In this episode of Tax Notes Talk, Tax Notes investigations editor Lauren Loricchio discusses security concerns regarding tax software platforms’ data-sharing practices.
Tax Notes Talk is a podcast produced by Tax Notes. This transcript has been edited for clarity.
David D. Stewart: Welcome to the podcast. I’m David Stewart, editor in chief of Tax Notes Today International. This week: the OECD and the EO.
We’ve talked many times on the podcast over the past several years about the OECD and its two-pillar project which aims to update international taxation for the digital age. Today’s guest, Scott Levine, is very familiar with that project as he served as the U.S. chief OECD tax negotiator for the past year in his role as deputy assistant secretary for international tax affairs.
Tax Notes chief correspondent Stephanie Soong recently sat down with him to discuss the Trump administration’s international tax policy and his experience. Stephanie, welcome back to the podcast.
Stephanie Soong: Good to be here.
David D. Stewart: So could you give us some background on Scott?
Stephanie Soong: Like you said earlier, he was the top OECD negotiator at the OECD inclusive framework representing the U.S. as deputy assistant secretary for international tax affairs at Treasury. Before that, he was a partner at Jones Day and was at KPMG before that, and he’s also been an adjunct Georgetown Law professor.
David D. Stewart: And what sort of issues did you talk about?
Stephanie Soong: We mostly talked about President Trump’s executive order on the global tax deal and its implications for the OECD’s two-pillar reforms, the future of multilateralism in tax, and his time at Treasury — what he was proud of accomplishing, what he wished he could have finished, and what’s next.
David D. Stewart: All right. Let’s go to that interview.
Stephanie Soong: Scott, thanks so much for coming on our podcast. Really excited to have you.
Scott Levine: Oh, it’s my pleasure.
Stephanie Soong: So let’s just dive into it. Going back a few months, in your keynote at the GWU IRS conference in December, your main message from your keynote was the U.S. should stay at the negotiating table at the inclusive framework, but we’ve seen a repudiation of multilateralism in this executive order that President Trump issued on Inauguration Day. What was going through your mind when you heard about this order? Does it feel like it’s undoing the work you’ve done?
Scott Levine: That’s a good question. First of all, I want to just mention that I have no particular knowledge of what specifically the executive order is going to do or not do and how they tend to follow up. I’m just giving you my own feeling about what the executive order might be going towards.
But I think importantly with respect to the order, I would start with what it doesn’t say as opposed to what it says. And what it doesn’t say, unlike the Paris climate accord executive order or the World Health Organization order, this particular memo doesn’t say whether the U.S. is pulling out of the OECD, it doesn’t suggest anything that extreme, and it also gives a cooling-off period of some sort, there’s 60 days to figure out what to do. And so I think this is the type of order that we should be focused on, concerned about, but not overreacting to quite yet. I think it’s best to probably wait and see what transpires over the next few weeks and months before we jump to any conclusions.
Stephanie Soong: Can we speculate a little bit about — what does this order mean then for pillar 2? How do you perceive this impacting the negotiations that are still ongoing in the inclusive framework?
Scott Levine: I don’t know where it’s going to go, but there’s some clear obvious paths that it could go. One possibility could be that they decide to try to blow up the entire system, the pillar 2 system. I don’t know if that’s possible to do, I think it probably is not possible to do, and I say that because we know that there are dozens of jurisdictions that have already implemented. We know that the European Union members passed a directive that has to be unanimous to be passed and then have subsequently implemented the legislation to the extent their timeline hasn’t given them a reprieve to do it at a delayed way. And then I think most importantly to understand it would take unanimity for the EU to undo it, which I think based on how hard it was to get the unanimity and where the individual governments in the EU are right now, unanimity would seem to be a very tall task.
And so what does that mean? That means I think that if that is the route that it goes, there’s going to have to be some way to address the elephant in the room, the U.S. not being compliant with the system and how the U.S. system would interact with the rest of the world. And so I think there’s two ways they could go there. They could decide to take the tariff retaliatory route, which may be alluded to in the executive order, but it’s just one of many options. Or they could decide to go back to the table and over the next few months try to negotiate an extremely good deal for the U.S., but that allows both sides to save face and to have a system that is workable going forward.
