From Lisbon: The Search for Consensus on International Tax

Juan Manuel Vázquez of Loyens & Loeff discusses the evolving international tax agenda, including ongoing pillar 2 negotiations and taxing the digital economy.

For more episodes from Lisbon, listen to:

• From Lisbon: The Future of International Tax Cooperation
• From Lisbon: Portuguese Tax Administration in the Digital Age
• From Lisbon: Highlights From the 2025 IFA Congress

For related tax news, read the following in Tax Notes:

• G20 Leaders Affirm Goal for OECD Global Minimum Tax Accord
• If Pillar 2 Directive Reopens, EU Won’t Close It, Official Says
• OECD Talks on U.S. Pillar 2 Exemption Focused on Simplification
• Italy Defends DST and Urges OECD to Restart Digital Talks

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Credits
Host: David D. Stewart
Executive Producers: Jeanne Rauch-Zender, Paige Jones
Producers: Jordan Parrish, Peyton Rhodes
Audio Engineers: Jordan Parrish, Peyton Rhodes

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Nominate someone for the Tax Analysts Award of Distinction in U.S. Federal Taxation! For more information, visit awards.taxanalysts.org.

This episode is sponsored by Avalara. For more information, visit avalara.com.

Transcript

This transcript has been edited for clarity.

David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: looking for certainty.

At the beginning of October the podcast team traveled to Lisbon for the International Fiscal Association's annual congress. While there, we recorded several interviews, as well as some sounds of the city, which you heard at the beginning of the episode. We'll be releasing those interviews in the upcoming weeks, so keep an eye out for that in your podcast feed.

This week's episode features Juan Manuel Vázquez, a lawyer at Loyens & Loeff and a researcher at the University of Amsterdam. Our conversation focuses on the shifting international tax landscape as the EU, U.S., and OECD attempt to implement the OECD's two pillars in a way that suits all parties. We also discussed the complicated task of taxing the digital economy, focusing on the rising importance of artificial intelligence and digital services taxes.

One note before we get to the interview: Since we had to leave the studio for this, the audio may sound a bit different than our usual interviews. All right, let's go to that interview.

Juan Manuel, welcome to the podcast.

Juan Manuel Vázquez: Hello, Dave. Thanks a lot for having me. It's a great pleasure to be here and share a chat with you.

David D. Stewart: So to start off, why don't you tell listeners a little bit about yourself and what you do?

Juan Manuel Vázquez: Sure. Well, I'm a tax lawyer, originally from Argentina. So I worked mainly in law firms, also a bit in the public sector, in the tax authorities in Argentina. [I] lived a bit in the U.S., doing my LLM at Georgetown and working in the U.S. a bit, and then came back to Argentina. But soon after, I went to Europe, where I started my PhD at the University of Amsterdam, and five years ago I joined Loyens & Loeff in the Netherlands, where I work, also next to my academic activities at the University of Amsterdam.

David D. Stewart: Well, that's great to have your perspective here. Could you tell us about what sort of recent developments in tax are you finding most challenging in your work?

Juan Manuel Vázquez: Sure. I mean, we're living [in] really exciting times. In my role at Loyens & Loeff, and also as a researcher, I really follow these developments on a day-to-day basis, and also not only trying to assess the impact that these developments may have on stakeholders, but also what are the real threats going behind them and the more substantive changes that these developments entail.

So just to mention how I see the tax landscape from a European perspective: So we are in the middle of a really heated U.S.-EU trade and tax conflict somehow. We've seen that this conflict [was] mainly triggered by, of course, pillar 2, UTPR [the undertaxed profits profits rule], and the kickoff of that rule in 2026. In that context, I think we have a lot to talk about today, and this new side-by-side approach that the G7 has somehow proposed and agreed and that the EU is trying to accommodate. We also see, in that context, the discussion on pillar 1 and digital services taxes being an important key element of these trade tensions.

