[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]





                                 

 
                 HEARING ON OECD PILLAR 1: ENSURING THE
               BIDEN ADMINISTRATION PUTS AMERICANS FIRST

=======================================================================

                                HEARING

                               before the

                          SUBCOMMITTEE ON TAX

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED EIGHTEENTH CONGRESS

                             SECOND SESSION

                               __________


                             MARCH 7, 2024

                               __________


                          Serial No. 118-TAX03

                               __________

         Printed for the use of the Committee on Ways and Means
         
         
         


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                               ______


                 U.S. GOVERNMENT PUBLISHING OFFICE

55-747                    WASHINGTON : 2024


        
         
         
         


                      COMMITTEE ON WAYS AND MEANS

                    JASON SMITH, Missouri, Chairman

VERN BUCHANAN, Florida               RICHARD E. NEAL, Massachusetts
ADRIAN SMITH, Nebraska               LLOYD DOGGETT, Texas
MIKE KELLY, Pennsylvania             MIKE THOMPSON, California
DAVID SCHWEIKERT, Arizona            JOHN B. LARSON, Connecticut
DARIN LAHOOD, Illinois               EARL BLUMENAUER, Oregon
BRAD WENSTRUP, Ohio                  BILL PASCRELL, JR., New Jersey
JODEY ARRINGTON, Texas               DANNY DAVIS, Illinois
DREW FERGUSON, Georgia               LINDA SANCHEZ, California
RON ESTES, Kansas                    TERRI SEWELL, Alabama
LLOYD SMUCKER, Pennsylvania          SUZAN DelBENE, Washington
KEVIN HERN, Oklahoma                 JUDY CHU, California
CAROL MILLER, West Virginia          GWEN MOORE, Wisconsin
GREG MURPHY, North Carolina          DAN KILDEE, Michigan
DAVID KUSTOFF, Tennessee             DON BEYER, Virginia
BRIAN FITZPATRICK, Pennsylvania      DWIGHT EVANS, Pennsylvania
GREG STEUBE, Florida                 BRAD SCHNEIDER, Illinois
CLAUDIA TENNEY, New York             JIMMY PANETTA, California
MICHELLE FISCHBACH, Minnesota        JIMMY GOMEZ, California
BLAKE MOORE, Utah
MICHELLE STEEL, California
BETH VAN DUYNE, Texas
RANDY FEENSTRA, Iowa
NICOLE MALLIOTAKIS, New York
MIKE CAREY, Ohio
                       Mark Roman, Staff Director
                 Brandon Casey, Minority Chief Counsel

                                 ------                                

                          SUBCOMMITTEE ON TAX

                   MIKE KELLY, Pennsylvania, Chairman

DAVID SCHWEIKERT, Arizona            MIKE THOMPSON, California
JODEY ARRINGTON, Texas               LLOYD DOGGETT, Texas
DREW FERGUSON, Georgia               JOHN LARSON, Connecticut
KEVIN HERN, Oklahoma                 MARIA SANCHEZ, California
RON ESTES, Kansas                    SUZAN DelBENE, Washington
LLOYD SMUCKER, Pennsylvania          GWEN MOORE, Wisconsin
DAVID KUSTOFF, Tennessee             BRAD SCHNEIDER, Illinois
BETH VAN DUYNE, Texas                JIMMY GOMEZ, California
RANDY FEENSTRA, Iowa
NICOLE MALLIOTAKIS, New York








                         C  O  N  T  E  N  T  S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page
Hon. Mike Kelly, Pennsylvania, Chairman..........................     1
Hon. Mike Thompson, California, Ranking Member...................     3
Advisory of March 7, 2024 announcing the hearing.................     V

                               WITNESSES

Megan Funkhouser, Senior Director of Policy, Tax and Trade, 
  Information Technology Industry Council........................     5
Rick Minor, Senior VP, International Tax Counsel, United States 
  Council for International Business.............................    17
Gary Sprague, Partner, Baker McKenzie............................    29
Daniel Bunn, President and CEO, Tax Foundation...................    40

                    MEMBER QUESTIONS FOR THE RECORD

Member Questions for the Record and Responses from Megan 
  Funkhouser, Senior Director of Policy, Tax and Trade, 
  Information Technology Industry Council........................    91

                   PUBLIC SUBMISSIONS FOR THE RECORD

Public Submissions...............................................    94


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                   OECD PILLAR 1: ENSURING THE BIDEN
                  ADMINISTRATION PUTS AMERICANS FIRST

                              ----------


                        THURSDAY, MARCH 7, 2024

                  House of Representatives,
                               Subcommittee on Tax,
                               Committee on Ways and Means,
                                                    Washington, DC.
    The subcommittee met, pursuant to call, at 2:50 p.m., in 
Room 1100, Longworth House Office Building, Hon. Mike Kelly 
[chairman of the subcommittee] presiding.
    Chairman KELLY. So we just finished a voting series, and I 
think that more of our folks will be here.
    I want to thank you all for being here today. This is 
incredibly important, some of the things we get a chance to 
talk about, and the issue today, to me, is incredible. I think 
this is one of the most complicated issues that has come up.
    And, while I try to avoid that when I am back home, people 
will still ask me to do it, and I say, listen, I live in a 
world of acronyms. I have no idea--neither do you--as to what 
is going on, but we will try to address at least the start of 
it today on a global tax situation that makes no sense to me 
for America.
    So I want to thank you all for being here today. We will be 
talking about OECD's Pillar 1 negotiations. And I am looking 
forward to the opportunity from my colleagues on both sides of 
the aisle and myself to hear our witnesses' testimony and 
perspective on OECD Pillar 1 and what the Biden 
administration's negotiations mean for America.
    So just clearly starting off--and I asked Elise who put all 
this together who--she serves with me in our office--if you 
could put some glossary together so we can look at all these 
acronyms and give us some kind of an idea of what it is that we 
are talking about, and it is almost impossible to do. But the 
Organisation for Economic Co-operation and Development is the 
OECD.
    The Biden administration is negotiating a bad business deal 
for America where U.S. companies and taxpayers will foot the 
bill. This Pillar 1 deal negotiated at the Organisation for 
Economic Co-operation and Development and was originally 
intended to eliminate the digital service tax to create a fair 
playing field globally, but, in reality, their proposal will 
not equalize the playing field. This tax burden will fall 
disproportionately on American companies, which are nearly half 
of the largest and most profitable in the world.
    I brought several things today that are just props, and if 
we can--do we have the one?
    So this is Atlas with the whole world on his back. And 
instead of Atlas, let's imagine this as America. And, somehow, 
we are saddled with the idea that, if it is to be, it is up to 
us, and we must be the participants at an unusual level in 
order to make some of these things work.
    I am sorry. I was born in America. My business is all 
America. Everything I have done is America. And, if it hadn't 
been for America, there would probably be not the world that 
exists today because of World War I and World War II, and we 
continue down a road which is really scary.
    The Biden Treasury Department has worked with OECD and 
foreign governments to cramp this Pillar 1 proposal instead of 
with the legislative body which represents the Americans that 
will have to pay for this deal. And, in my eyes, the worst part 
of this negotiation is Treasury's complete lack of cooperation 
with Congress on OECD Pillar 1.
    The Biden administration leapfrogged Congress and put the 
interest of foreign governments ahead of the concerns of the 
men and women elected to represent Americans' taxpayers. We 
will do our due diligence to protect American companies and 
consumers and ensure they get a good deal.
    Let's state the facts here. Two-thirds majority is required 
in the Senate for enactment of Pillar 1. In today's political 
environment, it is hard to believe that we can get that much 
support even on naming a post office, let alone an 
international tax treaty. It is simply not feasible without 
taking into consideration frequent and significant input from 
Congress.
    The aspect I find most ironic, Pillar 1 falls apart without 
the United States' invested interest. Literally, the proposal 
written by OECD requires the United States to be involved in 
the final deal. But why, they ask. Without America's taxing 
rights under a--Pillar 1 collapses. That tells me everything I 
need to know.
    And, if we can, we will give Atlas a break. I just want you 
to look at the number of countries that are involved with this, 
and it would be an interesting exercise for somebody to take a 
look at this and understand, where is America? Who props up--
there are 145 different countries. I mean, I am trying to look 
at some of these and, quite frankly--and not that I am 
uneducated, but I have no idea who these countries are, where 
they are located, and more critically, why is it involved in 
any kind of a tax policy that we are trying to develop?
    So thank you.
    Now, the Biden administration needs to be transparent with 
Congress on strategy on Pillar 1. Congress has requested 
revenue estimates from the Biden administration. They have 
failed to follow through on this request.
    Previously, Secretary Yellen acknowledged that, if enacted, 
Pillar 1 would reduce U.S. revenues. Through Treasury's public 
comment period, U.S. businesses pointed to significant flaws 
with Pillar 1. Now, I am concerned that the Biden Treasury is 
putting the interest of foreign governments before U.S. 
businesses and the American economy. Just this week in The Wall 
Street Journal, it was noted, the benefit to America still 
hasn't appeared from the OECD deal that Treasury and Secretary 
Yellen just signed the United States up for. So we still don't 
know, how does that help us.
    But the facts are simple. Through Pillar 1 negotiation, 
U.S. companies would bear far more than our fair share out of 
the 145 countries involved. And, confirmed this week by JCT 
estimates, more specifically, if Pillar 1 would have been in 
place in 2021, the U.S. would have lost $1.4 billion in tax 
revenues.
    At the end of the day, folks, this is about the U.S. 
economy's security. 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?
    We are not going to stand by idly and watch the Biden 
administration and Treasury Department sacrifice American tax 
dollars for political gain, and I believe we will find out 
today that my colleagues feel exactly the same way. This deal 
diminishes the economic security of the United States at a time 
of global instability, and we just cannot take that risk.
    I look forward to hearing from our panel of witnesses to 
discuss with this subcommittee their expertise when it comes to 
OECD and international tax, and I really appreciate their 
outlook on Pillar 1.
    So now I would like to recognize my friend from California, 
Mr. Thompson, for his opening statement.
    Mr. THOMPSON. Chairman Kelly, thank you very much for 
holding today's hearing. And thank you to all the witnesses for 
being here today.
    Today's hearing is about a topic of great importance. It is 
a very technical and weedy topic, but that is exactly what this 
subcommittee is for: doing a deep dive on some of the thorniest 
tax topics facing our Nation.
    The proliferation of digital service taxes over the past 5 
years is concerning to members on both sides of the aisle. 
These taxes, as imposed, discriminate against some of the most 
innovative American-built businesses and act as a quick and 
politically convenient revenue grab for the governments who 
impose them.
    Pillar 1 of the OECD's Inclusive Framework is the world's 
attempt to agree to roll back these discriminatory taxes by 
creating a novel framework to reallocate a share of the most 
profitable companies' profits to the jurisdictions where their 
customers live.
    The human resources that have been put into devising this 
brand-new international tax frame are astounding. The Biden 
administration and other delegates at the OECD should be 
commended for their tireless dedication to the task. Their goal 
is an admirable one: providing stability to the international 
tax system.
    With a stable tax system, everyone wins. Business wins when 
it knows what its tax bill will be when it seeks to invest in 
foreign markets. Governments win when they know they can rely 
on a stable revenue stream to fund their operations. And 
everyone wins when we avoid costly and protracted transfer 
pricing disputes, which wastes both government and private 
resources.
    Any multilateral negotiation such as this one discussed 
here is bound to be a tough one. No doubt, members will be 
discussing the JCT's report that was released to accompany this 
hearing showing that the flow of funds between the United 
States and other jurisdictions will generally be negative for 
the U.S. We are, in JCT's estimation, going to be losing $1.4 
billion each year under the Pillar 1 agreement.
    For some, that might be the end of the discussion. Why give 
up revenue to other countries, they will ask. My view is that 
we need to understand the benefits of the agreement and not 
just look at the cost. What are the benefits of the 
international stability the agreement could potentially 
provide? For instance, Amount B, if other countries will accede 
to the Biden administration's ``red line'' to make Amount B 
mandatory, could present a real benefit for U.S. businesses by 
significantly reducing transfer pricing disputes.
    And, perhaps more important, those who look at the JCT 
report and say that we should pack our bags and go home should 
ask themselves, what is the alternative? Are advocates for 
abandoning Pillar 1 then suggesting that the patchwork of DST 
that will doubtlessly spring into place are preferable to the 
Pillar 1 proposal? And, if not, how do you believe that the 
United States can stave off those taxes?
    To be clear, I am not arguing that the administration 
should sign just any agreement. A final Pillar 1 deal must 
provide protection against unilateral DST and promote a high 
level of tax certainty and stability without conceding on key 
U.S. interests.
    That being said, the questions I have raised are serious 
ones that must be addressed if one advocates abandoning the 
OECD process, and the very nature of those questions is why I 
remain supportive of the administration staying at the table 
and devoting themselves to this crucially important endeavor. 
As they say, if you are not at the table, you are on the menu.
    And, Mr. Chairman, before I yield back, I would just like 
to ask that if we do this again, I would hope that we would 
invite the Treasury Department who is representing us at the 
OECD matter. If you recall, we had them before when we 
discussed this, and I found them to be very helpful.
    Again, Mr. Chairman, thank you. Thank you, witnesses. And I 
yield back.
    Chairman KELLY. Thank you. And Mrs. Yellen will be here 
very quickly at the beginning of April, so we will have a 
chance to talk to her about that.
    I would like now to introduce the panel. Let me tell you--
thank you all for being here. You give up a day of your life to 
come here. Now, clocks and calendars don't seem to matter in 
this business. We had it scheduled for 2 o'clock, but then we 
were asked to go and vote, which is kind of really why we were 
elected. So I want to thank you for coming here today to 
discuss with us what I find to be a very complicated issue.
    But Megan Funkhouser is with us today, and she is the 
senior director of Policy, Tax, and Trade at the Information 
Technology Industry Council. Rick Minor is senior vice 
president and international tax counsel at the United States 
Council for International Business. Thank you.
    Gary Sprague is partner at Baker & McKenzie. Daniel Bunn is 
president and CEO of the Tax Foundation.
    Thank you all for joining us today. Your written statements 
will be part of today's hearing, and you each have 5 minutes to 
deliver your oral remarks.
    Ms. Funkhouser, please.