That system could look, for example, like the U.S. having some sort of exemption or at least with respect to the UTPR, which seems to be at the heart of the concern of the Republicans. It could be broader than that, it could be the whole U.S. system could find a way to be exempt, but that was never discussed on my watch, and I think that’ll be a heavy lift, but maybe where we end up trying to negotiate.
Stephanie Soong: Can you maybe talk a little bit about some of the proposals that were floated around to protect the research and development credit? I understand there was a proposal about protecting the domestic expenditure employment intangible asset investment that we treated as a qualified tax incentive under the pillar 2 rules. Is that right?
Scott Levine: First, I do think the question somewhat is putting the forest for the trees kind of issue. Because in the new world with this new administration, we’re past trying to just focus on a fix for the U.S. R&D. My guess is they’re going to want something more global, something more universal.
But just to give you a little window into where things were with the R&D credit, we did talk with some members of the inclusive framework, not everyone, about certain ideas that we had that we thought made sense. And one way that was that some members felt might be reasonable, others not so much, was this idea that we would focus on incentivizing activities in the jurisdiction, and those incentives would be okay, but incentives that were trying to attract income to the jurisdiction would not be okay, like a patent box is an example.
That’s one way this could have gone, or could go, but there might be other ways too. And, again, I think the concern will probably be, first and foremost, how does the OECD inclusive framework get the U.S. to coexist with pillar 2, and that might take a lot more than just the R&D credit.
Stephanie Soong: Can you talk about the design of the permanent safe harbor and the sessions that you left there when you stepped down? What was the state of the negotiations there?
Scott Levine: There’s not much to say on that except to say that it’s ongoing negotiations about how to make that work. On the one hand, if you care about the integrity of the system, the more generous of a safe harbor you have, the less it suggests that the underlying rules matter. So I think it’s important that whatever comes out of it, if it is to come to fruition, that the permanent safe harbor takes into account that there needs to be a fair enough gap or a big enough gap between what the effective tax rate or the actual tax rate that’s being recorded under their normal rules and what would be recorded under the pillar 2 rules. And so how that gets worked out remains to be seen, but I do know there’s a lot of interest in it from many members to get to the finish line on a permanent safe harbor.
Stephanie Soong: Was there unfinished business that you wish you could have gotten done before you left on pillar 2?
Scott Levine: There’s obviously a lot of things we would’ve liked to have accomplished that didn’t get to the finish line. What I would say though is that it’s important to understand that the system for pillar 2 to work, it’s going to continue to need to have administrative guidance.
If you look at just the United States and the tax laws that are enacted every few years, back to the ’86 tax act, which was a fundamental change to the U.S. tax system, the Treasury Department is still putting out guidance addressing issues on the ’86 tax act. I just saw a 355 set of regulations come out a couple of weeks ago. And so the idea that we’re going to be able to take this very complex system, try to make it as simple as possible, but then it’s inevitably complex, the idea that each jurisdiction is going to have their nuanced issue that doesn’t fit neatly into the model rules, and there needs to be some additional guidance to explain how it works and that all that is done already is, I think, a little silly.
Stephanie Soong: And I think dropping the administrative guidance before inauguration day, that was just a coincidence, right?
Scott Levine: I felt that we were somewhat trapped. On the one hand, we know we needed to get out a qualified list. If we didn’t get out a qualified list, then U.S. multinationals, who I was mostly concerned about, but all multinationals who have to file public filings on their year-end like a 10-K, would not have known which jurisdictions they’re operating in were qualified and which were not, and all havoc would’ve been unleashed, and very difficult for those kind of companies to be able to file with any kind of sense of certainty. And to get that qualified list, we had a couple jurisdictions that had done something in their tax regime that they had passed that many members of the inclusive framework thought was inappropriate. And so much so that there was a bloc, a large bloc of countries that would not have let the qualified list go out unless it was dealt with.