Next to those two big topics that I think are conditioning or somehow taking all the attention of the agenda, at the EU level, most of the focus is on the European Commission's intentions to make Europe a more competitive jurisdiction for businesses. So it's the EU competitiveness agenda that the EU Commission is pushing after the publication of the so-called Draghi and Letta reports, which have identified that the EU is lagging behind in terms of competitiveness, that there is a lot of red tape to cut, that there is a need for simplicity and a need for incentives for businesses and startups to invest in Europe, to stay in Europe, and grow in Europe.

So in that context, also on the broader EU competitiveness agenda, you see many proposals of the European Commission to declutter the tax system. For example, they are considering recasting the Unshell proposal and pour[ing] it into DAC6 [the Directive on Administrative Cooperation, sixth amendment], kind of take out a bit of the most burdensome elements of that proposal and making a watered-down version with a reporting of information.

Also, you see proposals to introduce [the] 28th legal regime so that basically small companies do not have to comply with 27 different national tax regimes — but also, that is broader than taxation. This is an approach that goes beyond taxation [into] other legal fields, too.

Apart from that, we see recent initiatives from the European Commission to boost the European financial market by promoting, for example, a tax incentive — what's called the savings and investment accounts. So this is another big tendency, how to make Europe more competitive.

But at the same time, we are in the middle of a change in geopolitical powers where many countries are investing heavily in military equipment. And so that implies, of course, raising new revenues to cover for those costs. So the EU is also — not only because of that, but because of repaying the debt assumed for the COVID-19 pandemic — having to think and design and adopt new EU own resources.

So there was recently this discussion on the core contribution — that it would be a contribution at the corporate level across the EU, which is also a big elephant in the room whenever talking about EU law and what's happening in the EU. Sometimes it gets a notice. There was also this idea or expectation that the EU might propose an EU digital levy. Then it was somehow taken off the table. But it is another element to say, "OK, we want to raise more revenues."

Also, we see on the broader terms a pushback from many member states in relation to all the initiatives that are coming from the European Commission, because mainly, I think, the pendulum has been on extreme, where we've seen in the last few years proliferation of antiabuse measures and adoption of directives in the field of direct taxation, which was not the case many years ago, where there were just a few. Now we've seen adoption in the last few years of many directives after the BEPS project to kind of curbed the abuse.

But now we see many member states pushing back to many of these proposals; the Unshell is one example. But also, we see some concerns raised in relation to BEFIT [Business in Europe: Framework for Income Taxation], for example, to CORE [Corporate Resource for Europe]. There are also proposals and discussions on wealth taxation that many member states are fighting back [on]. So I think we're in a very interesting time where all these recent developments are somehow intertwined, and they are really embedded into a broader context of political tensions and trade discussions. So it's very interesting times to do international taxation.

David D. Stewart: So you mentioned this two-systems approach that's happening with pillar 2 and the U.S., the agreement from the G7. In actuality, this would seem to weaken the OECD consensus that had been reached. So how do you see that playing out?

Juan Manuel Vázquez: Yes, indeed. I think, first, we should not ignore the fact that basically exempting the U.S. from rules that have been globally agreed to to ensure a 15 percent effective tax rate [around] the globe, it really somehow undermines the whole underlying policy of the pillar 2 project. And that's, I think, the big feeling around the world, of many European countries, also in relation to this side-by-side approach. The UTPR has somehow raised this problem, and of course this was something that was already existent when pillar 2 was developed, because already there were great differences — even larger differences than those that exist today between the GILTI [U.S. global intangible low-taxed income regime] and pillar 2, and mainly the difference between jurisdictional blending and global blending that still remains, let's say.

