email everyone. Also, if you are a Taxlinked member and you'd like CPD credits for attending the webinar, get in touch with Masha or myself and I will make sure to send those to you. Just make sure that you are paying attention because the system actually tracks whether you're listening or not, so you have to actually be attentive if you want to get that credit. Also, if you have any questions for Stuart, John, Elena or Larry just use the Zoom control panel to submit those questions and I will forward those onto John and he'll incorporate them into discussion in one way or another. So with that said, I am going to say goodbye and leave it in John's hands. Thank you very much everyone and have a great webinar.

John Richardson: Thank you very much Mateo and thanks to Elena, Stuart and Larry for participating in this today. This is indeed an esteemed panel, and I am grateful for the opportunity to participate with you. Beginning with the title on the screen, International Taxation in the Upcoming US Presidential Elections, a very broad title and I think it's worth noting at the beginning that we can view international taxation from the perspective of the United States, the lawmaker or from the perspective of those who have to deal with the rules, particularly Americans abroad, which is one of the areas of expertise certainly that Elena and Larry bring to us. Could I though begin with giving each of you the opportunity to introduce yourselves to the extent that you would like, to give people a sense of the background and the insight that you will bring to this.

Elena Hanson: Hi, my name is Elena Hanson and I am a cross-border tax practitioner. I run an independent practice out of Toronto, Canada, and we do anything international. So we do US inbound, US outbound, most of our clients are international with respect to Canada and US, but we have a few which actually focus on Canada and third countries, US and third countries. So this topic and the upcoming elections and the platforms, it's something we are closely monitoring because it's going to obviously impact the majority of our clients.

John Richardson: Thank you. Elena's actually sort of more or less down the road from me in the Toronto area, so I know Elena quite well. Larry?

Larry Stern: My name is Larry Stern. I’m a partner at Aboulafia, Avital, Shrensky & Co., based in Jerusalem and Tel Aviv, Israel. We specialize in Israeli local taxation but with a fairly large US tax practice dealing with individuals, partnerships, corporations and so on. So obviously the presidential election is going to have a major impact. The other topic that's going to be discussed regarding the OECD and PE is another area that a lot of our local clients that do business in America are impacted by. So this is an area, very much hot button, for us and something that we monitor regularly.

John Richardson: Right, but your client base consists of a lot of dual citizens, correct?

Larry Stern: Not only. There are a lot of local Israelis that have businesses in America so that's part of it and a lot of relocation work for Israelis that relocate to America and Americans that relocate to Israel.

John Richardson: So you have the great privilege of dealing with some of the most complex areas of the US tax code?

Larry Stern: Some would say yes, definitely.

Stuart Gibson: Thanks John. I’m happy to be here at O-dark 30 on the east coast of the United States. I’m Stuart Gibson. I had 36-plus years as an attorney with the federal government mostly with the US Department of Justice, Tax Division. I retired in 2013 and failed at it, and I’m now in my third tax publishing gig as the Chief Editor Global News and US at IBFD and you can see my logo in the back there. Much of what I’ve done since I rejoined the workforce in 2014 is to cover international tax issues at Tax Analysts, then at Bloomberg last year and now at IBFD. It just keeps getting better.

John Richardson: Okay, wonderful. As I mentioned earlier, I have been to various seminars where you've spoken over the years and you bring tremendous insights. On that note, I think let's begin. Now we're going to be talking again about sort of specific things, general themes, moving over to the OECD but let me begin with Elena. How do you view the upcoming election in terms of the potential for tax reform and what are some ways that that might affect the individuals who you serve?

upcoming election

Question: How do you view the upcoming election in terms of the potential for tax reform and what are some ways that that might affect the individuals who you serve?

Elena Hanson: Thanks John. So we have two candidates and they're quite different in terms of the platforms they're offering for this election from the tax perspective. So we have the current president Trump and he fulfilled his tax mission in his first term, so we're not expecting much additional provisions coming from him if he gets elected, so it's more continuation of what was enacted in the first term, which was a major reform called the TCJA or Tax Cuts and Jobs Act that was the largest since 1986. I guess what he will try to do is perhaps make some of the provisions which were subject to sunset after 2025 become permanent, so that's on the personal side. His platform is quite easy and I would say uneventful.