And on the other hand, you have that handful, or maybe two countries, that didn’t want to budge. They felt that what they did was appropriate and that they should be able to continue to do what they were doing. And so we were at loggerheads. If neither side was able to compromise and we would not have had a list come out and then that would’ve been, I think, very bad for the public markets, very bad for the system.
And so we were able to negotiate a compromise, which I thought was a very reasonable compromise, that allowed those countries to get some of the benefit that they were affording their taxpayers, but not all of it, not most of it, and at the same time made the remaining countries who felt really strongly about not letting such incentives take place a way to get comfortable enough that this wouldn’t happen again.
Stephanie Soong: So as far as unfinished business, what were some regulations you wish you could have gotten out or what were close to getting out?
Scott Levine: Well, first I’d say we got a tremendous amount of guidance out at the end, and I’m really happy we were able to do that.
I sometimes think of it as those who take the shuttle back and forth from New York to D.C., you’re sitting in LaGuardia at 5 o’clock on a summer afternoon and there’s a thunderstorm rolling in and there’s only so many planes that can take off. And so there was a lot of guidance that had to get out, not just from the Office of Tax Policy, but throughout Treasury and throughout the Biden administration, and so I think we got our fair share. Items that we thought were critical made it to the finish line.
There’s two in particular that I was disappointed we couldn’t get out, but you’re always going to have that. And if you got those two out, there would’ve been two more I probably would’ve mentioned, but in specifically the section 45O1 buyback excise tax regs, I thought was important to get out that we just couldn’t get there. There’s a funding rule that’s been spoken about a lot and some controversy or tax practitioners have complained about, and I do think that there’s a disconnect between how Treasury was interpreting what they wrote and what practitioners, how they were interpreting it, and I think fixing that or clarifying that could have been very helpful, but hopefully the next administration will be able to take that up.
The other piece, which is the section 892 sovereign wealth fund regulations were ready to go, and unfortunately just was a victim of too many projects to get out at the same time. So, again, I think it’s a middle-of-the-fairway type of regulation, and I expect and hope, I should say, that the Trump administration finds a way to get those out sooner than later.
Stephanie Soong: Going back to — you mentioned the UTPR, do you think we’ll see the slow death of the UTPR, just given the uncertainty around it, the Trump administration’s opposition to it, the legal challenge at the EU, Belgian Constitutional Court, there’s so much pressure on the UTPR. Do you think — could there be a situation where the UTPR just disappears and is withdrawn?
Scott Levine: So I don’t have a crystal ball, but what I would say is this: We know that the UTPR is there for a reason, it’s not cosmetic. It’s there because it needs to enforce the countries that don’t want to enact a minimum tax, that tax will be collected one way or the other. And without it, you could see an unraveling.
So one possibility is you see the UTPR being somewhat optional, and so you have countries like the EU, etc., the European members countries that have passed it already, but it doesn’t work that way. It works to collect the 100 percent of the tax, whether there’s one country collecting or 150 countries collecting.
One way I think it could end up is where, like I said before, the U.S. somehow gets exempt from the UTPR. Good arguments could be made as to why that should be the case. Our system’s very unique, we collect a lot of tax, and we tax our multinationals on their worldwide income, and some of that tax is collected in ways like our 861 allocation rules, for example, that increase the effective tax rate for U.S. purposes but not for GLOBE purposes, and so you could see a fairness there to exempt the U.S. system as it currently exists.
Another possibility though is that the European Union feels pressure from the United States to abandon the UTPR, and they’re going to have the most difficult abandoning it because as I mentioned before about their directive and the ability to undo it.