 STATEMENT OF MEGAN FUNKHOUSER, SENIOR DIRECTOR OF POLICY, TAX 
       AND TRADE, INFORMATION TECHNOLOGY INDUSTRY COUNCIL

    Ms. FUNKHOUSER. Chairman Kelly, Ranking Member Thompson, 
and members of the Tax Subcommittee, thank you for the 
opportunity to testify today.
    My name is Megan Funkhouser, and I lead international tax 
policy for the Information Technology Industry Council, also 
known as ITI. In this role, I represent the global technology 
industry's perspectives before policymakers in the United 
States and abroad, including on the efforts in the OECD/G20 
Inclusive Framework that are the subject of today's hearing.
    ITI's membership comprises leading companies from all 
corners of the technology sector, including hardware, software, 
digital services, semiconductor, platform, network equipment, 
cloud, cybersecurity, and other internet- and technology-
enabled companies that drive innovation and rely on 
technologies to evolve their businesses.
    ITI's membership includes many of the largest U.S. 
corporate taxpayers and top investors in research and 
development, contributing to U.S. competitiveness and the 
strength of the U.S. economy. That is why we greatly appreciate 
this committee's leadership in advancing the pro-growth tax 
package that passed the House earlier this year.
    Thank you for convening today's hearing to discuss updating 
international tax rules through Pillar 1. ITI greatly 
appreciates members' interest in and engagement with the 
Inclusive Framework's efforts, from participating in meetings 
in Paris and Berlin, to encouraging the Treasury Department to 
hold a consultation on the draft Multilateral Convention to 
implement Amount A of Pillar 1, as well as sending many 
congressional letters and statements, particularly those 
expressing strong bipartisan opposition to digital services 
taxes.
    Absent robust U.S. engagement, including that of Congress, 
there is little chance of resolving outstanding issues with 
Pillar 1 and crafting a final package that provides certainty 
and predictability for taxpayers. That is why I am glad the 
committee is holding this hearing today.
    All of ITI's member companies rely on clear and established 
tax rules to innovate and grow their operations. However, the 
proliferation of digital services taxes has contributed to the 
fragmentation of the international tax system by departing from 
long-standing international tax norms such as neutrality, 
efficiency, certainty, and simplicity.
    The first generation of digital services taxes targeted 
globally engaged companies that provide services like digital 
advertising and digital intermediary services. Subsequent 
iterations expanded to capturing nearly all nonresident 
companies engaging with the market. We have also seen 
governments adopt novel approaches to introduce 
extraterritorial means of corporate taxation, which contribute 
to uncertainty and instability for taxpayers.
    Congress' consistent bipartisan opposition to digital 
services taxes and other novel approaches has undoubtedly 
helped to stem the further proliferation of these damaging 
measures, as have the Office of the U.S. Trade Representative's 
Section 301 investigations.
    Ultimately, global tax policy challenges require global tax 
policy solutions, which is why ITI supports reaching a 
multilateral consensus-based solution that withdraws digital 
services taxes and prevents their future introduction.
    In light of alternatives, ITI sees potential in the draft 
Multilateral Convention for developing a multilateral 
consensus-based framework to alleviate the negative 
consequences of the increasingly fragmented and controversy-
heavy international tax environment.
    I would like to request to submit ITI's response to 
Treasury's consultation for the record, but want to highlight 
here three buckets: one, relieving double taxation; two, 
securing the removal of digital services taxes and relevant 
similar measures; and three, ensuring tax certainty.
    First, ITI firmly believes that income should be taxed 
once, with concerns of the extent of relief in some 
circumstances where a company is already paying taxes on 
residual profits in a jurisdiction, as well as the menu of 
options and limited commitments that governments have to fully 
relieve double taxation.
    Two, on the removal of digital services taxes, ITI 
recommends strengthening the definition of prohibited measures 
to reduce subjectivity, as well as introduce an enforcement 
mechanism to give greater weight to the political commitment to 
withdraw a digital services tax or relevant similar measure.
    Third, and finally, the approach under consideration in 
Pillar 1 would represent a significant overhaul of 
international tax rules. Providing certainty, particularly 
advanced certainty, for taxpayers and tax administrations alike 
as they adapt to new rules will be critical for supporting an 
environment that fosters investment and innovation.
    Taking a step back to consider the bigger picture, ITI also 
supports extending the standstill on the imposition of newly 
enacted digital services taxes, discouraging the Canadian 
Government from advancing its digital services tax proposal, 
securing a robust Amount B, and confirming the treatment of 
Pillar 1 taxation for the purposes of Pillar 2.
    Again, absent robust U.S. engagement, including that of 
Congress, there is little chance of resolving these outstanding 
issues and crafting a final package that provides certainty and 
predictability for taxpayers.
    Thank you, again, for the invitation to testify. I look 
forward to answering your questions.
    [The statement of Ms. Funkhouser follows:]

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    Chairman KELLY. Thank you, Ms. Funkhouser.
    Mr. Minor, you are recognized.

STATEMENT OF RICK MINOR, SENIOR VP, INTERNATIONAL TAX COUNSEL, 
        UNITED STATES COUNCIL FOR INTERNATIONAL BUSINESS

    Mr. MINOR. Good afternoon, Subcommittee Chairman Kelly, 
Ranking Subcommittee Member Thompson, and other members of the 
Subcommittee on Tax. Thank you for the invitation to testify at 
this hearing on Pillar 1.
    My name is Rick Minor. I am the international tax counsel 
for the U.S. Council for International Business.
    Pillar 1 is the attempt to change the international tax 
system to reallocate taxation rights to the market 
jurisdictions and eliminate the discriminatory network of 
digital service taxes and other similar measures. Such measures 
threaten to expand globally, jurisdiction by jurisdiction, and 
further destabilize the international tax system.
    The Multilateral Convention provides a legal framework and 
detailed rules for the implementation of the so-called Amount A 
taxing right and the removal of DSTs. Amount A is a novel 
regime that applies on top of the existing U.S. international 
tax rules for in-scope U.S. multinationals. Amount B is a 
simplified set of rules outside the MLC for the common pricing 
of routine, cross-border distribution services.
    USCIB makes four recommendations in reference to Pillar 1. 
Number one, the elimination of double taxation is a high 
priority for U.S. multinationals. Let me repeat that. The 
elimination of double taxation is a high priority for U.S. 
multinationals. A Pillar 1 solution that does not effectively 
eliminate double taxation in its application is not sustainable 
over the long run.
    USCIB members remain concerned that the draft MLC does not 
adequately deliver on the objective to avoid double taxation. 
This should be a key priority for governments and the U.S. 
business community when considering Pillar 1.
    Number two, the definition of DSTs and other relevant 
similar measures in the draft MLC must be revised. The 
prevention and rollback of DSTs must be comprehensive or the 
MLC will fail to stabilize the international tax system.
    One of the critical objectives of the Pillar 1 project is 
to remove harmful tax measures that target U.S. companies. 
These taxes are becoming more common, and the MLC should ensure 
that DSTs and other measures are withdrawn and not enacted in 
the future.
    The MLC should not enable countries to make a choice 
between Amount A and DSTs. The message from the U.S. should be 
that discrimination against U.S. companies should not be 
permitted in any case. Fiscal measures specifically targeted at 
U.S. multinationals should never be a legitimate tax policy in 
a stable international tax system.
    We note our disappointment that Canada has not respected 
the DST standstill agreement that was recently extended. Their 
continued insistence on moving forward with their DST puts at 
risk the principles of the broader project of Pillar 1.
    Number three, the scope of Amount B needs to be expanded. 
Progress could be achieved now with the creation of a robust 
and explicit roadmap of future design features, including the 
extension of Amount B to retail sales as well as to sales of 
digital goods and services.
    Amount B is an important component of Pillar 1 given the 
potential for it to deliver significant tax administration 
efficiencies. Tax controversies regarding routine distribution 
structures are time-consuming for tax administrations and 
taxpayers alike. All involved could benefit from the use of 
pricing safe harbors that are broadly respected across 
jurisdictions.
    We are concerned that the current design of Amount B falls 
short of the stated objectives of the OECD in its original 
blueprint. The OECD and Inclusive Framework must continue their 
efforts to negotiate and ultimately agree upon an Amount B 
design that is acceptable to all stakeholders and adopt it 
globally.
    Number four, USCIB encourages the Biden administration and 
U.S. Congress to remain engaged in the OECD process. The common 
mission is to ensure a comprehensive and durable multilateral 
solution to these complex international challenges now and 
going forward.
    Since the Pillar 1 solution was proposed, USCIB has offered 
practical solutions to advance the design of its components. 
Although we have not had a seat at the table in these years-
long Inclusive Framework government negotiations, we can 
imagine a reality in which these rules can exist in some form 
if the final rules stabilize the international tax system.
    We are available for any further requests for discussion on 
these topics beyond this hearing. Thank you for your attention.
    [The statement of Mr. Minor follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 

    Chairman KELLY. Thank you, Mr. Minor.
    Mr. Sprague, you are recognized for 5 minutes.

       STATEMENT OF GARY SPRAGUE, PARTNER, BAKER McKENZIE

    Mr. SPRAGUE. Chairman Kelly, Ranking Member Thompson, and 
members of the subcommittee, thank you for the opportunity to 
testify today on the OECD's Pillar 1 project.
    I am a partner with Baker & McKenzie based in Palo Alto, 
California. I have practiced international tax law for over 40 
years. I am an adjunct professor of tax law at the UC College 
of Law, San Francisco. My testimony will address Amount B as 
described in the February 19 report. I provide these comments 
on my own behalf, and they do not necessarily reflect the views 
of Baker & McKenzie or its clients.
    Amount B proposes a simplified and streamlined approach to 
set the transfer price to be paid by a market state 
distribution entity to acquire goods or services from a 
related, nonresident supplier for resale in the market state.
    The essential premise of Amount B is to increase certainty 
and reduce controversy for taxpayers and tax administrations 
with respect to relatively straightforward transactions. It 
potentially applies to all MNC groups, not just the small 
number of Amount A taxpayers.
    Amount B is also an integral part to the Pillar 1 project 
to restore stability to the international tax framework. The 
instabilities arising from DSTs and other unilateral measures 
are well known. Less well publicized are the instabilities 
created by aggressive transfer pricing positions taken by 
various foreign tax administrations related to the inbound 
distribution of goods and services, particularly those of U.S. 
MNCs. Amount B is designed to stabilize cross-border tax risk 
arising from those transactions.
    In its current state, however, the Amount B proposal is not 
likely to achieve its stated goals. The three major issues are 
the narrow scope of industries covered by Amount B, adopting 
the rules is completely optional for all jurisdictions, and the 
possibility that a further subject development will be 
introduced to the scoping criteria. U.S. Treasury has publicly 
remarked on those deficiencies.
    The Amount B report expressly excludes the distribution of 
software and digital services. This exclusion precludes Amount 
B benefits for some of the most innovative and dynamic sectors 
in the U.S. economy. This also removes Amount B protections for 
many of the U.S. enterprises which have experienced the sort of 
aggressive transfer pricing assertions outside the United 
States that helped inspire the idea of Amount B in the first 
place. At a minimum, any Amount A taxpayer in any sector should 
be brought within scope of Amount B.
    The second significant deficiency is the permission granted 
to all jurisdictions to opt out of the Amount B regime. That 
optionality will impair the benefits and predictability and 
stability for U.S. MNCs.
    These are not theoretical concerns. Immediately upon the 
release of the report, New Zealand announced that it will not 
participate in the Amount B project and will not regard any 
application of the Amount B pricing matrix as evidence of 
arm's-length pricing. Australia followed soon thereafter with 
the statement that it favors optionality.
    The third major issue is the possibility that an additional 
optional qualitative scoping criterion might be added to the 
Amount B rules. The effect will be to introduce a subjective 
step that jurisdictions may use to exclude distributors from 
Amount B. India has stated its support for this approach.
    So here are some suggestions for a way forward. There is no 
need for negotiations over the terms of Amount B to cease. 
Amount B will be incorporated into the OECD transfer pricing 
guidelines not in a multilateral treaty. The scope of Amount B 
could be widened to include digital goods and services in the 
future.
    If the initial Amount B guidance retains its current 
limited scope, the OECD should commit to a workstream and 
provide a timeline to identify the appropriate comparables for 
the distribution of digital goods and services so that those 
sectors can be brought into the simplified and streamlined 
approach. I was pleased to see recent comments by U.S. Treasury 
that the U.S. is still working towards a mandatory Amount B.
    Further, the IRS should consider negotiating competent 
authority agreements with major U.S. trading partners to 
achieve broader coverage and mandatory treatment on a bilateral 
or multilateral basis. Those agreements can build on the work 
already accomplished at the OECD.
    The pricing mechanism described in the Amount B report is 
well founded in transfer pricing theory and could easily be 
integrated into a competent authority agreement. U.S. 
leadership on that point will be useful to counteract the 
negative drag on the initiative created by tax administrations 
publicly embracing optionality or opting out together.
    Thank you for your attention, and I would be pleased to 
respond to any questions from the subcommittee.
    [The statement of Mr. Sprague follows:]

   [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 
    
    Chairman KELLY. Thank you, Mr. Sprague.
    Mr. Bunn, you are recognized.