His opponent Mr. Biden, on the other hand, he's offering something quite dramatic and very detailed and if he gets elected we certainly are out there for a bit of trouble in terms of seeing quite a few changes and getting used to the new provisions. Clearly it's going to impact a lot of our clients because a lot of our clients are the ones who the reforms are specifically directed at, that is affluent business owners conducting businesses in other countries, running multinational businesses, so there will be a playground for us to learn and implement his platform and also for clients to get adjusted to new rules and new rates.

So, specifically, I want to highlight two items that are on his agenda, that is changes to the estate tax, that's one of them, and the other one is an increase in the tax rates for GILTI.

John Richardson: So, Elena, this is great stuff. Could I ask you to pause for one second though before you get into the GILTI here. I wonder if you could go back to some of the provisions of the Tax Cuts and Jobs Act in 2017 and what generally, and as significantly as you can make it, were those changes in relation to US corporations and how do they end up affecting Americans abroad and individuals?

Elena Hanson: With regards to TCJA, the law impacted all major taxes. So we had a huge drop in the corporate tax, so that's considered probably the most significant change, from 35 to 21 percent because prior to that, at 35 percent, US had the highest corporate tax rate amongst the OECD countries. So now it’s somewhere in the middle. So that was a very welcome change because again remember in the US, most of the states, it's not just the federal tax level a taxpayer is facing, there's also state components, so again it's not 21 percent that people end up paying, it's more than that, more like 24-25 percent when you blend the state portion. As a result of that, there have been a lot of changes in structures and holdings. So that's on the corporate side.

On the international side, again, that's another area of law that oversaw a major change from the past. Before we had worldwide taxation of international business activities and earnings, so from that, under the new reform, we moved to quasi-worldwide taxation, so basically it's a quasi-territorial taxation, I should say. Of course, somewhere in the middle, because what the US wants now is it wants to impose a minimum tax on those multinationals operating abroad, so for as long as that minimum tax is met in the domestic country, the US seems to be satisfied and that was done just again to avoid profit shifting and complete tax avoidance. The changes were enacted through a series of new tax provisions such as section 965, GILTI, FDI and BEAT directed to various taxpayers and the levels of taxpayers.

John Richardson: So just breaking that down a touch here. So basically what we have is we start with 35 percent, we moved to 21 percent and, in exchange for that, you mentioned 965. So in a sentence or two, what was 965 about?

Elena Hanson: So 965 was a one-time tax imposed on accumulated corporate foreign earnings since 1986. So their shareholders were requested to compute tax on those accumulations, it was called the transition tax.

John Richardson: Then basically it was a current tax imposed on income that had not according to US law been previously taxed. Is that correct? You might call that a retroactive tax?

Elena Hanson: Right. It was a retroactive tax in the way when the provision was enacted and the tax was due, we really did not have much time to adequately prepare and compute and remit.

John Richardson: So basically it was a present tax on past earnings, correct? And the GILTI or the 951a, that was basically sort of based on the principle that, yeah, US corporations are generally territorial as long as they pay a minimum tax somewhere. Is that correct?

Elena Hanson: That is correct. So this is an ongoing tax, this now stands along with other international tax regimes, PFIC, Subpart F and then GILTI. For corporations, GILTI tax seems to be, I mean you need to go and compute, I mean obviously there are very complex rules, but in terms of the implications for as long as you're paying minimum tax in the country where you do business, that is ten and a half percent for corporations, there are no tax implications because if this is your tax rate, that's fine, you met the GILTI when you repatriate the dividends for corporations, there are no tax implications because that is being protected or exempted on the section 245 Cap-A, which is dividends received deductions. So when you repatriate those earnings, they’re becoming US sourced within the US entity, so basically the only tax implications the US corporation with those of foreign profits will see is when those dividends are paid out to shareholders. So for corporations, it's not that punitive. Where we've seen a very negative impact is actually for individuals because, first, it was not clear whether all the direct shareholders, individual shareholders will be impacted, then we were granted the 962 election opportunity and we were imposing that and as long as the domestic tax rate was at least 13.1 to 5 percent.