So you mentioned this Belgian litigation, which I don’t know much about other than what I read in the paper, but I guess that could act as a safety valve at the end of the day if, politically, the EU wanted to just get rid of the UTPR, but I think it’s probably going to be here for a while because I don’t think there’s an easy way out of it. And if it didn’t exist, then you also run the risk of countries that were historical holding company jurisdictions, most likely outside the EU, that could repeal their pillar 2 taxes and could try to take advantage of the fact that the U.S. at least isn’t subject to UTPR. So there’s a lot of forces at play here as to what ultimately would happen to the UTPR. I think we’ll just have to wait and see.
Stephanie Soong: What does worldwide pillar 2 adoption look like without U.S. involvement? Will we see another race to the bottom on tax?
Scott Levine: Well, if the whole thing went down, I guess we would be back to where we were before. There’s a desire to not have a race to the bottom, there’s a desire to have a level playing field, at least there was with the Biden administration, and I’ll be very candid, I still don’t completely understand U.S. multinational aversion, some at least, to the concept of pillar 2. I understand concerns about the rough edges, things like the U.S. R&D credit that result in double taxation potentially to U.S. multinationals, that’s all very fair and a reasonable discussion to have. What I don’t understand, and no one’s ever really been able to explain to me, at least to my satisfaction, is U.S. multinationals for decades were disadvantaged because they were the only multinationals subject to worldwide taxation, where the rest of the world’s multinationals were not. And that allowed all sorts of base erosion and profit shifting to take place by other countries at a much greater clip than U.S. multinationals were able to do.
Plus, we had a lot more antiabuse rules than the other jurisdictions so that it made it even harder. You flash forward to now and our multinationals are subject to worldwide taxation, all other multinationals effectively are subject to worldwide taxation as a result of pillar 2. Now, it’s not perfectly even, but it’s much more level than it ever was before, and if we could get those rough edges sanded down, then maybe it would be even more even. And why we would want to blow that up so that foreign multinationals go back to the old way it was when they didn’t have to worry about worldwide taxation and ours, our GILTI regime would still have to worry about worldwide taxation didn’t make sense to me. And so I hope at the end of the day that that will ring true and that we’ll ultimately find a path that everybody can live with.
Stephanie Soong: Let me move to pillar 1. So the executive order, it refers to the global tax deal, it didn’t really specifically call out the pillars. What does this order mean then for amount B? Because obviously the IRS, they’re going to propose regulations on amount B. Where does this leave amount B for the U.S.?
Scott Levine: I think you’re right. I think the executive order, I think it talks about extraterritorial taxes and maybe something about disproportionality or discriminatory. On that front I think it could easily just as much talking about digital services taxes perhaps than it is about the UTPR. I don’t know what’s going to happen with the MLC going forward, amount A. We handed it off to the next administration, we tried to get in the best place we could.
As I’ve said many times, it wasn’t where it needed to be, and so maybe the next administration or this current administration has the ability to get a better deal for the United States than it’s already on the table. But something’s going to have to give, and there’s going to have to be some way of dealing with digital services taxes and how to tax digital services. And so where we end up, there’s been a number of proposals, some actually from some of your columnists, as to where we could end up, and we’ll have to wait and see I think on that.
On amount B, I would strongly hope that that is something, if nothing else, that the Biden administration and the now Trump administration could agree on. It was widely bipartisan initiative that got us acting or negotiating and underscored how important it was to the U.S. multinational community and to both sides of the aisle in Congress. It’s got all the hallmarks of good governance, so it allows for cost savings from both the taxpayer and the IRS, or the other tax collection agencies around the world. It allows tax authorities to focus on more important, higher-value transfer pricing disputes, and it just simplifies the system. Now, we know that there, based on the summary letter that came out a couple of weeks ago by the co-chairs, that there was not full yet agreement on amount B, on a mandatory amount B.
But at least with respect to this optional amount B, and you saw that we put out guidance towards the end of the administration on amount B, our thinking was that that guidance is there to say we are going to stand by what we were asked to do, and that is deliver a strong amount B. And so if we as the United States aren’t going to go first and say we’re doing it, it’s pretty hard to convince others to do it. And so we have. And I did start hearing, at the last OECD meetings, other countries starting to warm up to the idea of putting out guidance in favor of optional amount B.