  STATEMENT OF DANIEL BUNN, PRESIDENT AND CEO, TAX FOUNDATION

    Mr. BUNN. Chairman Kelly, Ranking Member Thompson, and 
distinguished members of the Subcommittee on Tax, thank you for 
the opportunity to testify on the OECD's Pillar 1 project.
    I am Daniel Bunn, president and CEO of the Tax Foundation.
    I think it is best to think about this project in the 
context of what policymakers might value, and there are three 
different things that you might value. You may choose 
differently, but I think there are three things in this context 
that you might value, and I will run through them and provide a 
little context for each.
    First, I think on a bipartisan and bicameral basis, there 
is a value to eliminating discriminatory digital services 
taxes, and I think as you hear from the witnesses today, you 
heard that there is more work to be done, that there is not--
while Amount A does provide a potential path to eliminating 
some digital services, there is much more work to be done to 
accomplish that goal if this is going to be the path forward.
    I know some members on the Republican side of this 
committee have worked on legislation to beef up U.S. potential 
retaliatory tools to countries that have unilaterally imposed 
these digital services taxes unfairly against U.S. businesses. 
And tools like that can be useful, but I am concerned, given 
the progress that has been made and the lack of progress, in 
some cases, with removing digital services, that an approach 
like that could spill into another round of attacks in trade 
war.
    Another thing that you might value is control over what is 
the U.S. tax base. This subcommittee, the full committee, is 
given the responsibility for writing U.S. tax laws. What this 
deal would require would be, as a multilateral negotiation, 
some changes to the U.S. tax base and impacts on U.S. tax 
revenues that have already been described.
    Chairman Kelly, you appropriately mentioned that there 
would be an outsized burden on U.S. businesses. The joint 
committees' analysis points this out, where 70 percent of the 
profits that they measured that would be in scope for Amount A 
would be from U.S. businesses or U.S. business segments.
    Now, the $1.4 billion in revenue loss--JCT's preferred 
estimate--is not massive, but it is meaningful, and I think it 
is even more meaningful if you think of the interplay between 
Amount A and the global minimum tax.
    These things change incentives. The global minimum tax in 
the Tax Cuts and Jobs Act changed incentives for where U.S. 
businesses or where multinationals generally might want to put 
their high-value assets or their high-return activities. And, 
if more of the high-value assets and high-return activities are 
in the U.S., then, over time--and if that trend continues over 
time--then there will be potentially more exposure for the U.S. 
tax base in the context of Amount A.
    So we think--we need to think about these things in tandem. 
Those incentives are somewhat intertwined.
    Finally, you may value the benefit, sometimes the cost, of 
being engaged in multilateral forums. Obviously, getting a deal 
like this together requires give-and-take across different 
desires from different countries, continents, and jurisdictions 
that may not have otherwise been interested at all in some sort 
of multilateral agreement.
    The deal that is available now, while it has drawbacks, I 
think it is worth thinking of like what might happen if this 
falls apart. What might be next? Is it some sort of tax and 
trade war? Or I think it is worth the committee's time to look 
at what the United Nations is trying to do in setting up its 
own multilateral tax negotiation.
    I don't know what the future looks like without an Amount 
A, but it is important to think through the value or, in some 
cases, the cost of being engaged in a multilateral way.
    I will also mention that unilateral approaches--many of 
them taken by foreign governments--are not necessarily creating 
any sort of certainty for taxpayers. There are all sorts of 
mutations and multiplications of these digital services taxes, 
but there is a bias towards taxing additional profits or 
revenues, in some cases, in market jurisdictions.
    I think some members of this committee will remember the 
destination-based cash flow tax debate many years ago back 
before the Tax Cuts and Jobs Act, and that was a bias towards 
taxing in the market as well, and the joint committee points 
out that that would have been more efficient than Pillar 1 
Amount A.
    And, with that, I thank you for your time, and I look 
forward to answering any of your questions.
    [The statement of Mr. Bunn follows:]

