Peter Barnes and Elizabeth Stevens Weigh in on Digital Services Taxes

Digital services taxes springing up around the world — and the global approach intended to replace them — are raising questions about the role government negotiators will play in resolving disputes expected to arise under both types of taxes.

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A problem that could arise in such a case is that some countries might not have treaties with, for example, the U.S., which means there would be no route to MAP, according to Peter Barnes, Of Counsel with Caplin & Drysdale and a tax professor at Duke University School of Law.

A separate issue is that even if MAP is available everywhere, the deadline for bringing a dispute may have lapsed in some countries by the time another jurisdiction makes an adjustment, Barnes said.

Say a multinational company that has allocated expenses among 20 affiliates is audited in Japan in 2023, he said. The National Tax Agency determines the Japanese entity was entitled to claim only $700,000 in expenses rather than $1 million for 2020.

"You don't have any place to reallocate a 2020 expense in 2023," Barnes said. "If Japan gets less in the way of expenses, other countries should pick up more, but it's too late. … That $300,000 would have no place to go because the years could be closed by the time you raise it."

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As envisioned in the OECD's latest proposal, a company would submit financial filings supporting its calculation of Amount A and its allocation across countries, according to Elizabeth Stevens, a Member of Caplin & Drysdale.

Included in the documentation would be the "surrender jurisdictions" — those giving up the revenue allocated to the market countries. The package of supporting documentation would be given to an "early determination panel," where, at least in theory, representatives from surrender countries and beneficiary countries would review and come to an agreement about Amount A, Stevens said.

One problem, however, is that companies won't have the information needed for these calculations during the current year, she said.

"You will be a few months into the next taxable year before you have complete audited financials," Stevens said. "I think most taxpayers would want to wait until they had their audited financial statements in case there are any changes."

Perhaps the OECD will come up with a solution for the timing issue, she added.

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