Lost in Translation: Excess Returns and the Search for Substantial Activities


Starting in 2010, one international tax reform proposal moved from being a onepage idea in the Obama Treasury’s proposed budget to being one of the OECD’s options for CFC reform to becoming the basis for one of the major international tax reform provisions in the 2017 U.S. tax reform to being considered as part of Pillar Two of the OECD’s current digital tax project. This proposal, for a minimum tax on foreign excess returns, has changed shape with every iteration, and its proponents have justified each version of this differently and defined its various elements differently. 

This Article tells the story of the many recent proposals for minimum taxes on foreign excess returns, starting with the Obama Treasury’s brief proposal and ending with the OECD’s current negotiations over digital taxation. This Article highlights the common threads that links all of these rules, and it also shows how differently the drafters of each rule have understood the purpose and design of a minimum tax on foreign excess returns. 

This Article argues that these are all effectively minimum taxes (or “top-up taxes”) on foreign excess returns that are attempting to exclude income from “substantial activities” from taxation while imposing taxation on income from intangibles that have been shifted outside the jurisdiction. These are therefore yet another chapter in the story of the search for substantial activities. 

But this Article also argues that, although policymakers are all using the same terminology of excess returns and normal returns, they are using these terms to mean different things. This in turn means that all of these measures define normal returns – and therefore substantial activities – very differently from each other, thereby creating confusion and masking the policy choices being made when calculating excess returns.