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    Chairman KELLY. Thank you, Mr. Bunn.
    Thank you all for being here. You know, the conflict--this 
is so complicated. I marvel at the way you all just go through 
it. It is like this, this, this, and this. But for the average 
American to sit back and try to understand, what is it that we 
are trying to put together, and why is it that we are trying to 
put it together to begin with?
    The other question I have is, is there some reason the 
administration didn't actually work with Congress? Because this 
is kind of one of our basic responsibilities. It would have 
been nice to be included.
    So, having said all that--I am trying not to be a wise guy 
about this, but I am serious about this. I cannot imagine 
bypassing this committee and saying, we will let you know when 
we come up with a deal, and then you guys can just jump on and 
everything is going to be fine.
    So please help me to understand how enacting Pillar 1 in 
its current form is pragmatic for the U.S. economy and, more 
specifically, for American businesses. Where is this--as I am 
an America First guy, where is this that it somehow enhances 
our ability to compete globally and maintain our position?
    By the way, I don't want to just participate in a global 
economy. I want the United States to dominate it, because I 
think it is the only way we can save the world as we go 
forward.
    But if any of you can help me understand this because this 
is so bizarre to anything I have ever come up with in my life. 
And, I will admit, I don't have a degree in anything that you 
are talking about. I would never try to do my own taxes because 
I know the danger, especially being a Member of Congress, if 
you make a mistake.
    But any of you that can discuss, tell us--tell us more, if 
you can, how does this--where does this fit into us, and where 
is it that it helps America?
    Ms. FUNKHOUSER. Thank you, Chairman, for the question. I 
think it is incredibly important and why I am so glad that we 
are having this hearing today because, as I mentioned in my 
remarks, I think the best way to have a better Amount A outcome 
that makes sense for the U.S. will be through congressional 
engagement and through opportunities like today to talk where 
U.S. industry sees the concerns with how it is currently 
drafted and work towards making it a better final package that 
does provide certainty and stability, because the U.S. economy 
benefits from the global economy. U.S. businesses are the 
leadership.
    And so this is why we are excited to have this conversation 
today, just to talk through, how can we make this a better 
package with you?
    Thank you.
    Chairman KELLY. Anybody else want to weigh in?
    Mr. BUNN. Sure. If I may, sir.
    Chairman KELLY. Yes.
    Mr. BUNN. The challenge here is avoiding what I described 
as a difficult digital tax and trade war. So where this began 
was some European countries interested in taxing in 
discriminatory ways in U.S. companies. And then, as the 
discussion developed, it was pretty clear that the way out of 
this was either going to be a multilateral agreement or some 
sort of trade war, and that is where the real impact to 
everyday Americans could have come down.
    You know, it is not really easy to say that, oh, well, we 
are working towards this multilateral agreement because of X, 
Y, or Z. But one of the things, when we think of the prices 
that people face in the grocery stores or manufacturer space 
with their suppliers, a tax and trade war can increase those 
things, and I think that is one reason to continue to seek a 
solution to avoid that kind of outcome.
    Chairman KELLY. Okay. Listen, I appreciate it so far.
    And we have so many people that want to ask questions 
today, so I am going to now have Mr. Thompson weigh in from his 
side what his concerns are.
    Mr. Thompson.
    Mr. THOMPSON. Thank you, Mr. Chairman.
    Mr. Sprague, in your written testimony, you state that the 
number of mutual agreement procedures, or MAP, cases opened for 
transfer pricing matters has spiked since 2016. You also point 
out that IRS figures show an increase in the number of cases 
related to distributors from approximately 39 percent in 2018 
to around 53 percent in 2022. I would like to get a sense of 
the real-world impact of these disputes on our American 
businesses.
    Based on your experience as an international tax attorney, 
about how much time and money do our U.S. businesses spend on 
these protracted transfer pricing disputes, and what impact 
would such an increase have on the IRS?
    Mr. SPRAGUE. Mr. Thompson, thank you for that question. 
Your question addresses a central purpose of the simplified and 
streamlined approach of Amount B.
    It is hard to quantify an average cost by company or by 
dispute, but there is no doubt that the costs are large. In 
many cases, large enough to make a CFO wince. So let me 
describe the reason why these costs are so high.
    First, you referred to the MAP program, which is the 
government-to-government process where the two tax 
administrations try to resolve a dispute usually raised by the 
foreign tax administration. But the majority of the costs for 
American business are incurred before the case even makes it to 
MAP.
    MAP is the ultimate recourse, but before a MAP case arises, 
the taxpayers had to address these issues on audit in front of 
the foreign tax administration. Those are the costs that Amount 
B is trying to contain.
    The costs are high because transfer pricing issues are 
intensely factual, and there is lots of room for 
interpretation. So, at both the audit and MAP levels, there are 
substantial costs of internal resources as well as external 
fees. Some jurisdictions are notoriously more challenging than 
others. Both internal and external costs are higher for audits 
in those jurisdictions.
    If Amount B succeeds, I would expect a reduction of burdens 
on taxpayers because the purpose is to provide the simplified, 
streamlined approach to transfer pricing for inbound 
distribution. And I also expect a reduction of burdens on the 
IRS, because if we can resolve more of these cases on audit, 
fewer cases then have to come to MAP, and the U.S. won't have 
to devote the same resources to MAP.
    For those cases that do make it to MAP, I would still 
expect that those issues would be narrowed at the IRS, the 
foreign administration level, because there would be a more 
narrow game plan or course, if you will, to settle those 
disputes within the simplified and streamlined approach.
    So, while I can't give you a precise number, you know, 
across all U.S. multinationals, it is very large, and I would 
expect the largest reductions in cost would be at the company 
level but significantly reduced at the IRS level as well.
    Mr. THOMPSON. Thank you. Thank you very much.
    Mr. Bunn, USTR found that the digital service tax adopted 
by Austria, India, Italy, Spain, Turkey, and the U.K. were 
subject to action under Section 301 because they discriminated 
against U.S. digital companies, were inconsistent with 
principles of international taxation, and burdened U.S. 
companies.
    What would it take for a digital service tax to not be 
discriminatory against U.S. multinational corporations? Is it 
possible to have a DST that is not discriminatory against U.S. 
multinational corporations? And, if such thing could exist, 
would their proliferation be a desired outcome?
    Mr. BUNN. Thank you for the question. In one sense, no. The 
U.S. has an outsized share of these large digital companies, so 
if you have even a digital services tax that doesn't have a 
revenue threshold, there would be some de facto discrimination 
against U.S. companies.
    But if you would say that even that de facto discrimination 
doesn't count--you know, there is no revenue threshold or 
something like that--the proliferation of such a policy would 
still be bad. This is a tax fund on gross revenues, and 
countries should not be taxing businesses on their gross 
revenues. Net income tax is where the policy should be focused 
or including digital services in the context of a value-added 
tax or something of that nature.
    Mr. THOMPSON. Thank you very much.
    Mr. Chairman, I yield back.
    Chairman KELLY. Mr. Schweikert, you are recognized for 5 
minutes.
    Mr. SCHWEIKERT. Thank you, Mr. Chairman.
    You ever have one of those cases where every time you think 
you start to understand something, your head starts to spin?
    Mr. Sprague, I am partially going to--because of your 
specialty--we were back here trying to have a conversation on 
different ways you could have leakage, but I first want to make 
sure I understand some of the most basic part of the math.
    I have an 11 percent gross rate of return. So 1 percent is 
now subject, and I take 20 percent of the 1 percent, and then 
that is now subject to an allocation internationally. Is that a 
fair way to--I am trying to make it as simple as possible. Am I 
okay so far?
    Mr. SPRAGUE. Right.
    Mr. SCHWEIKERT. For the base 10 percent that is basically 
sheltered, you say it is gross, but is it a classic gross as we 
would do our accounting in the United States of my capital 
expenditures, my interest costs, my caring costs, my personal 
costs, my healthcare costs--those as my base expenses shielded 
within--so I can get up to 10 percent rate of return before I 
am subject to the formula?
    Mr. SPRAGUE. Well, yes. You are referring to the Amount A 
formula, you know, correct? Not the Amount B?
    Mr. SCHWEIKERT. Uh-huh. Yeah. Just the A.
    Mr. SPRAGUE. Yeah. And so the 10 percent is indeed on 
operating income, so that is after all of the normal book 
expenses have been deducted. So the 10 percent figure in your 
case would be profit after all normal expenses. And then, if 
your company was, in-scope, $20 billion and had 11 percent 
operating profit, then indeed that 1 percent would be subject 
to Amount A----
    Mr. SCHWEIKERT. And 20 percent of the 1?
    Mr. SPRAGUE. Twenty-five percent of----
    Mr. SCHWEIKERT. Twenty-five percent of the 1?
    Mr. SPRAGUE. Correct.
    Mr. SCHWEIKERT. Okay. Now, if I came to you and said, you 
are my counsel. Find me a way as a--let's pretend I am an AI 
company. So I can put my stacks anywhere. I can put my servers 
here. I can move my IP anywhere, you know, and house it 
anywhere.
    Is there a way, as you understand the model right now, to 
somewhat game the system?
    Mr. SPRAGUE. Not really by--not by moving assets like that 
around because the pool of profits is global. Profit is the 
entire consolidated profit of the group. So you could establish 
a new operation in a different country and maybe earn income in 
that country instead of a different country, but the allocation 
under Amount A is based on global consolidated profit.
    Mr. SCHWEIKERT. You see, part of this was--derivative was--
Mr. Bunn had said, if I am in a different country and do I have 
different things that I could stack up as part of my expenses, 
my cost of doing business, either that or that country has 
certain different types of credit mechanics or--that would 
change my definition on the first base of the 10 percent.
    Does that make sense, Mr. Bunn?
    Mr. BUNN. So I would distinguish between what it looks like 
for the company, which Mr. Sprague just described, and the 
country.
    So what I was getting at is, it depends for the country and 
the country's tax revenues where you have your high-value, 
high-margin things. The allocation for the company, you know, 
regardless of where they have their stuff, it will still be 25 
percent of that 1 percent. But if all 11 percent of those 
profits are in the U.S., then it will matter for the U.S. 
Treasury for that 1 percent.
    Mr. SCHWEIKERT. Okay. Ms. Funkhouser--and here is where we 
have been sort of trying to game this out in our heads and see 
if we are missing anything. If I am in a world--it is a decade 
from now--and I am running parts of my factory on AI or other 
types of technology in the future, or I have a company that--
you know, doing synthetic biology and those things, is the 
design of this model, do you believe it is robust enough to 
handle the economic disruptions that we all expect over this 
decade?
    Mr. SPRAGUE. On the part of the model you are describing, 
yes, because it just starts with, for U.S. companies, gap 
financial statements. So whether you are a, you know, potato 
chip manufacturer or an AI company or some other enterprise, it 
doesn't really make any difference.
    Mr. SCHWEIKERT. Well, because in that AI model, you almost 
could have no domicile other than wherever the processors are, 
and the IP can--in a weird way, can almost float.
    Mr. SPRAGUE. Well, I doubt a $20-billion enterprise would 
ever not have a domicile somewhere.
    I think what you are referring to is the potential to move, 
as Mr. Bunn was describing, productive assets from one country 
to another, and that would produce more or less income in the 
particular country. But for Amount A purposes, you don't start 
with a particular country income. You start with the combined 
worldwide consolidated group and your gap financials.
    So the consequence would be, if you put, say by virtue of 
AI or whatever, all of your income in one country, but you 
still had to allocate out some amount to other countries under 
Amount A, then it is that one country that would be the country 
that has to, you know, relieve double taxation due to the 
allocation out to other countries.
    Mr. SCHWEIKERT. Mr. Chairman, thank you for your time. That 
was actually very helpful.
    Chairman KELLY. Thank you.
    Mr. Doggett, you are recognized for 5 minutes.
    Mr. DOGGETT. Thank you, Mr. Chairman.
    And thanks to each of our witnesses for your very 
insightful testimony.
    It seems to me, whether you are a small business on Main 
Street or a multinational spanning the globe, one of the most 
important things is to have some stability, some certainty, so 
that when decisions are made about investing in plant and 
equipment, expanding a workforce, you have some sense of how 
much risk you are experiencing. And the less chaos we can have, 
the better. And avoiding a number of countries coming forward 
and taxing their own instead of working this out is really 
antibusiness in nature.
    That kind of conflicts with what has been going on here in 
the Congress. Over the last year, we have had a substantial 
chaos caucus. Took us right up to the brink of defaulting on 
the full faith and credit of the United States for the first 
time in our history. It has taken us again and again right to 
the brink of shutting down the government. In fact, right now, 
we don't know if the government will shut down by the end of 
the month on more than half of the budget that should have been 
approved last September for the remainder of this fiscal year, 
and I hate to see that kind of chaos added to what is already a 
challenging multinational situation.
    Ms. Funkhouser, you have referred to the need for global 
tax solutions, and I think you are absolutely right. Let me 
just ask you if you believe that the United States suddenly 
withdrawing from the OECD process would be harmful to U.S. 
business?
    Ms. FUNKHOUSER. Thank you very much for the question, 
Congressman. And I would say yes, that would be very harmful 
for U.S. business, because when you think about how to secure 
the best outcomes for U.S. business and U.S. competitiveness, 
it comes from the U.S. being part of the conversation and 
driving the outcomes that benefit the U.S. economy and the U.S. 
people.
    And so as we think about certainty, to your point, it is 
looking at how can we provide certainty for these companies.
    Mr. DOGGETT. And, Mr. Bunn, you have used what is a very 
controversial term here in Congress with some, and that is the 
term ``multilateralism.'' We have some people that don't 
believe in anything international, don't even support NATO 
these days, but you say multilateralism is better than multiple 
rounds of attacks in trade war.
    Do you agree with Ms. Funkhouser that it would be extremely 
harmful to U.S. business interests to suddenly withdraw from 
the OECD negotiations that are still very much underway?
    Mr. BUNN. I think at this point, there is a lot of work to 
be done, and that requires remaining engaged. The challenge is 
whether the goals that Congress has for the Treasury to 
achieve, whether those will be achieved. At some point, there 
will be a final deal, and that is when the decision, I think, 
should be made.
    Mr. DOGGETT. And, Mr. Minor, while there is still much more 
work to be done, do you also agree that it would be a mistake 
for the United States to just fold up its tent and withdraw 
from the OECD?
    Mr. MINOR. Yes. That is the clear position of my members.
    And, you know, we don't have a final MLC. The Amount B 
rules are still in flux. So that is our recommendation, is to 
stay the course of the multilateral process for now, but also 
have a meaningful engagement between Congress and Treasury.
    Mr. DOGGETT. I thank each of you for that.
    Mr. Chairman, I ask unanimous consent to put into the 
record a letter that has been sent to the Appropriations 
Committee by a number of Members, including five from this Tax 
Subcommittee, that are urging that we end all funding for OECD 
and essentially withdraw from the negotiations because we won't 
be funding it anymore.
    I think that would be a serious----
    Chairman KELLY. So ordered.
    Mr. DOGGETT. Mistake. I think it is antibusiness in nature. 
It is contrary to the needs of our business community. We need 
to stay engaged. We cannot wall ourselves off from the rest of 
the world. Our business community certainly can't do that, and 
they need our support. These negotiations have not achieved 