So I think that this statement of the G7, coupled with, let's say, the failure of pillar 1 as a global project and all the tensions that were somehow built up from the early days of the discussion of the digital economy until last year, when we saw that there was no implementation of the multilateral convention on amount A — those two kind of signs coming from the OECD, I think they weakened enormously the leadership position of the OECD, because basically on pillar 1, we did not see an agreement, a success in the project, and in pillar 2, which was the success case to kind of showcase to the world, now we see a big exemption, a big carveout for U.S. multinationals that I think politically will end up prevailing because, of course, of the strength of the U.S. as a player in global tax policy.

But in the EU, there are tensions in relation to how to implement this at the EU level because, of course, we have a new directive that has implemented the OECD pillar 2 rules. And although there is an article there that allows, somehow, for safe harbors to be automatically adopted by any qualifying competent authority agreement that reached the OECD level, there are bigger discussions at the EU on whether indeed we should not amend the directive to allow for this type of exceptional treatment to the U.S.

And then comes the point of, also, how you will justify if you do not align this jurisdictional blending required by the EU directive and the global blending of income under the current version of the GILTI. If you do not overcome that, how are you going to also make the systems coexist, right? I do think that there are technical ways of making the systems coexist, but in general, the prevailing, let's say, position is that this has strongly undermined the pillar 2 project in favor of one of the biggest players — that, in this case, is the U.S.

David D. Stewart: Do you see this as a possible beginning of pillar 2 falling apart, in a similar way as pillar 1 didn't seem to meet the goals that it had set out?

Juan Manuel Vázquez: I think it's a bit [of a] difficult question to answer because basically the EU has invested a lot in pillar 2; they were one of the early adopters through the directive. There's been national implementation of the directive among the member states, guidance being issued, and a big sense of the rightness of adopting a minimum tax at the global level.

So I think that, at least from the EU perspective, it was not about ensuring that U.S. multinationals pay a fair share of at least 15 percent ETR. It was really a global problem of saying, "OK, we want to ensure — " and if you remember, this proposal was pushed by Germany and France in the early days of the BEPS 2.0 project. So there was, indeed, I think, this general and true intention of ensuring a minimum level of taxation beyond the U.S., right.

But of course, this setback, or this situation in which we have ended with pillar 2, might lead to, in the future, to reconsider the whole appropriateness of the project. I don't see that happening in the short or medium term; the European Commission and the authorities have been clear that they are not planning to repeal the directive, nor disinvest everything that they've worked on in the last few years.

And I think this is also something to reflect on because in the end, the fact that we've invested a lot also from practice — let's say, the advice that European law firms and consultancy firms are giving on pillar 2 is enormous, and it's a lot of work. But that doesn't mean that if the policy is not appropriate — and we see that the global landscape has changed and a measure that also is super complex, especially for developing countries to understand their impact. So, for example, now we're seeing cases of situations arising in certain big countries with high inflation rates where the pillar 2 is leading to really unintended negative effects.

And there are still new things coming out of pillar 2 that are creating new problems. And at the EU level specifically, we see this big, big problem, legal problem, about basically the fact that the directive refers to the OECD as a source of interpretation and illustration. And in many cases — on the safe harbors, for example — it even kind of assigns the OECD, it signs a blank check to the OECD to adopt these qualifying competent authority agreements without the need for an EU adoption under the procedures foreseen by the treaties. So basically, anything that the OECD would say in Paris, even after the directive was adopted and all the administrative guidance that came after the adoption of the directive, it's changing and expanding the scope and the limits of the rules. So at the EU level, that's basically giving away the democratic legitimacy required to adopt rules that are enforceable on EU taxpayers.

So all these new problems that are coming from pillar 2, I think that at some point, if they're not duly addressed, they will lead to strong questions [about] the initiative as a whole. And I think that that would be, in the end, the defining element to say, "OK, this is [not] going to last in the long term because we have a complex system with questionable legitimacy on many of the guidance and the rules, which now exempts the biggest player and the biggest country in terms of multinationals of the world." I think that these are mounting reasons that lead one to question to what extent this, in the long term, is going to survive. But let's see. I think it's an interesting question.

