Current Developments in

International Taxation
By Huanyu Ouyang and James G.S. Yang*

1. Introduction

The arena of international taxation has been evolving rapidly in the last decade.
There are built-in deficiencies in the tax law. An international transaction crosses
the national boundary. Different countries have different tax rates and different
tax policies. As long as there is a difference in tax treatment, it breeds tax loop-
Loopholes = Echappatoire holes. A multinational corporation (MNC) can always take advantage of it.
In recent years, the abuse of the tax loophole has become so rampant that it has
triggered the Organization of Economic Cooperation and Development (OECD)
to take action by promulgating the “Action Plan on Base Erosion and Profit
Shifting,” known as BEPS.1 It also prompted the U.S. Government to enact a new
tax law of “Tax Cuts and Jobs Act of 2017” (TCJA) that imposes a new tax regime
of “Base Erosion and Anti-Abuse Tax,” which is referred to as BEAT.2
Worse yet, the modern Internet commerce has exacerbated the abuse of a con-
trolled foreign corporation (CFC) as a means of shifting profit from one country
to another. As a consequence, it erodes a country’s tax base. It is now brewing up
a new tax concept called “digital service tax.”3
In the past, the U.S. international tax policy has always been based on a
so-called “worldwide tax system.” It has caused the U.S. MNCs to be in a disad-
vantageous position in the international marketplace. As a result, it has caused
the U.S. Government to change its international tax policy to a “territorial tax
system” under the new TCJA. This is a revolutionary change in the principle of
international taxation.
The above elements are the current developments in the international tax scene.
The purpose of this article is to investigate the evolution of the tax law leading to
the creation of BEPS, digital service tax, change in U.S. tax policy and BEAT. It
further explores the details of these new tax components. More importantly, it
offers some tax strategies in this new tax environment. It also presents many exam-
HUANYU OUYANG, B.A., is a Director ples for illustrative purposes. These aspects sustain the substance of this article.
of the Finance Department of Jiangxi
People’s Hospital, Jiangxi, China. JAMES 2. OECD’s Base Erosion and Profit Shifting
G.S. YANG, M.Ph., CPA, CMA, is a Professor
Emeritus of Accounting at Montclair
State University in Montclair, New Jersey, A U.S. MNC may earn income from domestic sources as well as foreign
U.S.A. sources. However, how both sources of income are taxed in the United States

September–October 2019 © 2019 H. Ouyang and J.G.S. Yang 37

 Current Developments in International Taxation
is completely different. The domestic-sourced income is
always taxable immediately without any delay; whereas,
the foreign-sourced income may be deferred or even
exempted. Before the new TCJA, the foreign-sourced in-
come could be deferred until the cash dividends are dis-
tributed back to the United States.4 After the TCJA, the
foreign-sourced income may be tax-free when the cash
dividends are received.5
Evidently, under any circumstances, the for-
eign-sourced income is more advantageous than its
domestic counterpart. This difference in tax treatment
inevitably provides an incentive for a U.S. MNC to seek
income from abroad. This is the starting point of profit
shifting, and this is a tax loophole. The vehicle to carry
out the strategy of profit shifting is the use of a CFC. It
results in erosion of the tax base from one country to an-
other, which led the OECD’s action to prevent it. Here
are some examples to show how an MNC exploits it.
2.1 Apple’s CFC in Ireland
The U.S. tax rate was always the highest in the world at
35 percent, while Ireland was the lowest at 12.5 percent.
There is an opportunity for tax maneuvering. In 1984,
Apple Inc. went to Ireland to set up Apple Operation
International (AOI) as a CFC that produced Macintosh
computers. As such, Apple’s profits in Ireland were not
taxable in the United States until the cash dividends
were distributed. Apple further established Apple Sales
International (ASI) in Ireland. ASI also operated many
branches in Europe. All sales in these branches were in-
tentionally designed to be sales from ASI. What was the
purpose?
AOI negotiated with the Irish Government that the
profits from AOI should be tax-free in Ireland because it
is a foreign-sourced income. Both sides agreed. Further,
AOI charged unusually high management fees on ASI. As
a result, ASI had little profit and paid a meager amount
of tax to Ireland. All profits went to AOI. However, AOI
never distributed cash dividends back to the United
States. Therefore, the profit is not taxable in the United
States either.