their full objectives yet, but that doesn't mean that you quit. 
We need to continue to be involved.
    I would say also that there are a number of American 
companies who would owe tax here under Pillar 1 as currently 
prepared, as best I can tell, including American pharmaceutical 
companies that book most of their profits abroad and pay tax on 
little reported profit here. For example, AbbVie sells 75 
percent of its drugs here in the United States, yet for years, 
it has reported a loss in the United States with billions in 
profits booked abroad.
    So Pillar 1 is not just about additional tax revenue for 
other countries. It has some potential particularly in the 
pharmaceutical area here in the United States. I hope these 
negotiations continue and the efforts by Republican colleagues 
to undermine OECD will be defeated.
    I yield back.
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    Chairman KELLY. Mr. Hern, you are recognized for 5 minutes.
    Mr. HERN. Thank you, Mr. Chairman.
    I thank the witnesses for being here. I really appreciate 
it.
    Since I have been on Ways and Means, I have been following 
this Pillar 1 issue and written multiple letters to Treasury to 
ask for their revenue modeling so that we better understood 
where their estimates were coming from and the impact of the 
OECD Pillar 1 agreement. And I have introduced legislation to 
force the Treasury to provide this information to Congress. I 
think it is important that we know what they are using to 
determine the impact. And, after years of the pressure, the 
Treasury finally provided the needed information to JCT.
    Yesterday, JCT released a report providing background and 
analysis of the taxation of multinational enterprises and the 
potential reallocation of taxing rights under Pillar 1. JCT 
estimates that enactment of Pillar 1 Amount A would have 
resulted in a revenue loss of $1.4 billion to the U.S. fisc in 
2021, ultimately confirming that this is a bad deal for 
Americans.
    Putting the projected losses to the U.S. fisc aside, there 
is good reason and motivation to find a solution that would 
convince countries to remove and/or deter implementation of 
digital service taxes that target our U.S. businesses with 
malign intent.
    But herein lies the problem. The treaty, as it is written 
now, does not completely solve the problem, which is to 
eradicate all novel extraterritorial digital service taxes and 
other discriminatory measures. Also, I am concerned that 
countries will still be able to aggressively target U.S. 
companies while claiming their revenue reallocation.
    It is clear that the negotiation was conceived as an 
economical solution and one worth pursuing, but has quickly 
turned into a political negotiation with massive amounts of 
complexity and key economic principles missing from the final 
product.
    There is always going to be an uphill battle getting 140 
countries to agree on an international agreement that stands on 
complete economic principles because every country, every 
country has different preferences that fit their needs, their 
wants, their politics, and economic agenda.
    Should we abandon all hopes of finding a solution to 
eradicate novel discriminatory taxes around the world? I would 
say no. But I have a deep concern with the treaty as it is 
presented at the OECD currently.
    Mr. Bunn, the draft treaty lists nine DSTs and similar 
discriminatory measures that are subject to be replaced by 
Pillar 1. The rules are written in a way that countries can 
adopt Pillar 1 or capitalize on their redistributed tax 
revenues or have the option to keep their DSTs in place. I find 
this leniency to be problematic since the overreaching goal is 
to find compromise for all DSTs and discriminatory taxes are 
eliminated.
    Does the draft treaty, as written, lead you to believe that 
all DSTs will be removed, and is there a door number two, so to 
speak, for new discriminatory tax measures to be implemented in 
the future?
    Mr. BUNN. Thank you for the question.
    No, I do not think the draft treaty would eliminate all 
discriminatory taxes. And, yes, I do think that it leaves open 
the possibility for new either mutated forms or proliferated 
forms of digital services taxes.
    Mr. HERN. And I do agree with Ms. Funkhouser that we do 
need to stay at the table and that we figure out what is going 
on, because if you are not at the table, you are on the menu, 
as the old saying goes. And so we are the ones that are the 
targets of these DSTs, primarily, and we have to have a way to 
figure these out as opposed to creating a trade war.
    Mr. Bunn, also under a formulaic system such as Amount A, 
the formula can be manipulated. Is there also concern that 
governments can modify their current DST to work around the 
current definition?
    Mr. BUNN. Yes. You could apply your DST to foreign and 
domestic businesses and potentially use that as an escape route 
to be able to maintain a DST, and I think that could be the 
route that some countries that are looking at this deal would 
take.
    Mr. HERN. Thank you.
    Mr. Minor, we have already heard that some countries such 
as Australia will likely opt out of using Amount B construct 
set aside by the OECD last month, opting instead to use their 
existing transfer pricing mechanisms. How does optionality like 
this undermine the certainty and stability that has long been 
the primary goal of this policy?
    Mr. MINOR. Yeah. Well, it is very problematic, and we 
don't--we are not very happy about that because that kind of 
sends a signal to other members of the Inclusive Framework 
that, you know, that may be an option for whatever purpose.
    So an action like that unfortunately significantly 
undermines the Pillar 1 principles, and we were surprised to 
see that happen, actually. But there is no guarantee that other 
countries might want to go that route. But it does undermine 
the principles of the Pillar 1 solution.
    Mr. HERN. I think it is worth noting--Mr. Chairman, if I 
may have just 30 seconds--that there is a group of us went to 
the OECD back in August, and it is a different conversation 
when you meet eye-to-eye with somebody versus sending text 
messages back and forth or, you know, certified letters, 
emails.
    And what is interesting with the OECD, and I brought this 
up to our leader of the OECD, who is a former consultant with 
one of our large tax or large consulting groups in the United 
States, and my point to her was that, I know that you know how 
important Tax Code is to making strategic decisions in 
companies, not just in the United States but around the world, 
and so this is not any different.
    Based on how we term and work this out and the United 
States' involvement will change--possibly change how companies 
do business around the world, and we need not give up our tax 
dollars in search of a solution to move around the world when 
we have done the right thing with GILTI and FDII to make sure 
that we fix it. Is it perfect? No, it is not. But we have got 
to do the right thing and make sure that we keep our companies 
safe here, create jobs here, put Americans to work here, and 
collect appropriate taxes here.
    I thank you all so much.
    Chairman KELLY. Mr. Larson, you are recognized for 5 
minutes.
    Mr. LARSON. Thank you, Mr. Chairman. And I want to thank 
all our witnesses as well.
    And I want to continue along the line of my colleague, Mr. 
Doggett, and say that I think, especially as we sit up here and 
ask our experts questions, that it seems to us that stability 
is optimal in this situation and that we want to make sure as 
well that stability, certainty, and avoiding chaos--the chaos 
that will obviously come from any kind of trade war that would 
ensue because we haven't remained at the table and focused on 
working this through.
    So we cannot allow our American innovation that is 
fundamental to the fabric of our country to be curtailed or 
punished by unilateral taxation from dozens of other countries. 
I think we are all in agreement on that.
    But I have a process question. And, Mr. Bunn, I am going to 
direct it to you, but anyone can feel free to jump in as well. 
But the way it has been explained to me at least, that Amount A 
will be delivered through a Multilateral Convention, or MLC, I 
guess, as it is called, which would first be signed by the 
Treasury Department, then similar to our bilateral tax 
treaties, be ratified by Congress.
    Is that correct, Mr. Bunn?
    Mr. BUNN. Ratified by the Senate.
    Mr. LARSON. Yes. So can you please explain the role of the 
House in this process and the role of the Senate as you see it?
    Mr. BUNN. So thank you for the question. So the Senate 
would have to ratify the treaty with two-thirds majority. The 
Senate has not been--does not have a great reputation for 
acting quickly on tax treaties, does not have----
    Mr. LARSON. Or any other legislation in the House either 
for that matter, but----
    Mr. BUNN. I walked into that one. The other piece of this--
and others on the panel may elaborate--would be implementing 
legislation. So there is part of this agreement that is us 
giving up our taxing right, but there is also legislative 
changes that would have to be done for us to claim the new 
taxing right.
    Mr. LARSON. Mr. Sprague.
    Mr. SPRAGUE. Yeah. No, I agree with that. For us to tax 
inbound Amount A, we need to change our so-called effectively 
connected income rules to give us tax nexus over the other 
countries' allocation of Amount A to the United States.
    So the House, as the body responsible for originating tax 
legislation, would be in charge of that revision. And also, in 
terms of, you know, ratifying the treaty, I would think the 
expertise in the House, you know, there is plenty of reason for 
you to be thinking carefully about these issues and, you know, 
giving your advice to the Senate.
    Mr. LARSON. Mr. Minor.
    Mr. MINOR. Yeah. I would just echo that sentiment about the 
importance of the House and this committee specifically being 
very engaged on the development of the MLC, the next step, 
including Amount B, and also considering what type of 
legislative changes would be necessary to possibly implement 
the MLC.
    Mr. LARSON. Thank you. Ms. Funkhouser.
    Ms. FUNKHOUSER. Yes. And I appreciate the question and 
believe that it is very important that the House, and 
particularly the subcommittee, is having this conversation, 
because it has to do, at the end of the day, with U.S. 
competitiveness and how companies invested in the United States 
are able to engage with customers, consumers around the world.
    And so, therefore, I am very glad we are having this 
conversation today and see that as an important role of the 
subcommittee.
    Mr. LARSON. Do you ever sit here and wonder as witnesses 
what you would do in our role? Is there anything specific that 
you would say, I don't understand why Congress just doesn't 
do--fill in the blank. We will start with you, Ms. Funkhouser.
    Ms. FUNKHOUSER. I will say at this immediate moment, I 
actually don't have something in mind because I have been very 
focused on this hearing, but I do look forward to staying in 
touch as we work forward in this process.
    Mr. LARSON. Mr. Minor.
    Mr. MINOR. I think starting off with this hearing is a good 
idea, and I would like to continue a dialogue between, you 
know, this committee and also the business community on a 
regular basis.
    Mr. LARSON. Because of the complication of the issue?
    Mr. MINOR. Yes.
    Mr. LARSON. Mr. Sprague.
    Mr. SPRAGUE. I guess I would encourage Treasury to keep 
engaged and try to work as hard as they can to get a deal that 
is good for America.
    Mr. LARSON. Mr. Bunn.
    Mr. BUNN. I think one of the things that could be helpful 
is some sort of trade promotion authority in the tax area, 
specifically where Congress lays out priorities before the 
negotiations even begin.
    Mr. LARSON. I like that. Thank you, all. I yield back. 
Thank you for the----
    Chairman KELLY. That is fine. You are going to have a 
couple of weeks. You will be able to talk to--the Secretary of 
Treasury will be here. It is really--I think it is encouraging 
the fact--that is why we are here today. So thank you all for 
being here.
    Dr. Ferguson, you are recognized for 5 minutes.
    Mr. FERGUSON. Thank you, Mr. Chair. And, to the witnesses, 
thank you for being here. I must say, your answers regarding 
what Congress should be doing are much more kind than what I 
get out of my district most of the time, so thank you for your 
genteel responses.
    Ms. Funkhouser, let me start with a question to you. When 
we are looking at this proposal--this is a digital services 
tax, okay? So we are talking about taxing the services in the 
digital arena. So much of that is based on data and the value 
of data.
    Do you ever wonder then, given the fact that the U.S. has 
the highest quality data and the most tradable data in the 
world, does this open up--do you think that this avenue would 
open up problems with other countries taxing the value of our 
data? Not the services, but the value of the data. Do you see 
that as a concern?
    Ms. FUNKHOUSER. Thank you for the question, Dr. Ferguson. 
And, I will say, we have applauded the efforts of this 
committee, as well as the administration, when it comes to 
extending the World Trade Organization's moratorium on Customs 
duties on electronic transmissions because this does get to 
some of what you are talking about when it comes to how 
companies are able to engage abroad and stay competitive.
    And so we see maintaining the moratorium on customs duties 
on electronic transmissions as critical to maintaining U.S. 
competitiveness.
    Mr. FERGUSON. Thank you. Mr. Bunn, when we look at the JCT 
score of this, I mean, their range is, like, a billion 4 to 400 
billion, right? I mean, do you think that it is responsible to 
be moving in this direction without more complete data and 
understanding exactly the impact that this would have?
    Mr. BUNN. Thank you for the question. So, if you read 
through the JCT analysis, one word that pops up regularly is 
``uncertainty.'' There is not, in my view, a point at which we 
will have much more certainty on those sorts of numbers than 
now, and that range, 100 million to, you know, 4.4 billion, 
that is a meaningful range. And, again, it is a single-year 
estimate, not a 10-year estimate, like JCT is normally able to 
provide.
    But there is just so much complexity in the policy itself 
that this is not, like, you know, changing the corporate tax 
rate and JCT being able to do that in their sleep. This is a 
very difficult and complex policy that makes it hard to 
estimate.
    Mr. FERGUSON. So advancing without the rules being written 
and understood seems pretty irresponsible to me at this point.
    Mr. BUNN. I agree. And one of the things that is uncertain 
is how companies--the data that the companies themselves would 
use to comply with this is not all, sort of, in one place or 
clearly available for analysis.
    Mr. FERGUSON. Okay. This question will be for whoever who 
can answer it, and we will just kind of point as we go along 
here.
    Do you think that there is a situation where the money--the 
taxes levied here could wind up going to China at any level? 
Mr. Bunn, I will start with you.
    Mr. BUNN. Yes. The allocation----
    Mr. FERGUSON. That is fine. Mr. Sprague.
    Mr. SPRAGUE. I haven't seen statistics, but if China is a 
net beneficiary of Amount A, then they would be able to tax the 
net Amount A transfer, but I have not seen any statistics on 
this.
    Mr. FERGUSON. Mr. Minor.
    Mr. SPRAGUE. Dr. Ferguson, could I respond to your taxing 
data question?
    Mr. FERGUSON. Sure. Well, I tell you what, real quickly let 
me get through this so we have got enough time. Mr. Minor.
    Mr. MINOR. Yeah. I haven't looked at that issue.
    Mr. FERGUSON. Ms. Funkhouser.
    Ms. FUNKHOUSER. No, I do not have statistics on that.
    Mr. FERGUSON. Mr. Sprague, back to you for just a quick 
response on the data tax.
    Mr. SPRAGUE. Taxing data, yeah. It is a very interesting 
question, and the original DSTs actually tax the transfer of 
data.
    So one of the advantages of getting rid of the DSTs is to 
take away that tax that exists today in the DST countries on 
transfers of data. And keep in mind that the EC not too long 
ago proposed a general tax on data transfers.
    The tax world is in a very unstable place at the moment 
with ideas like the EC data tax, the DST, you know, withholding 
tax on digital services. So, to the extent that the system can 
be stabilized to get rid of all of those departures from 
international taxation norms, that, I think, is what would be 
good for U.S. business.
    Mr. FERGUSON. Okay. Thank you for those comments. I will 
say this: We should not be considering or supporting any 
legislation that allows $1 of U.S. taxpayer money to go to the 
Chinese Communist Party.
    With that, Mr. Chairman, I yield back.
    Chairman KELLY. Very good. Ms. Sanchez, you are recognized 
for 5 minutes.
    Ms. SANCHEZ. Thank you, Mr. Chairman. I want to thank our 
witnesses for being here today. I have to confess, I am not a 
tax attorney. I am an attorney, and so trying to wrap my head 
around Pillar 1 sometimes is like trying to wrap my head around 
the rule against perpetuity, which takes a while until you are 
familiar with it.
    So today we have heard some concerns about Pillar 1, but we 
also heard some suggestions for how we could improve it. And 
while some of my Republican colleagues are pulling the fire 
alarm, I just want us all to remember that these negotiations 
have spanned more than one administration, and, in fact, most 
of the initial work on Pillar 1 happened under the Trump 
administration.
    But it is also important to keep in context the overall 