John Richardson: So basically what the Trump thing said was, all right, lower tax and in exchange for that you have to pay a minimum tax somewhere, we're going to attack previous deferral. Now moving over, vice-president Biden’s proposal, as I understand it, would increase the GILTI tax, double the GILTI tax and increase the general corporate tax rate. Now just briefly, is it your view that that would have some impact on the lives of Americans abroad who are individual shareholders of CFCs going forward. I presume your view is that it would have an impact.

Elena Hanson: It absolutely will. I mean it will make life much more expensive.

estate tax

Question: What about the estate tax?

John Richardson: It’s actually going to undo some of the stuff that's happening to make it work. Now back to your comment about the estate tax. So right now it's 11. In five years or 2025, it would drop down to 5 million anyway under the provisions of the Tax Cuts and Jobs Act, right?

Elena Hanson: Correct unless they would make them permanent.

John Richardson: The Biden proposals would be to reduce the threshold. Correct?

Elena Hanson: That is correct. So the Biden proposal is actually comprised of three parts: 1) reduce the threshold; 2) potentially reduce the rate from 40 to 35 so basically what we had pre-2010, and; 3) also eliminate the step-up in basis for high earners.

John Richardson: So on one level by reducing the estate tax threshold, certainly without getting into the details but by way of warning, that would become a problem for Americans who are trying to expatriate, correct?

Elena Hanson: Well, that's probably the biggest problem we actually see currently because a lot of domestic laws, if we have expats living in foreign countries, a lot of those countries have a deemed disposition on death with respect to our assets. So their holdings will be revaluated and they would be paying taxes domestically anyway when the wealth goes from the decedents to the next generation like we have in Canada. So elimination of step-up in basis that you can claim during your lifetime on death will have a dramatic impact on if you wish to expatriate because right now you can pass on $11.58 million, that's under 2020 brackets but if it drops down so you're losing half.

John Richardson: But the bottom line is that there is no question that these proposed tax changes will have an impact on individual US persons outside the United States. Correct?

Elena Hanson: That is correct and they're likely going to take effect in 2022 so we have a little bit of time to plan.

John Richardson: Let's focus a little more on the individual shareholders with the CFCs. Larry, could you give us your thoughts on how the proposed Biden tax change is specifically doubling the GILTI and moving the corporate rate to 28 percent. How those might impact your clients?

Question: How is the proposed Biden tax change specifically doubling the GILTI and moving the corporate rate to 28 percent?

Larry Stern: Sure. Let's start with a little bit of understanding of how the corporate rate works or the GILTI works to start with. Right now, corporate entities or individuals that elect to be treated as corporate entities are taxed at 21 percent US corporate rates with a 50 deduction under section 250, which would reduce the rate to 10 and a half percent. They would be entitled to a foreign tax credit of up to 80 percent, leaving the individuals with a 13.125 percent minimum rate in order to get under 962 and not have to pay GILTI tax. The alternative that was available is for individuals to use what the IRS has allowed as a high tax exception for those countries in which corporate rates are being assessed at greater than ninety percent of the US corporate tax rate, which comes out to 18.9 percent that they could be treated as if they would be looked at as if it's not in a tax avoidance scheme and that they'd be eligible to exempt the tested income under 951a from taxation.

John Richardson: Just trying to keep track because this is very complex stuff. So basically my understanding is that the Treasury regulation has interpreted this to mean that income that exceeds 90 percent of the US tax rate, which is currently 21 percent, would not be treated as GILTI income.

Larry Stern: Correct. So if we talk about a change to the tax rate under the Biden proposals, first of all, you'd be going to a 28 percent corporate tax rate, which would mean 90 percent of that would be 25.2.

John Richardson: So in other words, clearly a large number of American citizens abroad with small business corporations who are currently able to take advantage of the fact that anything below 18.9 percent whatever means it's not GILTI are going to be in trouble because in many countries the tax rate is not as high as 25 percent.

