prompt_front: You are given two reports by the government agency.



Question: Write a one-page summary of the report 1.

Report 1: Our past work has identified progress and challenges in a number of areas related to DHS’s management of the CFATS program including (1) the process for identifying high risk chemical facilities; (2) how it assesses risk and prioritizes facilities; (3) reviewing and approving facility security plans; (4) how it conducts facility compliance inspections; and (5) efforts to conduct stakeholder outreach and gather feedback  DHS has made a number of programmatic changes to CFATS in recent years that may also impact its progress in addressing our open recommendations; these changes are included as part of our ongoing review of the program  In May 2014, we found that more than 1,300 facilities had reported having ammonium nitrate to DHS  However, based on our review of state data and records, there were more facilities with ammonium nitrate holdings than those that had reported to DHS under the CFATS program  Thus, we concluded that some facilities that were required to report may have failed to do so  We recommended that DHS work with other agencies, including the Environmental Protection Agency (EPA), to develop and implement methods of improving data sharing among agencies and with states as members of a Chemical Facility Safety and Security Working Group  DHS agreed with our recommendation and has since addressed it  Specifically, DHS compared DHS data with data from other federal agencies, such as EPA, as well as member states from the Chemical Facility Safety and Security Working Group to identify potentially noncompliant facilities  As a result of this effort, in July 2015, DHS officials reported that they had identified about 1,000 additional facilities that should have reported information to comply with CFATS and subsequently contacted these facilities to ensure compliance  DHS officials told us that they continue to engage with states to identify potentially non-compliant facilities  For example, as of June 2018, DHS officials stated they have received 43 lists of potentially noncompliant facilities from 34 state governments, which are in various stages of review by DHS  DHS officials also told us that they recently hired an individual to serve as the lead staff member responsible for overseeing this effort  DHS has also taken action to strengthen the accuracy of data it uses to identify high risk facilities  In July 2015, we found that DHS used self- reported and unverified data to determine the risk categorization for facilities that held toxic chemicals that could threaten surrounding communities if released  At the time, DHS required that facilities self- report the Distance of Concern—an area in which exposure to a toxic chemical cloud could cause serious injury or fatalities from short-term exposure—as part of its Top-Screen  We estimated that more than 2,700 facilities with a toxic release threat had misreported the Distance of Concern and therefore recommended that DHS (1) develop a plan to implement a new Top-Screen to address errors in the Distance of Concern submitted by facilities, and (2) identify potentially miscategorized facilities that could cause the greatest harm and verify that the Distance of Concern of these facilities report is accurate  DHS has fully addressed both of these recommendations  Specifically, DHS implemented an updated Top-Screen in October 2016 and now collects data from facilities and calculates the Distance of Concern itself, rather than relying on the facilities’ calculation  In response to our second recommendation, in November 2016, DHS officials stated they completed an assessment of all Top-Screens that reported threshold quantities of toxic release chemicals of interest and identified 158 facilities with the potential to cause the greatest harm  As of May 2017, according to ISCD officials, 156 of the 158 facilities submitted updated Top-Screens and 145 of the 156 Top-Screens had undergone a quality assurance review process  DHS has also taken actions to better assess regulated facilities’ risks in order to place the facilities into the appropriate risk tier  In April 2013, we reported that DHS’s risk assessment approach did not consider all of the elements of threat, vulnerability, and consequence associated with a terrorist attack involving certain chemicals  Our work showed that DHS’s risk assessment was based primarily on consequences from human casualties, but did not consider economic consequences, as called for by the National Infrastructure Protection Plan (NIPP) and the CFATS regulation  We also found that (1) DHS’s approach was not consistent with the NIPP because it treated every facility as equally vulnerable to a terrorist attack regardless of location or on-site security and (2) DHS was not using threat data for 90 percent of the tiered facilities—those tiered for the risk of theft or diversion—and using 5-year-old threat data for the remaining 10 percent of those facilities that were tiered for the risks of release or sabotage  We recommended that DHS enhance its risk assessment approach to incorporate all elements of risk and conduct a peer review after doing so  DHS agreed with our recommendations and has made progress towards addressing them  Specifically, with regard to our recommendation that DHS enhance its risk assessment approach to incorporate all elements of risk, DHS worked with Sandia National Laboratories to develop a model to estimate the economic consequences of a chemical attack  In addition, DHS worked with Oak Ridge National Laboratory to devise a new tiering methodology, called the Second Generation Risk Engine  In so doing, DHS revised the CFATS threat, vulnerability, and consequence scoring methods to better cover the range of CFATS security issues  Additionally, with regard to our recommendation that DHS conduct a peer review after enhancing its risk assessment approach, DHS conducted peer reviews and technical reviews with government organizations and facility owners and operators, and worked with Sandia National Laboratories to verify and validate the new tiering approach  We are currently reviewing the reports and data that DHS has provided about its new tiering methodology as part of our ongoing work and will report on the results of this work later this summer  To further enhance its risk assessment approach, in fall 2016, DHS also revised its Chemical Security Assessment Tool (CSAT), which supports DHS efforts to gather information from facilities to assess their risk  According to DHS officials, the new tool—called CSAT 2 0—is intended to eliminate duplication and confusion associated with DHS’s original CSAT  DHS officials told us that they have improved the tool by revising some questions in the original CSAT to make them easier to understand; eliminating some questions; and pre-populating data from one part of the tool to another so that users do not have to retype the same information multiple times  DHS officials also told us that the facilities that have used the CSAT 2 0 have provided favorable feedback that the new tool is more efficient and less burdensome than the original CSAT  Finally, DHS officials told us that as of June 2018, DHS has completed all notifications and has processed tiering results for all but 226 facilities  DHS officials stated they are currently working to identify correct points of contact to update registration information for these remaining facilities  We are currently assessing DHS’s efforts to assess risk and prioritize facilities as part of our ongoing work and will report on the results of this work in our report later this summer  DHS has also made progress reviewing and approving facility site security plans by reducing the time it takes to review these plans and eliminating the backlog of plans awaiting review  In April 2013, we reported that DHS revised its procedures for reviewing facilities’ security plans to address DHS managers’ concerns that the original process was slow, overly complicated, and caused bottlenecks in approving plans  We estimated that it could take DHS another 7 to 9 years to review the approximately 3,120 plans in its queue at that time