The same strategy applied again when Apple switched
to iPod in 2001 and to iPhone in 2007. It is contin-
uing today. Obviously, there must be a tax loophole. It
is the use of a CFC as a vehicle to exploit a tax loophole.
ASI diverted the profits from all European branches to
Ireland under AOI. AOI converted Apple’s profits from
Ireland to the United States, but the profits in the United
States is tax-deferred. As a consequence, Apple’s profits
were never taxed anywhere in the world.6
38 INTERNATIONAL TAX JOURNAL
In other words, the tax base was shifted from all
European countries to Ireland, and then to the United
States, which has distorted the operating performance of
all MNCs. Furthermore, it caused misallocation of eco-
nomic resources in all countries as well. It triggered the
OECD to take action, as explained shortly. This is a cur-
rent development in the international tax scene.
2.2 Starbucks’ Transfer Pricing
The Netherlands is a tax shelter country that offers many
tax incentives to MNCs. In 2015, Starbucks, United
States went to the Netherlands to set up Starbucks
Manufacturing Company’s coffee roasting operations.
Starbucks Manufacturing then established Switzerland
Trading Company in Switzerland dealing with the coffee
bean purchasing business. Starbucks Manufacturing fur-
ther hired Alki Company in the U.K. to engage in coffee
research endeavors. They all belong to the same parent
company of Starbucks, United States.
Why would Starbucks get involved with so many dif-
ferent countries? The tax rate was at 25 percent in the
Netherlands, at 19 percent in the U.K. and at 15.5 per-
cent in Switzerland. There is an advantage of shifting in-
come from a higher-tax country of the Netherlands to
the lower-tax countries of Switzerland and the U.K.
Starbucks Manufacturing purchased coffee beans from
Switzerland Trading at an inflated price. It further paid
an unusually high research fee to Alki. As a result, the
profits of Starbucks Manufacturing are greatly under-
stated. The purpose is to shift profit from the Netherlands
to Switzerland and the U.K.
This strategy is known as intercompany transfer
pricing.7 This is a common practice in international
transactions. However, it has become so abusive in re-
cent years that it has caused the OECD to step in. This
is another current development in the international tax
arena.
2.3 Fiat’s Intercompany Interest Expense
In profit shifting, intercompany interest is another
strategy. Luxembourg has the highest tax rate in Europe
at 29 percent. It has branches in every country in Europe
to sell its cars. In 2015, it set up Fiat Finance and Trading
Company in Luxembourg that extended loans to all
branches. However, it purposefully charged interest at a
rate far lower than the current fair market rate. The pur-
pose is to retain the profits in the branches rather than in
Luxembourg. This strategy would result in a lower profit
in Luxembourg and paying less income tax.8
September–October 2019
 In other words, Fiat attempts to shift profit from a
higher-tax country of Luxembourg to the other lower-tax
countries in Europe. Fiat is now employing interest ex-
pense as a vehicle to achieve the objective.
2.4 SAP’s Royalty
The strategy of shifting profits from one country to an-
other includes not only the use of CFCs, intercompany
transfer pricing and intercompany interest expense, but
also the intercompany royalty. The tax rate in the United
States was 35 percent before the new TCJA, while
it was only 15 percent in Germany at that time. Any
amount of income shifting from the United States to
Germany can save income tax by as much as 20 percent
(35% − 15%).
SAP is an industrial software development company in
Germany. It set up a subsidiary in the United States to
sell its software by charging extremely high royalty fees.
The purpose is to shift income from the United States to
Germany. It will result in tax savings for both entities as
a whole.9 Is it legal?
The intercompany transaction is an ordinary and nec-
essary operation for an MNC. There is nothing wrong
with Starbucks purchasing coffee beans from a subsid-
iary. It is necessary for a Fiat branch to borrow funds
from its parent company. SAP is entitled to royalty fees.
Unfortunately, it is not an arm’s-length transaction. The
prices may not conform with the fair market value. It is
vulnerable to income manipulation. As long as the inter-
company price is within the normal range, it should be
permissible. More often than not, however, it is abused.