Larry Stern: There are a lot of countries that actually sit right in between where the current US tax rate sits now 21 percent versus the 28 percent. Israel is a good example of that in the fact that the corporate tax rate is 23 percent, which would mean that under the current legislation, high tax exception applies whereas under Biden’s proposal we'd be looking at a non-qualification for the high tax exception.

John Richardson: So, in other words, what people need to understand is that if that US corporate tax rate goes up to 28 percent, that's going to create a GILTI problem for individuals.

Larry Stern: And on top of that it would increase the GILTI problem by Biden’s proposal to basically double the GILTI tax in essence eliminating the section 250 deduction at this point. So you could end up with a double hit for those US expats.

John Richardson: Exactly. I wonder if you can elaborate on that a little bit more perhaps. If I could bring you back to the beginning of the Tax Cuts and Jobs Act that specifically did not allow individuals the 250 deduction, essentially allowed corporations to deduct half of the income but in the beginning individuals were not even entitled to that. Correct?

Larry Stern: Under the original code, that's correct. It was IRS regulations/clarification that basically said if you make the 962 election for an individual to be taxed as a corporation you would be entitled to the same section 250 deduction that a corporation would be entitled to.

John Richardson: So that was, if I might suggest, an example of Treasury actually working to protect individuals from very significant congressional overreach. But, okay, so an individual who uses a 962 election is then entitled under this regulation to eliminate 50 percent of what could be GILTI income from the GILTI calculation. So if they were to get rid of the 250 deduction and I agree with you that's the obvious way to double the GILTI tax, then that particular regulation would be of no benefit anymore to Americans individuals. Correct? If the section 250 deduction goes, it's even worse for Americans abroad because their tax rate is higher than a corporate tax rate regardless. Correct?

Larry Stern: That's correct. It would be a real hammer on the US shareholders and I think it would drive more and more people to potentially give up their US citizenship. It's a bigger issue especially in countries that don't have totalization agreements with the US where one of the major tax planning options to eliminate double social security tax is to open a foreign corporation and become employed through that foreign corporation. So in those many countries that don't have that tax, the planning that's available and the use of a local corporation doesn't particularly serve very well.

John Richardson: So in other words they'd be caught between a rock and a hard place. If they don't use a corporation, they're subject to essentially double self-employment tax in the US and, of course, I think Israel has self-employment tax too. So they're caught between one option having to pay US social security taxes or the way to avoid that is to create a foreign corporation where we become an employee of the corporation but then what happens is they're subject to these enhanced GILTI provisions. Unbelievable. I certainly think that that would, you say, well, more people would give up their citizenship, I would put it another way: I think anybody who wants to be self-employed may be forced to give up their citizenship at that point.

Larry Stern: I think a lot of people at least in the lower brackets where it's not cost effective to have a corporation, we haven't seen as much at least locally in terms of people giving up their citizenship but I think as the things progress and the social security tax actually becomes a bigger issue, especially under Biden’s other proposal to add social security tax above 400 thousand dollars. If you get rid of the corporate structure as a tax savings method and the person has to become self-employed and they make enough money as a self-employed individual, they may actually get hit with a much higher rate of self-employment tax than they would otherwise have gotten hit without the Biden proposals. So it's basically getting them from all three sides.

John Richardson: So anybody who thinks that a Biden presidency would have no effect on Americans abroad on the tax side is I think seriously deluded.

Larry Stern: It's ironic that we're such a big population outside the US where we would be the 13th largest state if they looked at us as a combined group yet there's very little thought process within the regulations. We saw this with the Trump regulations and the TCJA, that basically things were done haphazard without the questioning or the analysis that's needed to see what kind of impact it would have on individuals living outside the US and small businesses outside the US.

John Richardson: Or even individual owners. Of course what happened with the transition tax was that I think the s-corporation people managed to continue the deferral but it is interesting that, at least my impression, is they seem to have forgotten that foreign corporations can be owned up by individuals as well as by multinationals. Wow, so this is amazing stuff. But now of course individuals are not the only people who are affected by this. I mean US tax policy affects other countries in a significant sense as well.

On that note, I’d like to bring Stuart into the conversation and I wonder if we could use the debate over the digital services tax as perhaps the launch for this because this is, wow, I mean this is tax wars at its finest I think going on right now. So I’m wondering if Stuart we could start there and maybe you could take a second to explain the digital services tax.