David D. Stewart: So I guess that also leads to what I wonder about is for advising companies in this landscape of, you know — pillar 2 seemed to be driving toward, even though there's complexity, at least some sort of certainty. So, in this new world, where you have pillar 2's future that is not certain anymore, a dual system going on, potentially some countries abandoning it and going their own way, is there going to be additional complexity and uncertainty for companies going forward?

Juan Manuel Vázquez: I think certainty, it's indeed one of the key words and requirements here, because we are in the middle of all these policy discussions and setbacks and back-and-forths. In the end, there are companies, of course, that are still having to comply with pillar 2 and all these rules, and we see that policymakers are sometimes busy with, for example, these developments on the side-by-side system and how to make the rules coexist with the U.S. tax system.

But in the meantime, there are so many practical questions that tax authorities have to deal with on a daily basis and in specific situations with clients, with companies, that cannot be solved by the tax authorities of the countries themselves because they have to reach out first to the European Commission, and then to the OECD, because it's a system that is based on a common approach. So if you have divergent interpretations of the OECD model rules, then it becomes even more uncertain.

And all these practical questions on the rules that will keep coming, they are next to these other big policy developments that are being prioritized by policymakers because they have the political spotlight but are not necessarily addressed always. So I do see that there is a growing uncertainty for all these businesses that are already subject to the rules and are not certain about specific applications of the rules on how to solve this at the same time that these global discussions on the side-by-side system are going on. So I think we have something there that is problematic in terms of legal certainty and the impact of the rules on stakeholders.

David D. Stewart: Turning to the other source of instability in the international tax system. So we had pillar 1 that hasn't really lived up to its goals, but one of the main goals that pillar 1 had was to tamp down this move toward digital services taxes. So are we seeing a resurgence of digital services taxes as the answer to reallocating income tax rights?

Juan Manuel Vázquez: Yeah, I wouldn't call it resurgence, but yes, indeed. We are in a situation now in which the topic has become mainstream in the tax policy landscape, for sure. This somehow started because we had two moments of, let's say, popularity of digital service taxes, right?

The first one was basically in 2018, when the EU came with this failed proposal to tax digital business with a long-term measure based on significant economic presence and a short-term interim measure that was a EU digital service tax taxing three types of services. After that first appearance of what we now understand as the kind of prototype of digital service taxes, many countries in the EU — France being the first, but then followed by Spain, Italy — we have also in the U.K., Turkey, some countries in Africa, started adopting digital service taxes.

And in that first moment, the first Trump administration already tried to repeal that or tried to somehow counteract that reaction with several [section] 301 investigations that were put on hold somehow with bilateral agreements with these countries that adopted digital service taxes. And also, via the commitment reached at the inclusive framework level that put all the discussion on digital service taxes on hold basically by saying, "OK, we'll keep them until we reached an agreement on pillar 1, and then if we reach an agreement on pillar 1, we'll repeal these taxes and we'll credit the taxes for amount A purposes," right?

So at that moment, digital service taxes were not being discussed anymore in global tax policy until 2024, when we saw that this standstill and drawback commitment already, let's say, expired. And as of that point, we also see some key developments. For example, there was a French proposal to increase the tax rate of the French DST. Then there was the Italy elimination of the national threshold for DSTs. Then we saw some countries like Canada adopting a DST that they've now rescinded due to U.S. pressure. But we started seeing, again, some movement there — Germany coming up with a proposal of a 10 percent digital service tax.

And then there was this kind of second moment of popularity of DSTs in which we still are, that again, the second Trump administration tried to somehow discourage countries from doing so, not only by the traditional investigations under section 301, but also under the [section] 899 proposal. So many countries also started changing their mind on DSTs. New Zealand, for example, I think, had proposed one, and they decided not to move forward. Kenya had a DST, and they changed it for a significant economic presence type of approach. Canada rescinded its own DST. So also we saw like, OK, OK, there is something else going on also that affects this discussion of DST adoption that is, of course, a renewed threat of tariffs imposition.