Apple, Starbucks, Fiat, and SAP are not the only four
that attempt to shift income from one country to an-
other. There are many more, such as Amazon using
Internet commerce, Google employing search engine,
McDonald’s transferring income between subsidiaries,
Microsoft taking advantage of software, Gap adding
merchandise mark-ups, Ikea charging a patent fee, etc.
These profit-shifting abuses have become so rampant
in the last decade that the OECD has begun to take ac-
tion. The next section investigates the details. This is an-
other current development in international taxation.
3. OECD’s Action on Profit Shifting
Given widespread abuses of the tax loopholes and the
ill-effects of profit shifting, in 2012, the G20 requested
the OECD to develop an action plan to curtail it. In
2013, the OECD issued its “Action Plan on Base Erosion
September–October 2019
and Profit Shifting (BEPS),” as mentioned above, in
which it developed 15 actions. In 2015, the OECD
further promulgated “Base Erosion and Profit Shifting
Project: Action 15: A Mandate for the Development
of a Multilateral Instrument on Tax Treaty Measures to
Tackle BEPS,” in which it recommended that all coun-
tries restructure their treaties to eliminate any discrepan-
cies.10 In 2016, the OECD announced a “Multinational
Convention to Implement Tax Treaties Related Measures
to Prevent Base Erosion and Profit Shifting,” in which 85
countries have signed the agreement.11
Among the 15 actions, here are some important prob-
lems today.
3.1 Tax Problems of the Digitized
Economy
OECD’s Action 1 points out the tax problems that have
arisen from the modern digital economy. When mer-
chandise is sold, it immediately involves a question as
to which country has the taxing authority. In the past
long history, it belongs to the country where the seller is
located. That is, only when the government renders its
services to a seller can it derive the taxing authority. This
concept was known as “physical presence.”
Nowadays, merchandise is sold through the Internet.
More often than not, the seller has no physical presence
in the country where the merchandise is sold. The seller
and the buyer are not located in the same country. Then,
does the selling country still have the taxing authority?
Worse yet, many products can be digitized today,
such as movies, music, e-books, software, etc., just to
name a few. These products are invisible and can be
sold by means of an email. The seller exists only on
a computer website. It has no physical presence any-
where in the world, but it does derive profits from the
country where the merchandise is sold. Can the selling
country impose a tax on an out-of-country seller? If
affirmative, it is termed as “economic nexus.” It means
that, as long as a seller derives economic benefits from
a country, the selling country can impose a tax on the
seller.
Actually, these problems stemmed from the confusion
about the “source of income.” Where does an online sell-
er’s profit come from? Does it come from the country
where the seller is located or where the profit is derived?
This ambivalent treatment creates a tax loophole. It
enables an MNC to shift profits from one country to an-
other to avoid tax. The OECD now takes action on it as
well.12 This is another current development in the arena
of international taxation.
39
 Current Developments in International Taxation
3.2 Mismatch of International
Transactions
OECD’s Action 2 investigates the mismatch of a trans-
action between the parent company and its CFC. Quite
often, the parent company may borrow funds from a
CFC. The parent pays interest to the CFC. The amount of
interest is deductible on the parent, but it may not be tax-
able on the CFC because the CFC’s host country adopts
a “territorial tax system” by which the foreign-sourced in-
come is non-taxable. It results in double non-taxation on
both sides of the same transaction. Obviously, the interest
expense is not matched by the interest income. This is
another tax loophole that an MNC may take advantage
of it. The OECD attempts to eliminate this discrepancy.13
3.3 Abuse of Intercompany Interest and
Royalty
The most abused intercompany transaction between the
parent company and its CFC is the interest expense and
the royalty fees because both can be arbitrary and lack a
fair market value. For example, what is the fair royalty for
Pfizer to ask its subsidiary in a foreign country to perform
a test on an experimental medicine? It is unlikely that
there is a comparable price. If so, Pfizer may employ it as a
vehicle to shift income from the United States to a foreign
country. How can it be prevented? It may not be possible;
nevertheless, OECD’s Action 4 raises the concern.14 In
fact, there was such a case, i.e., Fiat as mentioned before.