Question: What’s going to happen with the digital services tax and the OECD’s plan to tax the digital economy?

Stuart Gibson: I want to go back and just cover a couple of things that were mentioned that Elena and Larry talked about with you, John. We're raising the level of alarm to a level that may or may not be warranted. These are proposals by somebody who hasn't been elected yet. I like to quote Tom Friedman because Tom Friedman described congress as the sum of all lobbies. And we all know that, even though the 2017 tax bill passed through reconciliation, so that meant that there were no Democratic votes, the Republicans put the thing together behind closed doors, in the past that's traditionally not how tax legislation is written in the United States. There's a proposal made, there's hearings in the House Ways and Means Committee and things get changed. This is what happened in the 1986 Tax Reform act, this is what happened in every other act until 2017. So I’d like everybody to take a little deep breath.

I will share that most of what we're discussing here is the impact on individual Americans living abroad of tax legislation that either exists or was proposed primarily to tackle a completely different issue, which is US corporations transferring their profits to low tax and no tax jurisdictions. So that's my segue into what the OECD is doing. So the digital service tax is actually a reactive tax. I’m just going to do a little history lesson; I’ll try to be as brief as possible. So in 2013, the G20 finance ministers realized after talking among themselves and to tax administrations that many multinational corporations were shifting their profits and eroding the tax base of countries in which they do business. And so they task the OECD with coming up with ways to work with the international community to reduce base erosion and profit shifting, hence, the acronym BEPS. They developed 15 action items with different working groups internationally on each, 1 through 15, and it was actually five years ago this month that the OECD adopted the action reports for 2 through 15. And when I say the OECD, I mean that there are 137 countries around the world that sign on to this, many of whom are not OECD members, not G20 members, so that's called the inclusive framework. And they have adopted these measures including a multilateral instrument that automatically amends hundreds of bilateral tax treaties. So the only one they didn't tackle was taxation of the digital economy, which is action item 1 and, in January of 2019, the OECD broke action item 1 into two pillars. They call them Pillar One, which is reallocation of global taxing rights, that is countries that have large markets, China, India, other countries that have large markets but not much nexus to production, not much permanent establishment by multinationals, wanted a piece of the pie. So there's a question about whether multinational companies that have residual profits, whether they will be subject to taxation in other countries other than the ones where they have nexus. The second is called Pillar Two, which basically was everything else but that now has been boiled down to something called GloBE, which is a global minimum tax.

So the OECD has been working on this for almost two years now and they were kind of close to reaching consensus. And then last December, the US decided that they didn't like the idea of other countries taxing our multinationals to that extent, so they said, “Well, we think that the proposal ought to have a safe harbor,” and when Secretary Mnuchin was asked what that means, it's basically that the system would be optional for individual companies. They could opt in to have other countries tax their residual profits or not. And that's thrown a huge set of uncertainty, I’d like to say a spanner into the works using UK parlance, a monkey wrench using US parlance. So the OECD has been working on this. Last week, they released the latest blueprints for Pillar One and for Pillar Two, recognizing that there's a path to consensus but that it's not at all certain and they asked the finance ministers and the central bank presidents to the middle of next year to see if they can work something out.

Now looping back to what John said and, by the way, I do want to make a shameless plug, IBFD is beginning this week a weekly news and commentary video series called Tax Takes: News and Views and later this morning I’ll be recording an interview with Pascal Saint-Amans who is the director of the OECD's office of tax policy administration to talk about this. So that will be available on the web within the next couple of days.