And this was — again, the second moment was in the middle of a much expressed trade war, somehow, between the EU and the U.S. that now has been somehow eased a bit through this agreement that we've reached, but that this does not affect the agreement, does not somehow cover future U.S. retaliation to digital service taxes.

So also in the last few weeks, we've seen there's been a French Constitutional Court judgment validating the French DSTs, basically addressing all the typical arguments that are raised against DSTs — the discriminatory element, the fact that it's confiscatory, that applies next to corporate income tax. So the French decision is really relevant because it will have an impact on the future of these taxes. And also we had a recent visit of the U.S. representatives to the U.K., where it was questioned whether they were going to address the U.K. DST in this trade agreement, but in the end, the U.K. DST survived. So we see now that in the last few weeks DSTs have somehow survived the U.S. pressure.

And the big question is how things are going to evolve, because although the European Commission has confirmed that they're not planning in the short term to propose an EU digital levy, the idea — at least in people working on this area, and I'm not speaking about people working in the European Commission, but in the environment in the EU — this idea is being discussed.

We held a conference at the University of Amsterdam, actually, recently, where we discussed this topic, bringing together people from the government, people from practice, people from academia, people from the U.S. and Europe. And actually we demystified a bit the fact that DSTs are not necessarily a response to this trade fight against the U.S. multinationals, but indeed it's an idea that is rooted on the rationale of saying, "OK, there is value being created by the monetization of data that is extracted from users doing certain contributions to the services of certain businesses, like advertisement or data collection, that justifies the fact that [a] jurisdiction may capture part of this revenue in the market."

So when you think about the tax from that rationale, the discussion on DSTs changes significantly because it detaches a bit from the political context and it becomes more technical, and actually more sustainable. And you see some experiences of many countries that are having good experiences with DSTs, and as I said, the latest developments have made this topic something that is becoming a concern for all stakeholders, basically.

David D. Stewart: So, to pick up on one of the things that was discussed was this tariff retaliation potential, and as we're seeing from the U.S., many changes to tariff approaches and them being used to put pressure on other countries — how does one advise clients in the tax world to prepare for potential shifts in tariffs that could happen overnight?

Juan Manuel Vázquez: It's a good question, and a complex one. I mean, in this scenario of instability, right, I think that the U.S.-EU agreement has provided, at least, certainty, which was something that was required from most EU taxpayers and companies. There is a lot of criticism on the agreement, and the terms of the agreement reached, on whether 15 percent was enough or not, or whether the EU actually was too permissive or too generous in the agreement in detriment of its own position vis-a-vis the U.S. So I do see that this agreement has provided certainty for taxpayers and for advisers to know that at least there's going to be an ease in certain — or a 15 percent cap to plan on this type of tariffs being imposed.

But on top of that, especially in the services sector, we see, of course, that the EU is really reliant on U.S. suppliers because they have a surplus in that sense, in the trade balance, in the trade scale. So I think that it's important to note that all these retaliations under either 301 or a revenge tax that may come under 899, if the side-by-side system does not work, or if countries continue adopting digital services taxes, then it becomes very difficult, because things can really change from one day to the other. And if a country comes up with a DST or a position that undermines, or it's deemed by the U.S. president as being discriminatory, then you could increase your costs on tariffs significantly from one day to the other. So I think that it is very difficult. We are [in a] very difficult time.

Something that I want to highlight also is that it's a bit, when you look to the discussion, it's a bit inconsistent from my perspective what's happening because the U.S. somehow is trying to fight many of the EU measures, labeling them as discriminatory, but the tariffs being imposed also at will on certain countries, on certain products, are also a clear discriminatory measure. So if we are going to use the same argument, I think it should apply to both sides, right?