3.4 Misleading Transfer Pricing
There is another intercompany transaction that is very
common in daily operations. It is the merchandise sales
between the parent company and its subsidiary. This
time, there should be a fair market value, but it involves
a mark-up rate. It is known as “intercompany transfer
pricing.” Can there be any abuse? Unlikely; nevertheless,
OECD’s Action 7 cautions that the intercompany transfer
pricing must be in conformity with the principle of a one
arm’s-length transaction. It means that the amount of
mark-up must be in line with the creation of value.15
Unfortunately, in the real world, the misleading
transfer pricing did happen before. It was the case of
Starbucks, as mentioned earlier.
3.5 Establishing Multilateral Instruments
OECD’s most important proposition of the Action Plan
is Action 15. There are many tax treaties among countries.
40 INTERNATIONAL TAX JOURNAL
More often than not, these treaties are quite different from
one country to another. One country may negotiate for a
better tax treatment than the other. The typical example
was the case of Apple in Ireland, as mentioned before.
Discrepancies in tax treaties among countries create tax
loopholes, and the MNCs undoubtedly take advantage
of them. It results in unfair competition among MNCs.
Worse yet, it shifts the tax base from one country to another.
Action 15 calls for an international conference to
identify these discrepancies and modify all tax treaties
in a way to eliminate the differences. It may be a monu-
mental task to perform; at least, the OECD has initiated
the efforts.16
In fact, the Action Plan proposes many more actions.
This section only delineates its essence. It serves to point
out the current developments in international taxation.
Also, there is a new movement concerning Internet com-
merce. It is called “digital service tax,” as is explored in
the next section.
4. Digital Service Tax
The contemporary digitized product involves two impor-
tant features. First, the product requires high-technology
with a tremendous amount of investment capital and re-
search efforts. Secondly, the product is produced in one
country but used in every country in the world. It results
in the following two problems:
4.1 What Is the Source of Income in the
Digital Age?
A high-tech product involves many producers, many
sellers and many users in many countries. For example,
Apple, Inc. is a U.S. corporation, but it set up a CFC
in Ireland to take advantage of the lower-tax rate. Apple
invented iPhone in the United States, but it outsourced
the production in China. John is an Irish citizen working
as a shoe salesman. He purchased an iPhone in Ireland
for his job, but he traveled to the U.K. to sell the shoes.
John used his iPhone wherever he went. Which country
has the taxing authority on the profit of the iPhone?
This question involves the United States, Ireland,
China, and the U.K. Actually, John traveled to all coun-
tries in Europe, with the U.K. as an example for sim-
plicity. (A) Can the United States claim that it has the
taxing authority because the major endeavor of an iPhone
is the invention? The rest of the efforts is insignificant.
(B) With the same token, can China also claim the taxing
authority given the fact that it produced the product?
September–October 2019
(C) Can Ireland do the same by means of the aspect that
Apple’s CFC in Ireland is an Irish-registered corporation?
Its tax domicile is in Ireland. (D) Likewise, can the U.K.
also assert the same taxing authority because the iPhone
is actually used in the U.K. The iPhone cannot produce a
profit until it is utilized to perform its intended function.
The digitized product of an iPhone has indeed created
a brand-new taxation principle. The country where the
iPhone is used is entitled to claiming the taxing authority
as well, i.e., the U.K. in this case. Apple indeed has “tax-
able digital presence” in the U.K, though it has no physical
presence there, but it is the ultimate true source of income.
This same principle can also be applied to many other
similar products, such as software, email, e-books, mobile
banking, music, online sales, data use, advertising, etc.
In other words, the concept of “source of income” is
no longer where the product is produced or sold as was
the guiding principle in the past tradition such as Sears,
not even where the product is invented as claimed by
Apple in recent years, but where the high-tech product is
actually and finally used by a consumer such as Google.
A contemporary concept of “digital service tax” is now
born. This is another current development in interna-
tional taxation.17
4.2 How Should the Digital Base Be
Taxed?
The concept of “digital service tax” was initiated by the
European Union only in the last year (except music and
movies) on a high-tech company, not on an individual
consumer. In fact, Italy’s 2019 Budget imposes such a
tax at a rate of three percent on its gross sales revenue
exceeding EUR750 million.18 It can generate tax revenue
of EUR5 million a year.19 The typical companies affected
are Apple, Amazon, Google, Facebook, and Alphabet. It
plans to start the tax collection in 2020.20
The above two developments are occurring in Europe
now. On the United States’ side, there are also two new
developments as well. One is the change from the world-
wide tax system to the territorial tax system, while the
other is the imposition of a new tax regime called “Base
Erosion and Anti-Abuse Tax (BEAT).” Both are scruti-
nized in the next two sections.