So, anyway, PSA over and to where we are with digital taxes. So DSTs. In response to this notion that the OECD may not reach consensus, a number of countries have reached out and said, “Hey look, if there's no international consensus, we want a piece of the pie,” and the first people to do it was France and they said, “We're going to impose a two percent digital services tax on all sales into our country whether you have a presence here or not,” and there's an acronym for the companies that are specifically going to be hurt most by this called GAFA, Google, Apple, Facebook and Amazon. So they imposed that and then the US said, “Well, we're going to impose retaliatory tariffs against French wine and French perfume and French designer handbags.” So a number of other countries have said, “Hey, we're going to do this too,” so there's a race as to whether the OECD and the 137 countries in the inclusive framework are going to agree on a framework for how digital taxation is going to work, how taxing rights are going to be reallocated under Pillar One or, that failing, there will be chaos in the international tax world because every country will impose its own digital service tax with its own rules. I just want to close this section by saying the economic analysis that was released last Monday from the OECD indicated that if the two Pillars are adopted in pretty much the current form, tax administrations around the world will reap between 80 and 100 billion dollars in additional revenue per year, most of it from the global minimum tax and that, if they are adopted, global GDP could drop about a tenth of a percent over the long run. But if they're not adopted and all these countries go off on these one-off DSTs, and I want to say that a number of countries in Europe have already adopted them, the UK and Greece and Italy and Vietnam, that global GDP could drop between 1 and 1.5 percent if we have this chaotic system. The other is, and I said I was going to end up but I’m going to end up in one second, which is the European Union is working together to put together a proposal for an EU-wide digital services tax that it would be prepared to implement if the OECD does not reach consensus. So I know that's a mouthful, I talk really fast, but that's where we are in the international front.

John Richardson: Mouthful maybe but I think a fantastic summary of that, so I thank you very much for that, as concise as it could be in this chaotic world, I think. Now it would seem to me that what's really happening is that countries that have traditionally been capital exporters like the United States and perhaps the UK have an interest, I think, in maintaining the status quo that is the permanent establishment principle because that gets American companies out of paying this type of thing and emerging economies, like for example India, would be countries that have a strong interest in, hey, you're making all this money from our customer base here, we want a piece of the action. Do you see to some extent the tension being played out along those lines? Old countries that don't want change because they're wedded to a tax treaty that has its roots from almost 100 years ago versus the new digital reality?

Stuart Gibson: Actually, Pascal mentioned this last week, the OECD had a webinar to roll out these latest blueprints and certainly there would have to be a new multilateral instrument that would implement any changes in how residual profits are allocated. I do want to fill in a couple holes in reallocating residual profits. There are two key unanswered questions that are more policy kinds of questions than technical questions. One of them is: What is going to be subject to this tax? Originally, there was this notion that it would only be businesses that operate in the digital space. So it would only be, they used to have this term at the beginning of these discussions called whether you can ring fence the digital economy. So there's a notion that you're at least going to include solely digital businesses. But the question is: Will you also include what they call consumer-facing businesses? And that's where a lot of the pushback has been because there are brick-and-mortar businesses that also have a digital component and they don't want the brick-and-mortar part being drawn into this. So that's something for negotiation right now.

It's interesting that you mentioned that because the whole notion of the digital services tax because there are other countries that I haven't even mentioned that are tackling the whole notion of digital services in a very different way and that's something that's alien to us in America, which is through a VAT. For example, Chile last year imposed a VAT on provision of digital services within the country, so now every Netflix subscriber in Chile has a 19 percent VAT added. Many countries in Latin America including Mexico, Colombia and Argentina are adding or considering adding VAT on digital services that completely takes it out of the realm of income taxation. So you have so many moving parts going and one of the issues that OECD is having to face is this whole notion of tax certainty, because in the corporate world how can you plan unless you have some idea of what the result is going to be across a number of international tax jurisdictions in different countries where you do business. I realize a lot of the discussion has been about individuals, but this is huge in terms of how it impacts multinationals and, at the end of the day, they're consumers, because most of these, you know when the US put tariffs on imported goods from China, China didn't pay anything, US consumers paid. They paid 80 billion dollars in Chinese tariffs because all the importers just passed the cost on. It costs more to buy a washing machine made in China today in the US than it did two years ago because of tariffs. So we need to take that into account.

There actually was a question about the WTO and the US and China are fighting these huge battles in the WTO and I’m sure that France if they have not already done so is going to file WTO complaints on the US retaliatory tariffs against French luxury goods. So there's a lot of moving parts.