picture of Pillar 1 and what we were trying to do in terms of 
tax policy. And, essentially, American negotiators were trying 
to stop a trade war. They were defending American businesses 
who were openly targeted by other countries' digital service 
taxes, and U.S. negotiators have focused on trying to secure 
certainty for American companies. That is a theme that I hear 
over and over from business. Certainty, stability, clarity are 
all important.
    So, surely, I think we all agree that we should protect 
American businesses against increasingly aggressive and 
confiscatory audits of their transfer pricing. And I think we 
should be focused in on how we can refine Pillar 1 to best 
protect U.S. interests without, again, forgetting why we 
entered these negotiations in the first place.
    Ms. Funkhouser, your industry is probably most directly 
targeted by DSTs. Can you describe what you think will happen 
if Pillar 1 fails?
    Ms. FUNKHOUSER. Thank you for the question, and I think it 
is a critical question to keep in mind as we are considering 
this. And I think, in the absence of a multilateral consensus-
based solution, we will see further proliferation of unilateral 
uncoordinated taxes that are imposed on gross revenues and are 
targeted to either a specific subset of companies, as we have 
seen in some of the DSTs to date with U.S. companies, or 
nonresident companies altogether. And so, that would have a 
devastating effect on the international tax-and-trade 
environment.
    Ms. SANCHEZ. And based on your experience following DSTs, 
do you think that aggressive taxes being pushed by other 
countries will stop at digital service taxes, or do you think 
that other countries will continue to try to find new and 
different ways to target U.S. companies?
    Ms. FUNKHOUSER. We have already seen an increase in novel 
approaches, if you will, to taxation. I think the first 
generation of DSTs was focused on, like I--digital advertising, 
user data, et cetera. The next ones went to effectively 
anything that happens over the internet, as we see in India's 
equalization levy.
    And then we have also seen changes, like the Australian 
Taxation Office's revised software payments ruling, which is 
looking at a new way of diverting from long-standing 
international tax norms.
    Ms. SANCHEZ. So, although we have heard concerns today 
about Pillar 1 and we have heard, obviously, some suggestions 
from our panelists about how we can improve and refine it 
within the parameters of how it currently exists--and I think 
my colleague, Mr. Doggett said, you know, ``What happens if the 
United States say, well, we don't like Pillar 1,'' we are just 
going to walk away from it, you know, does it really behoove us 
to stick our heads in the sand and hope that the problem of 
digital service taxes and other new problematic taxes by other 
countries are simply going to go away?
    Any of the panelists care to comment on that, that we 
should just walk away, blow it up, walk away?
    Ms. FUNKHOUSER. No. I strongly support continued engagement 
by the U.S. Government. Because, again, without strong 
engagement from the U.S. Government, we cannot make this a 
better Pillar 1 deal for the U.S. economy and for U.S. 
competitiveness.
    Ms. SANCHEZ. Anybody else care to chime in?
    Mr. SPRAGUE. Yeah, I will. The DSTs aren't going to just go 
away if Amount A or some other similar agreement is not 
negotiated and agreed to. I think the countries have made that 
pretty clear.
    Ms. SANCHEZ. Mr. Bunn.
    Mr. BUNN. I would agree. The challenge here is to get an 
agreement that fits the priorities of this committee, this 
Congress, and that is--I don't think that is the current draft, 
but to continue working towards that.
    Ms. SANCHEZ. So it is worth it to roll up our sleeves, try 
to do the hard work, figure out what--you know, negotiations 
are based on compromise as well, but--what is the best deal 
that we can get and how can we best try to protect U.S. 
companies, U.S. innovation by sticking with the confines of 
Pillar 1. Yes?
    Mr. MINOR. Yes, that is correct.
    Ms. SANCHEZ. All right. I appreciate our panelists, and I 
yield back.
    Chairman KELLY. Mr. Estes, you are recognized for 5 
minutes.
    Mr. ESTES. Well, thank you, Mr. Chairman, and thank you to 
our panelists today.
    You know, I have been concerned about the proliferation of 
the discriminatory digital services taxes since I came into 
office in 2017, which is why I encouraged the previous 
administration to engage with OECD BEPS 2.0 project, which 
turned into the two-pillar process that we see today. The goals 
of this project were to eliminate DSTs, provide tax certainty, 
and simplification for businesses in the growing digital 
economy. And that is where the negotiations were going before 
the Biden administration came in and changed the direction.
    I have been in ardent opposition to Pillar 2, the global 
minimum tax, especially the UTPR provision. I was hopeful that 
Pillar 1 would fulfill the stated goals of the original 
project. Unfortunately, what we are seeing is that more 
countries, like Canada, are enacting DSTs and the OECD issued a 
convoluted 800-page deal, quote-unquote, that leaves more 
questions than answers.
    Because of this, it is my belief that this still now 
represents a foot in the door for more extraterritorial taxes 
on successful businesses, and that it is a deal that is out 
there, but it is not necessarily that we should accept a bad 
deal.
    Additionally, the deal doesn't consider how businesses 
actually operate in the real world. Pillar 1's marketing and 
distribution safe harbor fails to adequately account for taxes 
paid in market jurisdictions under franchise or split ownership 
structures. This would force U.S. companies to overallocate 
profits to market jurisdictions resulting in more tax paid to 
foreign governments and less tax paid to the United States.
    As with the Biden Treasury Department's failure to 
grandfather guilty and failure to protect U.S. research and 
development incentives, the administration is, once again, 
failing to protect U.S. taxpayers and U.S. tax collections. I 
have heard from one U.S. Fortune 200 company that the failure 
to properly protect franchise or split ownership structures 
would result in an annual reallocation for that one company of 
$500 million to up to $1 billion of U.S. revenue to over 100 
foreign countries with a significant share going to already 
wealthy countries, like Germany and Spain.
    As my colleagues have noted, the recently released JCT 
report notes that a plurality of in-scope companies would be 
from the U.S., and 70 percent or $135 billion of Amount A would 
be from American companies. Likewise, the U.S. Treasury would 
forgo between $100 million and $4.4 billion--depends on that 
large range of--per year of tax receipts, and while we are 
granting a new tax right to other countries.
    It is my understanding that our Treasury Department is 
aware of the split ownership issue and has done nothing to fix 
it. Despite negotiating one of the most complex, confusing, and 
harmful deals that I have ever seen, the Biden administration 
claims that protecting our franchise and split ownership 
companies is just too complicated.
    I am tired of hearing about this administration's hollow 
excuses. The massive reallocation of U.S. revenue is also not 
limited to U.S. companies operating in franchise or split-
ownership structures. Another U.S. Fortune 200 company that is 
highly profitable in the United States would be forced to 
reallocate between $500 million and $1 billion of U.S. revenue 
annually to European and other foreign countries, even though 
these foreign countries have no economic nexus in the U.S. 
revenue. So for just two countries who are already up to almost 
$200 billion of U.S. revenue sent overseas.
    Mr. Minor, do you have any views of the marketing and 
distribution safe harbor and Treasury's failure to protect our 
U.S.-based franchise and split-ownership structures?
    Mr. MINOR. Thank you for the question. The two instances 
that you described have--are two of the issues that we have 
highlighted in our comments about making improvements to the 
marketing distribution safe harbor calculation, but we have a 
number of issues within DSH based on the modeling of our member 
companies that it does not seem to fully eliminate double 
taxation based on those calculations.
    It is a unique formula. It is not related to the transfer 
pricing principles that are broadly adopted. So we also share 
your frustration that those two instances that you described 
have yet to be resolved. They may still be resolved.
    I think the other one relates to the autonomous domestic 
business exemption, which does not apply to U.S. consolidated 
groups. And we think there are good arguments consistent with 
the principal of that exemption that should allow carve-outs 
under certain conditions. And we hope that those suggestions 
are still in play.
    Mr. ESTES. Thank you. Mr. Chairman, the JCT report 
underlines my ongoing concerns with Pillar 1's current 
structure. As the House Ways and Means Tax Subcommittee, we 
should be firm in our commitment to putting the United States 
first, maintaining our tax sovereignty, and not giving in to 
global demand, and the JCT analysis confirms that Pillar 1, as 
currently negotiated by the Biden administration, does not 
accomplish the original goals set out when we began this 
exercise in 2018.
    With that, I yield back.
    Chairman KELLY. Thank you. Ms. DelBene, you are recognized 
for 5 minutes.
    Ms. DelBENE. Thank you, Mr. Chairman, and thanks to all our 
witnesses for joining us today. I appreciate it.
    I appreciate the opportunity to highlight the concerns 
around discriminatory digital services taxes and the need to 
ensure that a Pillar 1 deal protects American businesses and 
workers against a patchwork of unilateral DSTs. That only 
happens if the United States continues to hold strong on 
demands for improvements to the current multilateral 
convention.
    Mr. Minor, if a critical number of countries were to sign 
and ratify the multilateral convention as it is drafted today, 
would that put an end to DSTs and relevant similar measures?
    Mr. MINOR. Well, that would for those jurisdictions that 
sign on to the Amount A, with the caveat that we still have 
problems with the way the DST review in the current version of 
the MLC is drafted. And so, we have provided our advice on how 
to improve on that.
    That does leave the issue of jurisdictions that decide not 
to sign up for the MLC. You know, under that situation, they 
are still free to pursue DSTs, but I am hopeful that there 
might be a trend then at that point against the proliferation 
of DSTs because I think the U.S. still has a number of options 
to go forward against those jurisdictions as it sees fit, if 
that is the case.
    Ms. DelBENE. Thank you. A top Canadian finance department 
official recently said that Canada is advancing its plan to 
impose a digital services tax even though the U.S. is opposed, 
in part, because the U.S. has not retaliated against seven 
other countries, such as India, France, or Turkey, that have 
adopted DSTs. These countries' taxes were found by USTR to 
discriminate against American companies and workers. And, 
following the USTR investigations, the U.S. agreed to impose 
and then immediately suspend tariffs on these countries as part 
of a political agreement, which was recently extended through 
June of this year, focused on reaching a multilateral agreement 
at the OECD.
    Ms. Funkhouser, what do you make of the contention that it 
is okay for Canada to impose a discriminatory tax because the 
U.S. has not yet retaliated against other countries with these 
taxes?
    Ms. FUNKHOUSER. Thank you for the question, Representative 
DelBene. And thank you for all of your work with the 
Congressional Digital Trade Caucus to push back against DSTs, 
particularly the Canadian proposal.
    I do not agree with the contention that it would be okay 
for the Canadian Government to move forward with this 
unilateral measure. On--one, it is modeled after the French 
DST. It is not identical, but it is very similar, which the 
USTR has found to discriminate against U.S. companies.
    It also comes at a point in the multilateral negotiations 
that are trying to remove unilateral measures. And, if the 
Canadian Government moves forward, it could lead to perverse 
incentives to actually finalizing those multilateral 
negotiations.
    Ms. DelBENE. So how do you think that impacts the OECD 
process. And so, you think Canada's actions will impact the 
OECD process?
    Ms. FUNKHOUSER. Yes. I believe that if the Canadian 
government moves forward with DST, it could inspire similar 
actions from other governments, and then that would just 
increase the amount of perverse incentives you have when it 
comes to actually coming to a final compromise that provides 
for the reallocation of taxing rights and provides for the 
withdrawal of digital services taxes.
    Ms. DelBENE. So their logic, if that holds, then anybody 
could say, we are going to go adopt a tax that discriminates 
against it because others are doing it?
    Ms. FUNKHOUSER. Yes, exactly. And that is not an adequate 
reason to do so. These are inherently bad taxes in structure 
and scope.
    Ms. DelBENE. Thank you. I appreciate it. I appreciate all 
of the feedback from everyone on the panel. Thank you.
    I yield back, Mr. Chairman.
    Chairman KELLY. Thank you. Mr. Smucker, you are recognized 
for 5 minutes.
    Mr. SMUCKER. Thank you, Chairman Kelly, for holding today's 
timely hearing.
    Before I move into questions, I just want to emphasize a 
few key points for my constituents back home who likely aren't 
following the OECD negotiations as closely as some of the tax 
community in Washington, but whose lives could be impacted by 
this.
    I want to go back to the initial reason for the Pillar 1 
discussions, as you have all said, were started with the intent 
of modernizing tax rules for the digital age. And the U.S. 
specifically entered into the discussions with the goal of 
reaching an agreement to remove discriminatory taxes, the DST 
taxes, on American companies, specifically American innovation, 
being enacted by several foreign allies.
    But the Biden administration chose to leave Congress out of 
the negotiations, and what we are left with is a Pillar 1 deal 
that has failed to achieve its original and its fundamental 
purpose, eliminating harmful digital service taxes--referring 
to them as DSTs--that threaten American jobs and will likely 
send U.S. tax revenue overseas.
    Because the Biden administration has chosen not to consult 
with Congress throughout those negotiations at OECD, I think 
today's hearing is an important opportunity to get the message 
out to the international community that Congress has serious 
concerns with Pillar 1. So I hope they are paying attention.
    For this deal to move forward--and maybe I will ask Mr. 
Bunn to confirm this--this cannot move forward unless the 
Senate ratifies the treaty and unless my colleagues and I on 
the Ways and Means Committee will need to advance change to the 
U.S. Tax Code as well. Is that correct?
    Mr. BUNN. Yes.
    Mr. SMUCKER. So this doesn't get done unless we and the 
Senate agree with it as well. So it is important that folks are 
paying attention to that.
    We believe endorsing a deal that penalizes American 
innovation that could cost American jobs and could end up 
sending tax revenue to foreign countries, even as some of you 
suggested here in answer to Mr. Ferguson's question, even 
nations like China that are askance simultaneously attempting 
to skew our innovation, we don't think that is in the best 
interest of our constituencies.
    And let me ask the question maybe to Mr. Minor. Is there 
any scenario, in your estimation, in which this proposal does 
not reduce or undercut U.S. Federal revenue? Just keep in mind 
half of the taxable companies are U.S.-based. So this almost 
certainly will result in less revenue in the U.S. Do you agree 
with that?
    Mr. MINOR. Well, thank you for the question. That is a 
tough one for me. I would have to defer to my colleague.
    Mr. SMUCKER. Anyone else want to answer that?
    Mr. BUNN. I think JCT's analysis with the uncertainties--
even with the uncertainties, the range--all of those numbers 
are negative. It seems like----
    Mr. SMUCKER. In other words, it would be a reduction?
    Mr. BUNN. Reduction.
    Mr. SMUCKER. Coming into the Federal--to the U.S.?
    Mr. BUNN. Right. Even after accounting for additional 
revenues that could come from foreign companies, the net would 
be negative.
    Mr. SMUCKER. Does that make sense to you? I mean, if we are 
even discussing reforming taxes surrounding U.S.-based 
businesses, shouldn't those taxes be used to benefit U.S. 
citizens and not people of other countries?
    Mr. BUNN. I think one of the things--thank you for the 
question. I think one of the things inherent in this discussion 
is that tug and pull. Is this compromise, that reduction in 
U.S. tax revenue, worth it to get the certainty or the 
elimination of digital services taxes. And, if those are 
questionable, then the sacrifice, in my view, is not 
necessarily worth it.
    Mr. SMUCKER. Ms. Funkhouser, would you like to respond to 
that as well?
    Ms. FUNKHOUSER. Yes, I would. Daniel touched on this at the 
end. But part of this compromise in Pillar 1 is looking at 
bringing together a more predictable, certain, and stable tax 
environment. And so, the JCT report is part of the picture when 
it comes to considering how Congress chooses to engage with 
Pillar 1.
    But I would highlight that companies are already paying 
digital services taxes, and for--they are impactful for all 
companies, regardless of profit margin, but particularly for 