5. Change from a Worldwide to a
Territorial Tax System
A U.S. MNC invariably derives income not only from do-
mestic sources but also from foreign sources. The former
September–October 2019
is, of course, taxable in the United States. However, is it
also true for the latter? If so, it is known as the “world-
wide tax system”; otherwise, it is termed as “territorial
tax system.” This is a fundamental policy in international
taxation. In its long history, the United States always
adopted the former. Not until the new TCJA was issued
in 2017 did it change to the latter. This is a revolutionary
change in the international taxation principle of historic
proportion.
What is wrong with the worldwide tax system? In the
past, the U.S. tax rate was always higher than that of
its foreign counterparts. Thus, it would be more profit-
able to earn profits from a foreign source than that from
a domestic counterpart. As a consequence, many U.S.
corporations moved abroad. In fact, in the last decade, a
total of 76 U.S. corporations have done so, resulting in
$20 billion losses in tax revenue.21
Why did the United States take so long to change
its tax policy? By 2015, the foreign taxable income
accounted for as much as 23 percent of the total U.S.
taxable income.22 It indicates that a substantial portion
of the U.S. tax revenue comes from abroad due to rapid
globalization of the U.S. economy. Worse yet, this pro-
portion is ever increasing at a rate of 25 percent per
year, while the domestic portion at only 4.3 percent.23
The United States simply cannot afford to lose its for-
eign-sourced tax revenue. A change from a worldwide to
a territorial tax policy would sacrifice such a tremendous
chunk of tax resources.
Unfortunately, the situation has changed in recent
years. The U.S. policy of worldwide tax system very
much stands by itself alone. It causes the U.S. MNCs to
lose its competitive advantages in the world marketplace.
It desperately needs to change to bring the U.S. corpora-
tions back. How has the tax policy changed?
5.1 Incentives for Undistributed Previous
Foreign Earnings
The change in the U.S. tax policy concerns two aspects:
the effective date and the tax rate on the earnings and
profits (E&P) before and after this date. It should
be noted that the new TCJA took effect beginning
January 1, 2018. Before this date, the United States was
using the worldwide tax system. As such, a CFC’s for-
eign-sourced earnings are taxable in the United States,
but the tax liability is not due and payable until the
time when the actual cash dividends are received.24 In
other words, the tax payment can be deferred. Hence,
if a CFC never distributes cash dividends, no tax shall
be due.
41
 Current Developments in International Taxation
To encourage a CFC to distribute its previous E&P
as cash dividends back to its U.S. parent company, the
new TCJA offers tax incentives. If the previous E&P
were held in the form of cash positions, such as cash,
stock, bonds or marketable securities, the tax rate is
reduced from 35 percent at that time to 15.5 per-
cent today. Whereas in the case of non-cash positions,
such as inventory, machinery, building, factory, and
land, the tax rate is further reduced to eight percent.25
In other words, no cash dividends are received, and
yet the tax payment is due now. It is called “deemed
repatriation.”
Better yet, the above tax liability is payable in eight-
year installment payments at eight percent in years 1 to
5, at 15 percent in year 6, at 20 percent in year 7, and at
25 percent in year 8.26
These tax incentives are intended to compensate for
the early payment of the tax liability. Evidently, there are
strategies to take advantage of them.
In response to these tax incentives, Cisco brought $67
billion of its foreign E&P back to the United States in
2018.27 Likewise, Apple will also bring back the major
portion of its $252 billion of foreign E&P.28 This is ev-
idence to show that the above tax incentive policy is
effective.
5.2 Incentives for Distributed Current
Foreign Earnings
There are also tax incentives for the distribution of E&P
that are earned after this effective date. Any cash divi-
dend distributions of at least 10-percent owned CFC’s
E&P shall be granted a 100-percent “dividend-received
deduction (DRD).”29 Dividends received are, of course,
taxable. However, it can be reduced to a certain ex-
tent depending on the percentage of ownership. This
is known as DRD. Now, if the dividends come from a
CFC, they are fully deductible. It means tax-free. There
is a tax advantage of a CFC. Obviously, this tax incentive
is intended to encourage a CFC to distribute its E&P as
cash dividends back to its U.S. parent company as soon
as possible.