John Richardson: This is fascinating; particularly, you're introducing into the discussion the response of some countries to handle this through a VAT. I’d like to get your thoughts on the following: If it's a VAT, then what happens is the consumers essentially pay the tax, if it's an income tax like a DST, the company pays the tax, right? So assuming you agree that the country of economic activity should get something for access to the market, if it's the VAT, it's the users who pay it, if it's the DST, it's the company that pays it. Seems to me conceptually two very different ideas.

Stuart Gibson: Not necessarily, John, because if you're Amazon, don't you just raise your price two percent to cover the DST? There's this big discussion and there have been about four or five different economic analyses of the Biden plan on the impact of the proposed corporate tax changes on individuals, and there will be some effect, raising the corporate tax rate to 28 percent, doubling the GILTI tax. One of the things we didn't talk about was the 15 percent minimum tax on book income because so many large corporations in the US have book income but they don't pay any US income tax. So all those changes and the question is how much of that trickles down to the consumer and some of it does, much of the incidence will fall on the shareholders though, on the owners of capital.

John Richardson: Larry, we were chatting about this a couple of days ago and, in the context of the discussion about the digital services tax, you had mentioned the Wayfair case and how that might affect the thinking towards this. I wonder if you could elaborate on that a bit.

taxation of digital companies

Question: How will the Wayfair case affect the taxation of digital companies moving forward?

Larry Stern: It's a bit ironic that the US is arguing for PE as the basis instead of PEA as the basis for taxation, where we've seen over the last couple of years especially after Wayfair that they're looking to tax based on end-user sales for US sales tax purposes. It's just ironic that they're taking the other side of the coin in the global fight where it suits the US’s needs whereas when it comes to foreign businesses the US wants to tax the sales of foreign businesses and collect sales tax at a local level based on where the purchaser is, not based on where the seller may have a PE or not. So it's an interesting dichotomy here about how the US is presenting the argument versus the OECD, whereas internally within the US, it's presenting just the opposite argument.

John Richardson: Sort of like trying to suck and blow at the same time. This is a very interesting problem. Just a question for everybody. This all starts from the problem of the permanent establishment or the reality of the permanent establishment clause that a company carrying on business in other countries taxed by another country to the extent that they have a permanent establishment. I think we would all agree that that is coming from a treaty that's about a hundred years old. Does anybody have any comments on having the discussion start from a presumption of a 100-year old tax treaty that was, my God, it was even pre-World War II to decide these issues.

Stuart Gibson: I’ll jump in here, John. The fact is that the world has changed in 100 years and the Supreme Court recognized that in Wayfair, by the way, when they basically said, “Hey, look, you don't have to have a warehouse in a jurisdiction to sell into that jurisdiction.” Larry mentioned PEA because the concept of permanent establishment has to do with this whole notion in US constitutional law of nexus. You have to have enough connection to some place physically to enable that jurisdiction to impose taxes. And so I coined the phrase, instead of PE, PEA which is also pronounced p as place of economic activity, so that it's very similar to some of the proposals coming out from academia about destination-based taxation, because this is essentially destination-based taxation where the incidence of taxation falls where the consumer is.

Elena Hanson: I also want to add that Wayfair was originally directed to sales tax but we're also seeing a shift now in how income tax is computed and measured and imposed at the state level. So we are actually moving away from traditional three-pronged tests, which is the payroll, sales and property to economic nexus, so it seems to be a shift that for various types of taxes in the states, sales tax moving towards the destination, income tax is moving to the destination, so it's no surprise that digital tax is also going to move to the destination.

John Richardson: One thing for sure is that, as we are now firmly in the 21st century, resolution of these problems is going to require a great deal of cooperation among countries and that's a tough one because globally, while there was never a need for greater cooperation, if you look at the political climate you know for the last 10 or 15 years, it seems like there's less and less an indication of cooperation. So I don't know. There's been a question a couple of times, we just divert for a second, this is actually coming back to Elena. The specific question is: You mentioned in conjunction with the transfer tax on death that there was a suggestion of getting rid of the step-up in basis. Is that correct?

Question: In conjunction with the transfer tax on death, there was a suggestion of getting rid of the step-up in basis. Is that correct?