those that are loss-making or low-margin companies. There are 
some jurisdictions out there that don't even have revenue 
thresholds. And so startups and small businesses are also 
directly affected by these gross revenue taxes.
    So I would encourage Congress to keep that in mind when 
considering the compromise of Pillar 1.
    Mr. SMUCKER. We also heard, some of you in answer to 
questions have said that this proposal will not eliminate all 
possible DSTs. So we could, essentially, have a situation where 
the Biden administration has negotiated an additional foreign 
tax proposal on U.S. multinational companies, while failing to 
eliminate the digital services tax.
    Anybody want to respond to that?
    Mr. SPRAGUE. I would like to respond to that. As Mr. Minor 
noted, the Amount A document actually lists the digital service 
taxes that are within scope, and would need to be withdrawn, 
and it includes all of the so-called first-wave DSTs; U.K., 
France, Spain, Italy, India, Turkey.
    I would be very surprised if U.K., France, Spain, Italy did 
not sign on to Amount A. And so, I would be extremely confident 
that those DSTs would, indeed, be withdrawn. Canada--I would be 
surprised if Canada didn't sign on, in which case it would be 
precluded from asserting a DST.
    Mr. SMUCKER. Do you think any country--I am sorry, I am out 
of time, Mr. Chairman.
    But would you foresee any situation where countries would 
not sign on, where DST tax would stay in effect?
    Mr. SPRAGUE. Maybe small countries. I mean, there are some 
very small countries with DSTs.
    Mr. SMUCKER. Thank you. I am out of time. Appreciate that. 
Thank you so much.
    Chairman KELLY. Good line of questioning.
    Ms. Moore, you are recognized for 5 minutes.
    Ms. MOORE. Thank you so much, Mr. Chairman. Let me start 
with you, Mr. Sprague. There has been a lot of discussion about 
the JCT estimates of revenues that would be lost, $1.4 billion.
    Does consider the amount under B if it were mandatory? 
Would that mitigate the loss of revenue to the U.S.? Because I 
think one of the problems that I have been hearing is that, 
because Amount B is not mandatory, the transfer pricing, that 
that is part of the uncertainty.
    Mr. SPRAGUE. Thanks, Congresswoman Moore, for the question. 
It is a pretty good question. There were a couple different 
points that I would like to respond to, first on Amount B.
    I do believe that the introduction of Amount B, assuming it 
is adopted broadly, would be a net revenue raiser for the U.S. 
And the reason is that I do think that Amount B will tamp down 
some of these aggressive foreign transfer pricing adjustments, 
and that means fewer foreign taxes the U.S. companies claim as 
foreign tax credits and fewer correlative adjustments the U.S. 
companies would then claim in the U.S.
    That is the--those are the two benefits of addressing, 
tamping down aggressive foreign adjustments.
    We also need to think about the inbound side, right? 
Because Amount B, if the U.S. adopts it, would also be 
applicable to inbound distribution from overseas.
    The IRS has just started a new project to look carefully at 
inbound distribution. My belief is that Amount B would not 
limit the IRS in its review of inbound distribution, and that 
project is likely to increase U.S. tax revenues.
    So I think both on the outbound side and the inbound side, 
the introduction of Amount B would be a net tax revenue raiser 
for the U.S. I can't say how much. It is not going to be in the 
same magnitude as Amount A, but it will be a counterbalancing 
number.
    The other element that I would like to emphasize is that 
the $1.4 billion is only one part of the whole. I think others, 
Ms. Funkhouser in particular, have mentioned that the deal is a 
deal that has lots of components. I mentioned that the 
international tax system today is in a very unstable state, and 
a lot of that instability, whether it is digital service taxes 
or withholding taxes on digital services, is directly impacting 
U.S. companies.
    If the Amount A goals were achieved, we will restabilize 
the international tax environment, and that will be good for 
U.S. business. U.S. business is the most multinational of any 
business, any country. And restabilizing the international tax 
framework is going to allow U.S. business to operate overseas 
with more predictability and more stability than is the case 
right now.
    Ms. MOORE. I got you. Let me ask Mr. Minor a question. We 
have heard a lot today about U.S. companies. The feedback we 
got in October was that they were concerned about the added 
complexity of complying with Amount A and then finding that 
they have very little tax liability.
    How can these compliances, challenges, be mitigated? And 
again, is it worth it to go through the complexity of complying 
with Part A, and would it benefit the U.S. companies to do it, 
even if they have a limited amount of tax liability so that 
they can, in fact, get those receipts incoming and also 
mitigate problems that they would have with aggressive transfer 
pricing?
    Mr. MINOR. Yeah. It is inherent in introducing a novel 
regime like Amount A that there is going to be significant 
compliance costs upfront, but there is a lot of money at stake.
    So I guess on a proportionate basis, it is not an unusual 
ratio, the compliance cost to the amount at stake. And we have 
to remember, as Mr. Sprague just said, there are multiple 
components to the Pillar 1 project.
    Ms. MOORE. Thank you. Ms. Funkhouser, why should ordinary 
people care about Pillar 1?
    Ms. FUNKHOUSER. That is a great question. Ordinary people 
should care about Pillar 1 from the perspective of how does it 
contribute to U.S. competitiveness and engaging with the global 
economy.
    Again, the U.S. economy benefits and contributes to the 
benefits problem, clearly the global economy, and that is why 
it is important for providing that stability, predictability, 
certainty that benefits U.S. companies and U.S. workers.
    Ms. MOORE. Thank you so much for your indulgence, Mr. 
Chairman, and I yield back.
    Chairman KELLY. Mr. Kustoff, you are recognized for 5 
minutes.
    We will go two-to-one now in the interest of time. I thank 
you all so much for being patient with us. Mr. Kustoff.
    Mr. KUSTOFF. Thank you, Mr. Chairman, for convening today's 
hearing, and thank you to the witnesses for appearing as well.
    Mr. Minor, if I can with you, the Pillar 1 multilateral 
convention will now require companies to file likely a 
substantial amount of sensitive financial information and tax 
information. In preparation for today's hearing, I was 
reviewing a letter submitted by the business roundtable. It is 
a comment letter to the Department of Treasury on the Pillar 1 
MLC.
    If I could, I wanted to read you part of it and then get 
your thoughts. This is from the letter dated December 11, 2023, 
from the business roundtable to the Department of Treasury. 
Regarding compliance, more information is needed as to the 
mechanics of filing returns, paying tax, and perhaps more 
importantly, the confidentiality of taxpayer information.
    The level of detail and the data required for calculation 
under the MLC is greater than under typical tax compliance 
rules. For that reason, there should be extra sensitivity to 
what is shared for Pillar 1 purposes.
    That is from the letter. So my question to you is, given 
the type and amount of information that companies have to 
report under the MLC, are there any concerns or legitimate 
concerns about confidentiality risks?
    Mr. MINOR. Yeah. I guess the--that is a very valid risk, 
and that--what you just read out loud was--sounded very similar 
to the language in our consultation letter on that topic. 
Because of the--again, it is a novel regime. It is a 
multilateral regime.
    And so, the dispute prevention and dispute resolution 
provisions are very detailed, very important. And one of our 
concerns was making sure that confidential information was only 
going to be shared with those jurisdictions who had a stake in 
any of that type of resolution review.
    So we are going to continue to emphasize this issue. But, 
again, I think it is a reasonable concern to have, and we can't 
over-highlight that concern.
    Mr. KUSTOFF. If I could--and I appreciate that. The letter 
goes on to say that stronger rules need to be in place where 
there are breaches of confidentiality since there is such a 
wide variation in the protections provided among parties and 
their domestic law. Given the more sensitive nature of the data 
that would be incorporated into calculations under the MLC.
    So what mechanisms, if any, if you will, does the MLC 
include or need to include to address breaches of 
confidentiality?
    Mr. MINOR. Yeah. Well, there need to be strong--you know, 
strong and clear consequences for breaches of any 
confidentiality, also as a deterrent, but as an enforcement 
mechanism.
    Mr. KUSTOFF. Thank you very much. Mr. Bunn, can you speak 
about why Pillar 1 will likely result in revenue lost to the 
United States?
    Mr. BUNN. Thank you for the question. As I have mentioned 
before, the analysis from the joint committee notes the 
uncertainties, but I will describe a situation in which these 
numbers hopefully make a little bit of sense.
    A lot of high-value activity for U.S. multinationals 
happens in the U.S., and those profits are booked in the U.S. 
and taxed by the U.S. Treasury. The way the Amount A rules 
work, that if you have very high profit margins, 25 percent of 
profits over a 10 percent threshold could be subject to 
reallocation.
    So the U.S., as home to very innovative and highly 
profitable businesses and where a lot of those profits are 
booked, will have an outside share available for reallocation. 
Part of the reallocation is to where customers are.
    Now, the U.S. is about 30 percent of worldwide consumption. 
So a lot of consumption happens outside the U.S. A lot of 
customers for U.S. businesses are outside the U.S.
    So you could see just from that kind of simple example that 
a lot of the profits available for reallocation could end up 
outside the U.S. Now, the U.S. would also get some inward 
reallocation, and the inward reallocation could come from U.S. 
businesses that have foreign operations, and they sell back 
into the U.S. market. And it could also come from foreign 
businesses that are selling into the U.S. market.
    But, on net, the joint committee's analysis shows that it 
would be a net revenue loss, particularly looking at 2021 data.
    Mr. KUSTOFF. Thank you, Mr. Bunn. Thank you, Mr. Chairman.
    Chairman KELLY. Mr. Feenstra, you are recognized for 5 
minutes.
    Mr. FEENSTRA. Thank you, Mr. Chair. Thank you to each of 
the witnesses today. It is great to hear from you. I am trying 
to understand whether there is any coherence between the steps 
this administration is taking in this sector.
    We started negotiating Pillar 1, for a large part, in 
response to the implementation of digital service taxes around 
the world, but more broadly, to adapt international taxation to 
the digital economy.
    One of the advantages of doing Pillar 1, if at all, is that 
it would enable a paper reallocation of profits, not a physical 
one that is transferring economic activity, investment, and R&D 
to market jurisdictions. We want to keep all of this here in 
the United States.
    But the abandonment of the moratorium of the digital trade 
by the Biden administration, meaning by allowing local data 
storage requirements to proliferate, essentially, creates a 
physical presence requirement in the market jurisdictions.
    So, on one hand, at the OECD we are negotiating for a paper 
reallocation of profits. On the other hand, at the WTO we are 
negotiating a physical reallocation of profits. Though that is 
not the intent, it ultimately is the effect.
    So what I am asking, Ms. Funkhouser, I am trying to 
reconcile these two seemingly contrasting objectives. Can you 
explain how the abandonment of the digital trade moratorium at 
the WTO, particularly the potential for the new local data 
storage, interferes with the goals of Pillar 1? Do you 
understand what I am saying?
    Ms. FUNKHOUSER. Yes, I do, Mr. Feenstra. Thank you for the 
question. I appreciate it.
    And, as you mentioned in October, the Biden administration 
withdrew support for some long-standing priorities in the World 
Trade Organization's plurilateral agreement on e-commerce, and 
these were priorities to prohibit data localization measures. 
And what this means, though, is that if a--if there are no 
commitments against data localization, a government can then 
require that if the company wants to serve that market, then 
that company would have to actually set up physical presence in 
the market, which would then lead to permanent establishment 
and lead to a taxing presence.
    And so, that would mean, though, that if a company can no 
longer do that same activity in the U.S., it has to then do it 
in market to serve the market. You then lose the opportunity. 
And so, yes, we are very disappointed in the direction of 
digital trade policy and really encourage a priority that puts 
forward U.S. competitiveness.
    Mr. FEENSTRA. So can you just explain, how does that create 
a disadvantage for American multinational or American 
companies?
    Ms. FUNKHOUSER. It means that if a company wants to do 
business in the market, then it actually has to physically go 
into that market and is not able to have those jobs and that 
activity in the United States.
    Mr. FEENSTRA. Thank you. And that can be very significant.
    Ms. FUNKHOUSER. Yes.
    Mr. FEENSTRA. And so I'm going to switch subjects now. I 
also look at what other countries are aggressively doing. They 
are shifting their tax burden on U.S. companies and are trying 
to find places where they can grab more dollars. We saw this in 
Europe, obviously, Germany's extraterritorial tax on Section 
49, and similarly, is targeting our U.S. firms for the sole 
purpose of raising revenue.
    We are seeing this also--Australia has designed its own tax 
targeted at U.S. software companies, and India is also 
frivolous in forcing U.S. companies in lots of litigation. What 
I am trying to get at is this:
    Would you agree, Ms. Funkhouser, that American companies 
are typically targeted by foreign tax collectors, and do we see 
this proliferating--obviously, we are talking about Pillar 1, 
but we are also talking about a lot of different aspects. How 
do we, as Congress, answer that, and what can we do as a 
country?
    Ms. FUNKHOUSER. Thank you very much. And you have really 
listed through the different ways that are is uncertainty in 
the international tax environment now. And perhaps as a first 
point, just thank you so much for your leadership in leading 
letters and making clear your concerns about the imposition of 
Section 49 in particular on the U.S. taxpayers.
    I think that is a big part of making clear that the U.S. 
economy and U.S. competitiveness, though, should not be faced 
with extraterritorial measures. And so, thank you for the 
leadership you have shown in that regard.
    Mr. FEENSTRA. Well, thank you. To me, this is very 
concerning, and I worry about this administration. It just 
seems like they are allowing this to occur. And this is very, 
very--we all can be aware of what is happening. We are losing 
our revenue, and the revenue is going somewhere else.
    So with that, I yield back. Thank you.
    Chairman KELLY. Thank you. Mr. Schneider, you are 
recognized for 5 minutes.
    Mr. SCHNEIDER. Thank you, Mr. Chairman. I want to thank the 
witnesses for sharing their perspectives on what is relatively 
a very clear and simple concept to understand. So thank you for 
that.
    One thing that I know from my years in business before 
coming to Congress is that two things that drive costs up are 
uncertainty and complexity. We are certainly talking here about 
a situation with great uncertainty and great complexity and the 
goal is to try to reduce that.
    Mr. Sprague, you used the term earlier, the international 
tax system is unstable or incredibly unstable. Very briefly--
because I want to touch on some other things--but what are the 
key implications of that instability in our focus, American 
multinational corporations?
    Mr. SPRAGUE. Well, Mr. Feenstra's reference to the Section 
49 tax is a perfect example. I mean, that was an opportunistic 
effort by Germany to tax the profits of U.S. multinationals.
    The cost to U.S. business of the uncertainty is the cost--
the tax cost of the special taxes, like Section 49 and DSTs, 
plus the expense of trying to plan a business when you don't 
have great visibility into what your tax liabilities are going 
to be.
    That is another advantage of Amount B, trying to bring into 
a more narrow range, which a range of tax exposures is going to 
be, and distribution activity in foreign countries.
    Mr. SCHNEIDER. Thank you. I am going to quote Ms. 
Funkhouser. You said in your opening remarks, absent robust 
U.S. engagement, including that of Congress--I will emphasize, 
Congress should be all caps and underlined because we have to 
be involved--there is little chance of resolving outstanding 
issues and crafting a final package that provides certainty and 
predictability for the global technology and you can expand 
that to industry as a whole.
    My question for you, because we are talking about certainty 
and unpredictability, what is likely to happen if we walk away 
from the table for American technology companies?
    Ms. FUNKHOUSER. Thank you very much for the question. 
Because it is something we spend time thinking about, and it 
really would be a further proliferation of unilateral 
uncoordinated taxes that are imposed on a gross revenue basis, 
and in some ways are attempting to reassess the digital economy 