It is rather interesting to observe that the distribu-
tion of cash dividends from the previous E&P that were
earned before the effective date is taxed at only a reduced
rate of 15.5/8 percent. Nevertheless, the distribution of
cash dividends from the E&P that are earned after the ef-
fective date is tax-free. This difference stems from the fact
that the United States was employing a worldwide tax
system before the effective date, but changed to a terri-
torial tax system after that. This tax-free rule applies only
42 INTERNATIONAL TAX JOURNAL
to the cash dividends that are distributed. What happens
to the undistributed current E&P?
5.3 Has the Tax Policy Been Changed?
Even more curiously, if a CFC never distributes its E&P,
is it tax-free? The undistributed E&P shall become cap-
ital gains taxable at 21 percent when the U.S. parent
company disposes of its investment in this CFC. In this
circumstance, a CFC’s E&P will still be taxable. This
tax rule implies that it is more beneficial to immediately
distribute a CFC’s E&P as cash dividends rather than
waiting until the time of disposition of the investment.
At that time, it will lose the advantage of being a divi-
dend at free of tax.
The territorial tax system was meant to be tax-free for
a CFC’s E&P. However, it is not true if a CFC never
distributes its E&P and it is thus eventually taxable as
a capital gain. In this sense, the United States has not
completely changed from a worldwide to a territorial tax
system.
This is yet another current development in interna-
tional taxation in the United States today. There is still
another one. It involves the penalties of a CFC that
is purposefully engaged in income shifting from one
country to another. It is intended to abuse the interna-
tional tax loopholes. It is called BEAT, as is investigated
in the following section.
6. Base Erosion and Anti-Abuse Tax in
the United States
International transactions inevitably involve many dif-
ferent countries at different tax rates with different tax
rules. The differences breed tax loopholes. The MNCs are
bound to take advantage of them. For example, a shift of
revenue from a higher-tax country to a lower-tax coun-
terpart would yield tax savings. On the other side of the
same coin, a shift of expense from a lower-tax country
to a higher-tax counterpart would create tax savings as
well. Is this legal? The answer is absolutely affirmative.
Actually, it is a normal and wise tax strategy.
However, this strategy can easily become abusive and
thus unethical. The boundary of distinction is sometimes
blurred. More often than not, it was employed as a de-
vice to shift income from one country to another solely
for the purpose of tax savings. It causes tax base erosion
and profit shifting. At the beginning of this article, some
typical examples were presented, such as an intercom-
pany transaction in loyalties, interest, transfer pricing,
September–October 2019
management fees, and consulting fees. The abuses have
become so rampant in recent years that it has triggered
the OECD in Europe and the Treasury Department in
the United States to take action to curtail it.
In 2013, the OECD issued the “Action Plan on Base
Erosion and Profit Shifting” in an attempt to narrow the
differences in tax rules among countries. The purpose
was to eliminate the tax loopholes. In 2017, the U.S.
Congress enacted the TCJA in which it initiated a new
tax regime called BEAT. The purpose is to impose tax
penalties on those MNCs that abuse the tax loopholes.
How much is it?
6.1 How Much Is the Tax Penalty?
The BEAT is imposed only on a company having a gross
receipt of at least $500 million per year on average in
the past three years,30 and the tax rate is 10 percent.31 It
is aiming at the amount of intercompany payments to a
foreign subsidiary entity that causes the profit shifting.32
It is called “base erosion payment.”33 It starts with the
“regular taxable income” leading to the “regular tax li-
ability” at 21 percent under the new TCJA. Next, the
“modified taxable income” is the sum of the “regular tax-
able income” and the “base erosion payment.” Then, the
“modified tax liability” is the “modified taxable income”
multiplied by 10 percent. Finally, the BEAT is the “mod-
ified tax liability” minus the “regular tax liability.” The
BEAT is actually an added-on tax above the “regular tax
liability.” Therefore, the final tax liability is the sum of
the “regular tax liability” and the BEAT.34
Conceivably, there can be many strategies to alleviate
this tax burden. Here is an example to illustrate the com-
putational procedure of the BEAT.