Elena Hanson: So we don't know the specifics at this point. We don't know the threshold and who is going to be impacted. So what's currently happening is that if you're a US citizen and you're a decedent, so in essence 11.58 million of the worth of your assets on death can be transferred on an estate tax-free basis to your heirs or beneficiaries. So that's presuming you never claimed your lifetime exemption through gift tax before. So what is being proposed is instead of such a generous exemption is to bring you down and, oh yeah, the most important fact is that when your heirs and beneficiaries acquire those assets, they actually have a new basis, so the basis of those assets becomes the market value on the day of the decedent's death. So they carry on out that asset at a stepped-up basis, so in the future when they dispose the assets, they’re paying capital gain tax on the difference between the sales price and the value on the day of death. So by having this provision in place in the policy, it allows US citizens to actually avoid paying capital gains basically for generations. You just keep moving and moving and moving that asset from decedent to decedent. So Biden’s proposal is intended to eliminate such a generalized deferral.

John Richardson: In other words, at the moment the asset passes to the beneficiary, there's going to be some kind of a tax paid on that gain.

Elena Hanson: Yes and we don't know who is going to be, I mean, we know that the elimination of step-up means that the asset is going to retain the original cost basis, so we don't know when the tax is actually going to be imposed. But it will be taxed.

John Richardson: In other words, ending this whole idea that just by passing it on ad infinitum from generation to generation, that there will be no tax. Well, that would bring it in line with what's happening in at least one other country I know, namely Canada. Stuart, do you think that there's a ghost of a chance of that being becoming a reality?

Stuart Gibson: Well, they've tried this before. I believe they tried it with the 86 act and it was killed. I don't think it ever made it out of the cradle. I think it was killed in very early infancy and I think that there may be a way for this to happen but it would have to be limited because right now 99 percent of the impact of the proposed Biden plan would fall on people making over 400 thousand dollars a year, people who make over a million dollars a year and large multinational corporations. So if it were to impact blue-collar people who had stock that they inherited from their parents who were wise investors, it would hit them. So there has to be a lot of discussion. I think Elena is right, there's a lot more that we don't know than we do know about this proposal. But it's got a long way to go and there's generally been reluctance on the part of Congress to eliminate this benefit.

Larry Stern: Assuming that the step-up in basis is eliminated, I think it would create a situation where you're going to see a lot more gifting at early stages of assets intergenerationally than you would waiting for assets to be transmitted upon death.

John Richardson: Absolutely, I think you're 100 percent right on that one again because there's no benefit to waiting until death. We're coming to the end here but I would like to ask each of you a question. We did not touch on this and if you could give fairly brief answers, Biden is I think probably the consensus choice of the democratic party and I think that many of the would-be candidates have some impact on his tax policy and the result there's been a lot of talk about a wealth tax in the United States and I’m just wondering briefly the three of you do you think the chances are of that becoming a reality? Maybe we'll start from the top from the top of my screen visually, let's start with Stuart.

Question: There's been a lot of talk about a wealth tax in the United States. What are the chances are of that becoming a reality?

Stuart Gibson: I think he's laid out a very comprehensive plan that makes the tax code more progressive that shifts the burden toward really the top one tenth of one percent. I don't see a wealth tax emerging anywhere here.

Elena Hanson: I agree, I don't see that happening. I think the target audience of the Biden policy are high net worth, they're already going to be paying extra through increased bracket, through increased social security, we have increased corporate tax, so I think they're well taken care of.

Larry Stern: I would agree with my colleagues here and just add that if Biden is accomplishing that by going back to the 39.6 percent tax bracket and if he decides to do something even higher, that that is in effect a wealth tax to start with. So I don't see it actually coming in as a wealth tax separate from the income.

John Richardson: I don't think it will come in as a wealth tax for the foreseeable future, but the problem is that these things are often talked about for many years, so people get used to them and then they become law but anyway. Maybe we'll have 10 years from now a similar webinar to see where that is. But Mateo is back, which means two things: First of all, that we're wrapping it up. The second thing is I must remind you that we're talking about implications for Americans abroad that may affect the long-term status of their American citizenship. And thank you very much to Stuart, Elena and Larry, this has been a fascinating conversation today.

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