As far as a mandatory one, I think we still have some ways to go, there were material countries, material in the sense of their size and their size of their economies, that were not on board for various reasons with what we thought was a minor ask in the scheme of things. But nothing important is easy, and so we still have some work to do there.
Stephanie Soong: In the meantime though, are we going to see countries move ahead with their DSTs or enforce them or expand them or introduce them? Where does this leave us?
Scott Levine: Well, we did see some countries start announcing in the fall, or late fall, early winter, the idea that they would expand their DST, they would revamp their DST. I think one country in particular suggested that they would revamp it in a way that made it nondiscriminatory.
My sense with respect to DSTs is it’s almost impossible to make them nondiscriminatory because regardless of how many businesses are included, if there’s no threshold, for example, if one country has the multinationals that represent 99 percent plus of the revenue, it’s going to de facto look discriminatory. So I think what’s going to have to happen in the long term is they’re going to have to come up with a set of rules that address this new environment we’re in, where digital services dominates a lot of the commercial activity that takes place around the world, into a way that’s fair and that allows the U.S. to maintain its taxing rights, but that allows market jurisdictions to take part in the revenue collection, at least to the extent that historically would’ve taken place had it been a brick-and-mortar company.
Stephanie Soong: As taxpayers and practitioners are waiting for more clarification about what this order means, what the Trump administration is going to do, are they between a rock and a hard place? What are they supposed to do? What kind of advice would you give them in the meantime while they’re in a waiting period?
Scott Levine: First off, I think my experience as a tax adviser in my prior job — heads of tax, VPs of tax, CFOs — they don’t like paying taxes, they prefer to pay less than more. They really don’t like uncertainty, because, as a CFO, you can’t decide where you’re going to allocate your resources going forward, you can’t make all sorts of decisions until you know what the rules are. And the rules are far from clear now as a result of the executive order. So what I would advise is to assume that the system as it currently exists will continue until it doesn’t, because I don’t know what else you can do.
I’m not an auditor, I’m not a CPA, but I think that the general rule tends to be that you follow current law until there’s a change. Even if you think there’s likely to be a change, until it happens, you don’t change your course. But as far as planning goes, it’s very difficult right now. And I think you’ll probably see is if companies are doing, say, integration planning because they just did an acquisition, that will continue on as it was going, but they’ll probably take a pause on any pillar 2 related planning maybe until things settle down a little bit.
Stephanie Soong: What does this order mean for multilateralism more generally as far as the inclusive framework’s relationship to the U.S.? Are we going to see cooling down of multilateralism in general, or?
Scott Levine: It doesn’t seem like the current administration is as big a fan of multilateralism as the previous one. I personally, after seeing it firsthand, see the real benefits to the United States of multilateralism, it’s a much more efficient way to conduct business. And the U.S. does a really good job at the end of the day, whether it be some of the more boring issues like exchange of information, for example, that is really important, it’s a bedrock principle of our system, and I know on both sides of the aisle it’s very important. We’ve seen lots of work held up in the Senate because one or more senators really thinks exchange information is a sensitive issue, and the U.S. has done a great job leading the charge there at these international organizations like the OECD. And that does require multilateralism because you can’t do it one off. It takes too long and it’s very challenging.
And many times in these negotiations, the U.S. is alone in defending the principle, but we’ve been able to defend the principle. So I am hopeful that we don’t completely abandon any multilateralism. I think that’s probably not going to happen. I do think there’ll be more bilateral negotiations, as we’ve seen just in the last few days there’s been some news about back-and-forth between certain countries, and so I suspect that will happen in both public and in private. That’s not a bad thing, but I do really hope that the OECD, which serves a critical function, whether it’s through the model treaties, the transfer pricing guidelines, and other really important bedrock principles of the OECD that have been led by the United States continues.
Stephanie Soong: Got to ask a couple of things about your time in Treasury. What was your proudest moment and what was your most challenging moment?