6.2 Example
In the current year, a U.S. drug company has $1,300,000
in sales revenue, $300,000 in cost of goods sold and
$600,000 in patent research fees paid to a foreign subsid-
iary company which is considered to be highly inflated
for income-shifting purposes. It results in a net income
of $400,000 (1,300,000 − 300,000 − 600,000). What is
the U.S. company’s BEAT?
The “regular taxable income” is $400,000 (1,300,000 −
300,000 − 600,000). The “regular tax liability” is
$84,000 (400,000 × 21%). The “base erosion pay-
ment” is $600,000. The “modified taxable income” is
$1,000,000 (400,000 + 600,000). The “modified tax li-
ability” is $100,000 (1,000,000 × 10%). The BEAT is
$16,000 (100,000 − 84,000). The final tax liability is still
September–October 2019
$100,000 (84,000 + 16,000). It is the same as the “mod-
ified tax liability.”
This example shows that, if the BEAT is positive, the
final tax bill is the “modified tax liability.” If the BEAT
is negative, the final tax bill is the “regular tax liability.”
6.3 Difference Between BEPS and BEAT
Is there any difference between the BEPS in Europe and
the BEAT in the United States? The former is much
broader than the latter. The BEPS is intended to prevent
all kinds of income-shifting transactions, such as royal-
ties, interest, transfer pricing on merchandise, manage-
ment fees, consulting fees, patent fees, research fees, etc.
Whereas, the BEAT is very limited in scope. According
to Code Sec. 267A, the BEAT includes only intercom-
pany royalties and interest.35
Further, the OECD has no legislative authority. It
cannot impose tax penalties on the member countries.
It only serves as a recommendation to all nations for
improving the tax policy. This step requires coordina-
tion among nations. On the other hand, the BEAT was
enacted into law. Although it does not apply to other
countries, it imposes tax penalties to the U.S. companies.
This is still another current development in interna-
tional taxation in the United States today. In fact, there
are more areas of development. Nevertheless, the most
perplexing problem today is the fact that the rapid ad-
vancement in technology has confused the source of in-
come in international transactions. Many products are
invisible without a national boundary. Where does the
income come from? The ambivalence has led to many
cases of abuse by the MNCs.
7. Conclusion
This article points out four areas of development in in-
ternational taxation today. First, the international tax law
contains many tax loopholes. MNCs take advantage of
them. In recent years, it has become so rampant that it
has triggered the OECD to recommend steps to be taken
to prevent it. This article has described its current stage
of development.
Secondly, in modern technology, many products can
be digitized. The product becomes invisible. It can be
invented, produced, sold and used in many different
countries. It hence creates a problem as to which country
has the taxing authority. The typical example is the case
of iPhone. In the midst of confusion, an MNC can ma-
nipulate a tax-saving strategy in its best interest. A new
43
 Current Developments in International Taxation
tax concept is born. It is called “digital service tax.” This
article has elaborated on it.
Third, the United States enacted a new law of TCJA in
2017. It has changed its international tax policy from the
traditional worldwide tax system to the more prevailing
tax policy of territorial tax system. This article investi-
gated its impact on international business.
Fourth, given the abuses of tax loopholes that cause
income-shifting strategies, the new TCJA further imposes
a new tax regime known as BEAT in the United States.
ENDNOTES
* Huanyu Ouyang specializes in financial man-
agement and has published three refereed
journal articles. James G.S. Yang specializes in
International Taxation and Internet Commerce
Taxation, and has published 134 refereed
journal articles. This article first appeared
in the Taxes—The Tax Magazine: Ouyang and
Yang, The Current Development in International
Taxation, Taxes, June 2019.
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44 INTERNATIONAL TAX JOURNAL
It is in line with the BEPS in Europe. This article scruti-
nized its technical details and presented an example.
This article further pointed out some other urgent
problems that are currently developing in the arena of in-
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ment of Internet commerce. It renders the international
business borderless. It gives rise to the ambivalence of the
source of income. It further complicates the problem in
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8
Id. 19
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13
Id., Chapter 3, Action 2. 27
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35
Code Sec. 267A.
September–October 2019
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