USA Law and Practice Contributed by: Devon M. Bodoh, Joseph M. Pari and Blake D. Bitter, Weil, Gotshal & Manges LLP
4.5 Digital Services Tax The US does not impose a federal tax specific to digital services, and income from digital services is subject to tax under the general income tax rules. The US generally views the imposition of taxes spe - cifically targeted at digital services by non-US juris - dictions as unfairly targeting US businesses and has threatened retaliatory tariffs against certain countries’ imposed unilateral digital services taxes. Additionally, although not ultimately enacted, Section 899 would have identified digital services taxes as extraterritorial and discriminatory, thus imposing additional taxes on jurisdictions that have a digital services tax. However, several US states and localities impose taxes that are specific to digital services. 5. Anti-Avoidance and Anti-Evasion Measures 5.1 Definition and Identification of Tax Fraud, Evasion, Tax Avoidance and Abusive Schemes Tax avoidance in the US is generally defined differently from tax evasion and tax fraud. More specifically, tax avoidance is generally an action taken to lessen tax liability that is generally legal (ie, allowed under the Code or Treasury Regulations). Tax evasion, however, is the failure to pay or a deliberate underpayment of taxes (which may include taking actions that are not allowed by the Code or Treasury Regulations), includ - ing wilful attempts: • to evade or defeat any tax imposed by the Code; • failure to file tax returns and pay any tax; • failure to collect and remit taxes required to be col - lected by a person under the Code; • making fraudulent tax returns or statements; • issuing fraudulent withholding exemption certifi - cates; and • concealing property or destroying or falsifying records in connection with an agreement or com - promise with the IRS. The Code does include a general anti-avoidance rule that may disallow benefits under the Code if a transaction lacks “economic substance”. Economic
Furthermore, the US has enacted country-by-country reporting consistent with the BEPS recommendations and has the limitation on benefits article in most of its income tax treaties. It should be noted that US also applies a corporate minimum tax (effective from 1 January 2023) that generally imposes a 15% minimum tax on the finan - cial statement income for US corporations (including consolidated groups) with financial statement income of more than USD1 billion for three taxable years (or USD100 million in the case of a US corporation that is part of a non-US multinational group that has com - bined financial statement income of more than USD1 billion). The US also enacted (in the TCJA and further modified by the One Big Beautiful Bill Act) a minimum tax on the income of a US person’s controlled foreign corporations (now called “net tested income”, which is taxed immediately but at a reduced rate). However, the net tested income does not generally qualify under Pillar Two because it is not calculated on a jurisdic - tion-by-jurisdiction basis. 4.4 Specific Features or Deviations of Pillar Two As described in 4.1 Pillar One – Amount B , the BEPS Executive Order effectively pulled the US out of the Global Tax Deal. Following the BEPS Executive order, early drafts of the One Big Beautiful Bill Act included a provision (referred to as “Section 899”) that required an increase in tax rates, removal of certain tax exemp - tions, and other retaliatory measures on countries (and such countries’ residents) that have “extraterritorial” or “discriminatory” taxes. Section 899 was understood to target taxes such as Pillar Two’s undertaxed profits rule, digital services taxes, and other similar taxes. This retaliatory provision was not included in the final One Big Beautiful Bill Act in response to the deal with the G7 to exempt US companies from certain aspects of Pillar Two. In response, the OECD recently issued a “Side-by-Side Package” following the USA’s agree - ment with the G7 countries. This package includes a number of items, including a side-by-side regime that may effectively shield US-based multinational compa - nies from the application of the global minimum tax rules (eg, the income inclusion rule and the under - taxed profits rule) beginning in 2026.
507 CHAMBERS.COM
Powered by FlippingBook