and are really presenting trade barriers to the ways that 
companies invest in the United States are able to engage with 
other markets around the world.
    And so you--the gross revenue base in particular is 
especially impactful for loss-making and low-margin companies. 
And so, as you are thinking about companies that are in the 
United States and looking to expand elsewhere, the 
proliferation of DSTs is especially harmful.
    Mr. SCHNEIDER. Thank you. We need to move forward on this.
    You also talked, Ms. Funkhouser, about the goal of Pillar 1 
with predictability and uncertainty. The Biden administration 
is working to make Amount B as mandatory. Making sure it is for 
all countries is the way we achieve that certainty within 
Pillar 1.
    Anyone disagree that it should be mandatory?
    Ms. FUNKHOUSER. I believe it should be mandatory for 
governments to adopt Amount B and that companies should have an 
option when it comes to opting into Amount B and/or it should 
operate as a safe harbor. Again, if this is about simplifying 
transfer pricing, then that is how we would see it.
    Mr. SCHNEIDER. Mr. Minor, anyone else?
    Mr. MINOR. Yes, I agree. In my mind, mandatory is 
essential, and, you know, it should be seen as part of the 
overall deal for including Amount A as an important component 
of Pillar 1 and the elimination of DSTs.
    Mr. SCHNEIDER. Mr. Sprague.
    Mr. SPRAGUE. I agree with both of those comments, including 
that it should be a mandatory integral part of one that goes 
along with A.
    Mr. SCHNEIDER. Mr. Bunn.
    Mr. BUNN. I also agree that it should be mandatory.
    Mr. SCHNEIDER. As my time is winding down, let me ask 
another question. I will just make it easier. Raise your hand 
if you think U.S. should stay at the table trying to achieve 
agreement on Pillar 1? We have got four out of four. Thank you. 
I appreciate that.
    I will finish this one thing as we are coming to the end. 
My friend, Chairman Kelly, mentioned Atlas. There is often a 
misnomer of Atlas holding the world on his shoulders. It was 
actually the skies that Atlas held up. And Atlas was a Titan, 
was a giant.
    I would like to--and this may be torturing the metaphor--
view the United States as a titan of innovation, as a titan of 
creativity. We have talked 50 percent of the multinationals 
that are affected are U.S. companies. I am proud of the success 
and innovation and the progress that U.S. companies make.
    I want to make sure that whatever we do here ensures that 
those companies continue to be in the United States and that 
the sky is the limit for their potential.
    With that, I yield back.
    Chairman KELLY. Well said. I agree with you. It is also 
nice that this committee is actually getting involved in it and 
will continue down that road because this is so complex. It is 
very difficult. But I thank you all for doing that.
    Mr. Smith.
    Mr. SMITH. Thank you, Mr. Chairman, and to our ranking 
member for allowing me to waive on to the subcommittee here 
today. Appreciate the concerns so many have already expressed 
about the implementation of Pillar 1 and its impact on American 
businesses and innovations.
    It is clear that both Pillar 1 and Pillar 2 are bad for 
American jobs and American workers and revenue to our Treasury. 
However, I am also here today because I am concerned that, in 
addition to the other problems discussed here, Pillar 1 will 
stop international efforts to--it will not stop international 
efforts to strip more revenue from American businesses 
operating abroad in the digital space, as has been discussed 
somewhat here today already.
    Despite ongoing efforts with Pillar 1, Canada continues 
moving toward implementation, obviously, of its own DST, as was 
discussed, as do nations across Europe and around the world. 
Nations like Australia and Denmark, to name just two, also 
continue to pursue domestic content requirements for streaming 
services, placing even more demands on American businesses.
    When policies like these are implemented by partners with 
whom the United States has trade agreements, they don't just 
undermine efforts to find a global standard, which Pillar 1 
proponents say they are attempting to achieve. They also 
violate commitments made in trade agreements, like USMCA, and 
also the Australia/U.S. Free Trade Agreement.
    We need an agreement which limits the ability of foreign 
governments to unfairly tax American companies, and we need it 
to do more than merely stop a single method among the many that 
foreign governments are using to target them. Pursuing targeted 
trade remedies should never be the first resort, but I fear 
that ongoing international efforts to implement DSTs and other 
requirements intended to directly target American companies 
could lead us there.
    Mr. Bunn, in your opening statement you reflected on 
international implementation of DSTs and the potential effect 
of DSTs and other requirements in the trade space. Will Pillar 
1, in its current form, put a stop to these efforts?
    Mr. BUNN. In its current form, Pillar 1 identifies some 
DSTs that would likely go away once countries sign on to it, 
but that is not the full scope or the full universe of these 
discriminatory policies.
    Mr. SMITH. And so, I mean----
    Mr. BUNN. Some of them would likely remain, or there would 
be new mutations to get around the definitions within Pillar 1.
    Mr. SMITH. And how would you propose moving forward to 
address some of these concerns?
    Mr. BUNN. That is the challenge. If we remove ourselves 
from this negotiation, then there is less leverage to try to 
tighten the rules in the context of the negotiation. And you 
mentioned targeted trade remedies. I am not certain that those 
would be sufficient to change the policies of other countries 
without just an escalating trade war.
    This is the real puzzle of the problem. You can increase 
the types of tools or increase the leverage that the U.S. might 
have in those negotiations and kind of see how it goes, but I 
don't think there is--there is a path outside of this 
multilateral negotiation that leads to more certainty on 
elimination of digital services taxes without some sort of 
trade war.
    Mr. SMITH. Well, thank you. I think that these perspectives 
are important and that we continue to have this conversation. 
Obviously, we might have a separate trade subcommittee, but 
let's face it, trade policies from the Ways and Means Committee 
involve a lot of taxes and tax policies. So we might have 
separate subcommittees, but we definitely need to work together 
and to think and strategize together on behalf of American jobs 
and innovation and to apply ideas moving forward that will not 
shortchange us in the big picture.
    So thank you again, Mr. Chairman. I yield back.
    Chairman KELLY. Thank you. That is a great perspective 
coming from the chairman of the Trade Subcommittee.
    Jimmy Gomez, 5 minutes.
    Mr. GOMEZ. Thank you, Mr. Chairman. From the title of this 
hearing, at first glance, and some of my colleagues' testimony 
or statements, it seemed like my colleagues on the other side 
of the aisle were dead set on criticizing the Biden 
administration on just about anything, including Pillar 1.
    Where the administration actually continues to actively 
fight for American interests by insisting on changes that will 
level the playing field for the U.S., there is actually a great 
deal of bipartisan agreement on the goals of Pillar 1. On 
Amount A, we agree that the U.S. should not be discriminated 
against with digital service taxes designed to target only 
American businesses and that the rules to enforce this must be 
uniform throughout all jurisdictions.
    On Amount B, we agree that American companies and their 
subsidiaries should be able to operate across borders at arm's 
length in a stable, international tax system with wide scope, 
mandatory rules to ensure high certainty and low compliance 
cost. The administration has stated that they are for making 
Amount B mandatory and not optional, and there are--a lot of us 
agree with that.
    When it comes to the cost of Pillar 1 or the effects on 
revenue, it is considered to be negligible. Some people would 
even say it is a rounding error. But it is a small price to pay 
for international tax certainty for American businesses.
    There seems to be consensus on the principles of Pillar 1. 
So it is strange to me that, rather than supporting the Biden 
administration negotiating strategy of using our leverage to 
insist on provisions that level the playing field, critics on 
the other side of the aisle seem to prefer to tank a deal on 
Pillar 1 altogether.
    But what is the alternative? Continued good-faith 
negotiations are the only thing preventing the worst outcomes. 
Sticking our heads in the sand and refusing to negotiate in 
good faith with the international framework will not make these 
challenges go away.
    As more commerce moves online, countries with suspended 
digital service taxes will re-implement them. And, if we pull 
out of these negotiations with no alternative, other 
jurisdictions, like Canada and the EU, as a whole, will join 
them.
    The previous administration threatened to escalate Trump's 
trade war by imposing retaliatory tariffs on key industries 
from countries that instituted digital service taxes.
    Ms. Funkhouser, who pays the price for the higher tariffs 
of a trade war, and will those consequences be worse than 
continuing the Biden administration strategy of insisting on 
reasonable good faith improvements to Pillar 1?
    Ms. FUNKHOUSER. Thank you very much for the question, 
Representative Gomez.
    At the end of the day, global tax policy challenges require 
global tax policy solutions. That is why ITI has been so 
supportive of administrations--I mean, going back several 
administrations now, participating in good faith in those 
negotiations to secure a more predictable and certain 
international tax system.
    So that is what is going to be the best outcome for U.S. 
competitiveness is an international--domestic and international 
tax environment in which companies have a certainty so that 
they can make investments, so that they can pursue R&D, so that 
they can engage with other markets.
    Mr. GOMEZ. Mr. Sprague, do you see any viable alternatives 
to avoiding DSTs and trade wars other than the administration 
continuing in multilateral Pillar 1 negotiations, while 
insisting on commonsense changes like a mandatory Amount B?
    Mr. SPRAGUE. I really think the continuing engagement on 
the Amount A concept is the only realistic way the DSTs will go 
away. If there isn't a treaty like Amount A, I would expect the 
existing DST taxing countries to retain them and other 
countries like Australia to impose them.
    Mr. GOMEZ. Thank you. One thing I want to make clear is 
that Congress should be involved. But the administration has 
the correct position of negotiating, and people shouldn't 
assume negotiating is a sign of capitulation or weakness when 
it comes to American interests or putting America first.
    I think it is the appropriate course of action, and if 
things do not work out, we always have other tools in the 
toolbox to address violations or discriminatory treatment of 
American companies.
    With that, I yield back.
    Chairman KELLY. Mrs. Miller, you are recognized for 5 
minutes.
    Mrs. MILLER. Thank you, Chairman Kelly and Ranking Member 
Schneider.
    And thank you to all four of you witnesses for being here 
today.
    I have been acutely concerned with the actions taken by the 
OECD and the Biden administration's failure to protect American 
interests over the course of the past several years.
    I traveled to the OECD with Chairman Smith and my 
colleagues last summer to tell these unelected globalist 
bureaucrats that they are going down the wrong path, and the 
U.S. tax base is not a piggy bank for Europe socialist 
policies. These failed negotiations have left the United States 
in a much worse place than when President Trump started the 
process to protect our interests from the rising threats of the 
digital services taxes.
    Biden's Treasury negotiators were either asleep at the 
wheel, or actively undermining U.S. companies, which will 
result in our tax dollars and jobs being sent overseas. Either 
way, this result is unacceptable. In the coming months, 
Treasury must do everything in its power to mitigate the damage 
that they have caused at the OECD.
    The whole point of these negotiations was to protect U.S. 
companies from the digital service taxes, but France, Canada, 
and other countries have already moved forward, and the OECD 
process is unlikely to solve this issue.
    As President Trump once wrote in ``The Art of the Deal,'' 
the worst thing you can possibly do in a deal is to seem 
desperate to make it. This makes the other guy smell blood, and 
then you are dead. I urge President Biden to heed the advice of 
his predecessor and, hopefully, successor.
    Mr. Bunn, can you go into further detail on why the U.S. is 
negotiating at the OECD on Pillar 1 and Pillar 2 in the first 
place?
    Mr. BUNN. Thank you for the question. I think a little bit 
of the history of this is going to, I think, shed light on 
where we have come relative to where we were a few years ago.
    So, after the passage of the Tax Cuts and Jobs Act, other 
countries looked at our policies like GILTI and said, ``Well, 
maybe there can be a global agreement based off of this newly 
designed U.S. tax tool.'' We could call that a global minimum 
tax. And at the same time, with the digital services taxes that 
were being adopted, it looked like a decent path forward would 
be multilateral negotiation to eliminate those.
    Back in 2019, Secretary Mnuchin sent a letter to the OECD 
that outlined concerns with the direction for Pillar 1 and 
suggested that maybe this should be an optional route for 
companies. And, in my view--this is my interpretation of the 
letter--is that if there was going to be a new multilateral 
agreement on allocating taxing rights, that the design of that 
should be attractive enough with certainty and stability and 
things of that--that companies may want to opt in to that.
    And then, separately, the position of the Trump 
administration was to look at what was being negotiated on the 
global minimum tax and say, other countries, you are welcome to 
do that but as long as it doesn't implicate U.S. law and 
require U.S. law change.
    Where we are today is we are--as we talk about Amount B, 
there are countries that are looking at Amount B and saying, 
``Well, we might want that to be optional.'' And on the global 
minimum tax side, the agreement has already eroded part of the 
U.S. tax base on GILTI. So that is where we have come from, or 
the journey we have been on over the last several years with 
these negotiations, and it is not clear that there is an 
opportunity to move back to that previous negotiating position.
    Mrs. MILLER. Shame.
    Mr. Minor, can you explain how the current definition of 
digital services taxes in Pillar 1 fail to meet the moment, and 
how could these definitions be improved in further negotiations 
to protect U.S. interests?
    Mr. MINOR. Yeah. So, under the current language, there is 
some flexibility that an aggressive jurisdiction could simply 
see how the DST is defined and then draft its version of what I 
would then call DST that does not fall within the forbidden 
elements of the DST prohibited under the current draft of the 
MLC.
    There is also an interesting exception for policy for 
imposing a DST in the current MLC, which looks like more of a 
political provision than, you know, a technical provision. And 
we have called for--there must be a more airtight version of 
the definition of DST to keep jurisdictions--prevent 
jurisdictions from being tempted to plan around what definition 
is in the MLC now.
    Mrs. MILLER. Okay. One more quick question.
    Would Pillar 1 be an easier way to comply within its 
current form, or would it make matters worse?
    Mr. MINOR. Well, it is still being amended, and so, it is 
difficult to come to that conclusion until we have seen the 
final text of the MLC.
    Mrs. MILLER. Okay.
    Thank you, Mr. Chairman. I yield back.
    Chairman KELLY. Thank you.
    So Mr. Schneider and I were just talking back and forth 
here. This is the first time I have ever been in a hearing like 
this where nobody says, this is the Republican witness, this is 
the Democrat witness, as opposed to, these are all people who 
are concentrating on policy and not politics.
    So I think if we start looking at our time here and what we 
are able to actually do--first of all, for the four of you to 
leave what you do every day to come here, God bless you. The 
only thing that is worse is having to come here every day.
    But what we are talking about, this is so incredibly hard 
to understand. But for you to come and talk with us--and I 
think we will continue down this road.
    The one thing that Mr. Schneider and I agree on: Congress 
has a role to play. My big concern always was from the 
beginning, when do we actually get involved? And I think, if 
you want to talk globally, the rest of the world looks at us 
and says, ``When the United States get weak, somehow we get 
stronger, except, except when something tragic happens in the 
world.'' We are the first responder to every single thing that 
happens out there. So it is really incredibly important that we 
have a very strong economy.
    I am going to fall off my stump here in a minute, but I 
mean this sincerely. Thank you all for taking the time, and 
thank you all for your expertise to come here. We sure 
appreciate it.
    So, with that, the meeting is adjourned.
    [Whereupon, at 4:56 p.m., the subcommittee was adjourned.]
      

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