On February 13 the OECD issued a public consultation document requesting input on two pillars developed to address concerns about taxing the digital economy.(1) Pillar 1 deals with profit attributable to the jurisdiction of the customer or user (the market jurisdiction), while pillar 2 addresses base erosion and profit shifting.

Three options are proposed under pillar 1: the user participation proposal, the marketing intangibles proposal, and the significant economic presence proposal.(2)

In July 2015 then-House Ways and Means Committee members Richard E. Neal, D-Mass., and Charles W. Boustany Jr. released a discussion draft of the Innovation Promotion Act of 2015 (IPA 2015), designed to encourage the generation of intangible income in the United States.(3) A key component of the proposed legislation was to define intangible income to which a tax deduction would apply — so-called innovation box income and thus produce a lower effective tax rate on intangible income. IPA 2015 defined the profit attributable to non-marketing intangible income as the ratio of five-year cumulative research and development expenses to five-year cumulative total operating expenses.(4) The proposal reflected concepts similar to the BEPS action 5 definition of non-harmful tax incentive regimes for intellectual property.

This article tries to match the pillar 1 discussion with the guiding principles previously established under the OECD’s BEPS project. It introduces an expanded version of IPA 2015 as a potential way to reach consensus on the allocation of marketing income under pillar 1 and to address concerns that some local tax laws may constitute export subsidies under the WTO rules.

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