Scott Levine: Well, I guess first I should really take a second and just to really thank Secretary Yellen and Assistant Secretary Batchelder for giving me the opportunity to serve and to have such an incredible job. Greatest experience of my career, it was the most humbling as well, but really special. And I would suggest that anybody that’s interested in serving should really consider it because it’s nice to give back to your country. I’d also want to just make a shoutout if I can, I know I’m going off topic here a little bit, but the ITC staff in particular — the International Tax Counsel staff — is really incredible. I knew how great they were coming in, but I didn’t really know until I was there. They work around the clock, they were literally on calls with Europe in the morning at 4:00 or 5:00 in the morning and midnight with Asia.
They do all of this obviously for very little pay and really because they want to give back as well. I hope that the public appreciates the work that they do. The public might not always agree with what comes out of Office of Tax Policy, but I can tell you that everybody’s heart is in the right place, and everybody’s trying really hard to get it right. So I think it’s just a important point to make.
As far as, I think you asked me my best moment, I don’t know. It’s probably just any time we received a call or an email from a stakeholder, whether it be a member of Congress, whether it be another country, whether it be U.S. business, etc., and we were able to actually take the issue and deliver the end of the day on it either bilaterally or multilaterally at the OECD.
Those are very rewarding moments. Of course, the downside of that is there’s a lot of times where we weren’t able to deliver. And that doesn’t mean the system’s flawed. It just means it’s hard to get 147 countries to agree to something in some cases. The way I would describe it is, I think it’s Mike Tyson who said, “Everybody has a plan until they get punched in the face.” And so when you come to a job like this, you prepare for months before, you’re trying to read up on all the open issues that maybe you haven’t seen in private practice, you’re asking people you know and trust what they think is important that should be addressed, and you have this list and you come in and you’re ready to go and you get punched in the face.
And the first day you’re there, you find out that there’s a State Department issue and that there’s a country that’s got a unique issue that nobody thought about before, and the secretary’s about to testify on the Hill, and, and, and. And all these things come at you and you realize a year later you didn’t get to your list, but you do your best and you try to prioritize as you can. And so I wish we could have tackled a few more things on my list, but I think sometimes you have to step back and say, “We did a pretty good job.”
Stephanie Soong: What advice would you give to your successor, whoever that may be?
Scott Levine: So I already went off about how great the ITC staff is, so one thing I would suggest to them is to really appreciate the ITC staff. They are there to help. They are very good at separating the political from the technical. And take full advantage of them because they’re going to be your best friend, they’re going to be the ones who keeps you out of trouble, they are going to be the ones that so you don’t put your foot in your mouth more than you have to. So I would first and foremost say to appreciate the ITC staff.
The other thing I would say is to make sure to listen to your counterparts. So the U.S. has an outsized role in everything we do. We’re the U.S., so whether it’s at the OECD or any other organization. And everybody’s going to stop and listen when the U.S. flag goes up to talk.
But it’s really important that the person who’s taking my seat next really stops and listens to what the other countries are saying. It’s not because you’re going to capitulate on everything that they want you to do, but it’s because you’ll better understand where they’re coming from and make it easier to find the compromise that both parties can live with. So I’d say that’s another one. It can be overwhelming when you walk into the OECD for the first time as the U.S. delegate and everybody’s looking at you for what you have to say and realize how important your words are. So I would wish that person really the best of luck.
And then lastly I would just say enjoy the position while it lasts. It’s a really unique experience. I’ve been telling people that whatever I do next can’t possibly be as interesting as what I just did.
Stephanie Soong: What’s next for you?
Scott Levine: I really don’t know. It’s been a real whirlwind for me the last year-plus between the job and we’ve had some family medical issues, so I’m going to just take a few months to take a deep breath, enjoy my wife and kids, and then I’ll figure out what I’m going to do next.
Stephanie Soong: Well, I’m sure we will be hearing from you in your next endeavor, so good luck with everything, and thank you so much for coming in.
Scott Levine: Again, my pleasure.
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