Bloomberg Tax recently spoke with Liz Chien, vice president of global tax and chief tax counsel at Ripple Labs about the changing U.S. and international tax landscape—and how a tax and trade war stemming from the global digital tax discussion is the last thing needed.
Ripple Labs is a technology company developing cross-border enterprise payments solutions. Chien leads the company’s tax function, and she and her team work cross-functionally on matters ranging from business and transaction advisory, to digital asset tax issues, global mobility, tax operations and compliance.
Before Ripple, Chien served as a policy adviser at the Organization for Economic Cooperation and Development, where she worked on international tax reform. Previously she was global tax director for GE Digital, tax director at Softbank Group International, and Asia-Pacific head of tax for Google. The views she expresses here are her own and don’t necessarily reflect the position of Ripple.
Bloomberg Tax: You were already dealing with the 2017 tax overhaul when the crisis hit. How will the changes to the tax code wrought by the stimulus legislation affect your business? What further legislation would you like to see from Congress?
One of the most important criteria for evaluating any type of tax policy change is certainty. The tax changes introduced in the CARES Act were generally beneficial to businesses in that they promoted increased liquidity and capital for businesses through tax levers. One example is the five year NOL carryback, which should result in cash tax refunds for qualifying years. However, it is concerning that subsequent “phase 4” legislation passed out of the House—barely two months after the CARES Act was signed into law—would substantially unwind the NOL carryback provision. Such a volatile policy environment ratchets up the uncertainty for taxpayers, making it difficult to forecast cash and working capital, and ultimately to meaningfully evaluate strategic business decisions relating to hiring and investment.
In terms of future stimulus legislation, industry participants would welcome provisions that increase liquidity and reasonably-priced access to capital.
Bloomberg Tax: In our preliminary discussion, you described the benefit of a tax policy that would encourage cryptocurrency holders to lend, something that could be useful as the economy struggles under the weight of the pandemic. How would that work?
The digital asset market has an estimated market capitalization of $266 billion (as of June 18). Market participants estimate that at least $50 billion of this total would be available for lending, if there was certainty that such transactions would not cause lenders to recognize gains in the loaned digital assets. Securities loans currently benefit from this treatment under Section 1058 in the Internal Revenue Code, but because digital assets are not classified as securities, potential lenders may not rely on Section 1058 for digital asset loans. In the absence of such certainty, the tax exposure to potential lenders is too high for them to get into the market. In times of economic uncertainty and contraction, new sources of capital should be welcomed into the market, both as a channel of liquidity and capital for businesses that may have difficulty borrowing from conventional lenders, and as a useful complement to an accommodative monetary policy.
Bloomberg Tax: OECD nations and partner countries have been working to create standards for taxing digital businesses. On June 17, President Trump’s trade representative, Robert Lighthizer, told Congress that the U.S. is pulling out of the talks, though he left open the possibility that a deal could still be reached. What were your hopes for the initiative, and do you think it might still succeed?
That is a complex question due to the history and context of how we got to there on digital tax issues, but my hope is that a coherent, simple, and equitable multilateral solution can still be found with an OECD-stewarded process. The Pillar 1 project has always been more politically-driven than technically-driven, and was born out of a political compromise between the U.S., which was (and is) staunchly opposed to differentiating or ring-fencing “digital” as a basis for any type of tax, and many governments around the world, who felt they fairly deserved increased revenue from digitalized business models that collect and process personal data from their citizens. Given these opposing positions, it is difficult to see a path forward resulting in consensus without both sides softening their current views on digital taxation.
It is hard to dispute the principle that gross basis taxes, such as digital services taxes (DSTs), are suboptimal. However, taxes are primarily a cost of doing business for multinational enterprises, and it is critical to have clarity on how to measure and estimate those tax costs, which in turn informs strategic business decisions around product pricing, expansion into new products and markets, capital and headcount investments, etc. Countries have a sovereign right to tax and an obligation to respect their international agreements. Many argue that DSTs are disguised tariffs that violate international trade agreements. Regardless, multinational enterprises are daily living with the reality of the proliferation of unilateral, uncoordinated DSTs around the world—all of different scopes, rates, and compliance procedures. The OECD estimates that 40-50 DST regimes are expected by the end of 2020. Given this reality, mitigating the damage from these regimes is critical. In this regard, there could be a benefit from the OECD formally or informally facilitating coordination on a uniform DST regime to ensure coherence globally, to undertake technical work on whether DSTs can be reformulated as net-basis taxes or taxes covered under treaty, and to establish the equivalent of a “one-stop shop” for DST compliance.
Faced with the resolve of European and other countries to take action on digital tax this year, it is unfortunate that the U.S. is now signaling that it will not entertain even an interim compromise on digital tax, and appears to be stepping back from the OECD Pillar 1 process, as it looks to Section 301 investigations and tariffs in an attempt to increase its leverage. In the midst of a global economy already facing record unemployment, stagnant exports, and negative interest rates, a tax and trade war is the last thing the world needs.
Bloomberg Tax: The 2017 tax act was supposed to give companies a tax incentive—in the form of a lower effective tax rate—to bring home overseas IP. But if such companies are suffering losses because of the pandemic-induced economic downturn, they won’t see that benefit. Is that something that Congress might address in the next stimulus package?
Thanks to the Tax Cuts and Jobs Act (TCJA), companies that decide to bring IP back to (or keep IP in) the U.S., hire in the U.S., and sell from the U.S. can qualify for a deduction under the foreign derived intangible income (FDII) regime. Importantly, this new deduction is only available when a company is profitable and has positive U.S. taxable income. However, in a year where a company continues to sell from the U.S., but generates losses as a result of an economic contraction (like the current pandemic-driven downturn), the company then loses the benefit of the FDII deduction for its goods and services exports from the U.S. From a policy perspective, in this difficult economic environment, it is more important than ever to provide support for U.S. companies to operate domestically and sell abroad, rather than the reverse. In order to effectuate that policy objective, legislation is needed to allow a company to claim FDII benefits even in a taxable loss year.
Bloomberg Tax: Even for a global tech company, pandemic-mandated remote working arrangements must be terribly disruptive. How has the crisis affected your team and how you work? What lessons would you share?
With video conferencing technology and other workplace messaging and sharing tools, the remote working arrangements have not been as disruptive as initially anticipated. While the intangible value of chance hallway discussions or white-boarding sessions, or catching up with colleagues over coffee cannot be substituted by 2-D video conferencing, we have adapted to remain productive and engaged these past three months.
We’re also putting a clear emphasis on mental health, and taking time away when needed. I have also found that catch-up meetings purely for socializing are critically important to maintain engagement and keep the human connection alive.