And from my perspective, these geopolitical tensions and tariff tensions do not help, in the end, taxpayers and countries and governments to actually provide a peaceful and certain landscape in which business can be done easily and with certainty, and the governments can collect revenue, that it is generated by genuine economic activities that also improve the public services. So in the end, I think that all stakeholders in this scenario of uncertainty, confrontation, and lack of stability are affected in the end.

David D. Stewart: So, turning from the sort of practical nuts and bolts of the present day, I want to ask you — maybe a little bit speculative here — about the future, because tax is always sort of following changes that are happening in the larger economy. So the big thing going on around the world right now is AI. Do you see AI becoming a new challenge in the tax world?

Juan Manuel Vázquez: Indeed. I think we're so distracted sometimes, we're trying to adapt the tax system to what is called the web 2.0, right? The world of digital economy, of business being able to operate around the world without physical presence. We're still struggling to deal with that. And in the meantime, the web 3.0, where you have blockchain technologies, decentralization, and now the boom of artificial intelligence — it's getting us. I mean, we are there, and in the early days we could see that at least in the tax landscape, artificial intelligence was approached more as a tool to be used by tax administration. OK, how can you make the administration of the tax system more efficient with these automation tools, right?

Then we saw a second moment in which many of the applications of artificial intelligence and algorithms to tax administration, and basically to risk detection and audits, started showing their unintended side effects and negative effects — when, for example, there is this infamous Dutch child care scandal where there's been basically a discrimination and a black box algorithm being used for the purpose of assessing certain social welfare benefits being received by certain people. And that has already sounded the alarms of some risks of using AI for tax administration purposes in terms of risk detection. So then we had — if you would talk about this topic already in the early 2020s and even up to 2022, 2023, most of the discussion on AI was on avoiding black box type of algorithms, of having a human in the loop, about explainability, about all that kind of, in the tax world, the requirements that AI should comply with to be able to be respectful of taxpayers' rights.

But now, in the last few months, with all this proliferation of tools on AI that are showing that it's not only useful for tax authorities and for risk assessment, but also for practice, for practitioners, for citizens in prompting and requesting AI bots to come up with efficient and fast solutions to many tax problems, ranging from legal research to drafting documents that would demand hours before, all these developments have made AI, now in the last few months, and I would say year, being more focused on, "OK, how do we use, as tax practitioners, this tool that is changing our life and our society to reshape the way in which we operate and we work as tax advisers and academics and policymakers?"

And I do see now the big tendency of exploring more the possibilities that AI provides in this regard. So many big law firms are considering pilot AI tools to check them, to test them, to somehow reconsider and adapt for what is coming. And the same in academia, we see the whole idea of people not relying on AI to write a master's thesis, a PhD, and it's being reconsidered. I'm thankful that I finished my PhD before the emergence of AI because I think it's not clear yet on how much these tools will change our careers, our professions, our daily work as tax scholars, as tax practitioners, as government officials. I see now that at least there is more consciousness on that; there is more thought being poured on that.

And still, there are so many angles from AI that we have not explored yet. I mean, building tax rules that are embedded into algorithms and apply automatically because we're still discussing the taxation of data and the DSTs being collected by digital businesses to monetize them. But now the monetization is via also these AI bots, like, how is that impacting the future of the tax system? How is the tax mix going to look like when we see social contributions from employment shrinking because AI, it's taking over many positions. And are we going to tax capital? Are we going to continue taxing jobs and labor?

So I think there are so many discussions and angles, apart from how do we use this practically every day to learn to prompt? Do we have — maybe in the future we need tax courses on how to prompt for taxation, because of course, this is a very specific and technical area, and it's not the same [as] prompting for other purposes. So I think we live in really interesting times with AI coming up. And for me, I'm excited about it, at least.

David D. Stewart: Well, it's going to be a fascinating area to watch as it develops. Juan Manuel, this has been a great discussion. Thank you so much for being here.

Juan Manuel Vázquez: Thank you for having me. It's been a great pleasure. And yeah, looking forward for the next chat.