Report 2:  We also estimated that, given the additional time needed to do compliance inspections, the CFATS program would likely be implemented in 8 to 10 years  We did not make any recommendations for DHS to improve its procedures for reviewing facilities’ security plans because DHS officials reported that they were exploring ways to expedite the process, such as reprioritizing resources and streamlining inspection requirements  In July 2015, we reported that DHS had made substantial progress in addressing the backlog—estimating that it could take between 9 and 12 months for DHS to review and approve security plans for the approximately 900 remaining facilities  DHS officials attributed the increased approval rate to efficiencies in DHS’s review process, updated guidance, and a new case management system  Subsequently, DHS reported in its December 2016 semi-annual report to Congress that it had eliminated its approval backlog  Finally, we found in our 2017review that DHS also took action to implement an Expedited Approval Program (EAP)  The CFATS Act of 2014 required that DHS create the EAP as another option that tier 3 and tier 4 chemical facilities may use to develop and submit security plans to DHS  Under the program, facilities may develop a security plan based on specific standards published by DHS (as opposed to the more flexible performance standards using the standard, non-expedited process)  DHS issued guidance intended to help facilities prepare and submit their EAP security plans to DHS, which includes an example that identifies prescriptive security measures that facilities are to have in place  According to committee report language, the EAP was expected to reduce the regulatory burden on smaller chemical companies, which may lack the compliance infrastructure and the resources of large chemical facilities, and help DHS to process security plans more quickly  If a tier 3 or 4 facility chooses to use the expedited option, DHS is to review the plan to determine if it is facially deficient, pursuant to the reporting requirements of the CFATS Act of 2014  If DHS approves the EAP site security plan, it is to subsequently conduct a compliance inspection  In 2017, we found that DHS had implemented the EAP and had reported to Congress on the program, as required by the CFATS Act of 2014  In addition, as of June 2018 according to DHS officials, only 18 of the 3,152 facilities eligible to use the EAP opted to use it  DHS officials we interviewed attributed the low participation to several possible factors including: DHS had implemented the expedited program after most eligible facilities already submitted standard (non-expedited) security plans to DHS; facilities may consider the expedited program’s security measures to be too strict and prescriptive, not providing facilities the flexibility of the standard process; and the lack of an authorization inspection may discourage some facilities from using the expedited program because this inspection provides useful information about a facility’s security  We also found in 2017 that recent changes made to the CFATS program could affect the future use of the expedited program  As discussed previously, DHS has revised its methodology for determining the level of each facility’s security risk, which could affect a facility’s eligibility to participate in the EAP  DHS continues to apply the revised methodology to facilities regulated under the CFATS program and but it is too early to assess the impact on participation in the EAP  In our July 2015 report, we found that DHS began conducting compliance inspections in September 2013, and by April 2015, had conducted inspections of 83 of the 1,727 facilities that had approved security plans  Our analysis showed that nearly half of the facilities were not fully compliant with their approved site security plans and that DHS had not used its authority to issue penalties because DHS officials found it more productive to work with facilities to bring them in compliance  We also found that DHS did not have documented processes and procedures for managing the compliance of facilities that had not implemented planned measures by the deadlines outlined in the plans  We recommended that DHS document processes and procedures for managing compliance to provide more reasonable assurance that facilities implement planned measures and address security gaps  DHS agreed and has taken steps toward implementing this recommendation  DHS updated its CFATS Enforcement Standard Operating Procedure (SOP) and has made progress on the new CFATS Inspections SOP  Once completed these two documents collectively are expected to formally document the processes and procedures currently being used to track noncompliant facilities and ensure they implement planned measures as outlined in their approved site security plans, according to ISCD officials  DHS officials stated they expect to finalize these procedures by the end of fiscal year 2018  We are examining compliance inspections as part of our ongoing work and will report on the results of our work in our report later this summer  In April 2013, we reported that DHS took various actions to work with facility owners and operators, including increasing the number of visits to facilities to discuss enhancing security plans, but that some trade associations had mixed views on the effectiveness of DHS’s outreach  We found that DHS solicited informal feedback from facility owners and operators in its efforts to communicate and work with them, but did not have an approach for obtaining systematic feedback on its outreach activities  We recommended that DHS take action to solicit and document feedback on facility outreach consistent with DHS efforts to develop a strategic communication plan  DHS agreed and implemented this recommendation by developing a questionnaire to solicit feedback on outreach with industry stakeholders and began using the questionnaire in October 2016  Chairman Shimkus, Ranking Member Tonko, and Members of the Subcommittee, this completes my prepared statement  I would be pleased to respond to any questions that you may have at this time  If you or your staff members have any questions about this testimony, please contact me at (404) 679-1875 or curriec@gao gov  Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement  Other individuals making key contributions to this work include John Mortin, Assistant Director; and Brandon Jones, Analyst-in-Charge; Michael Lennington, Ben Emmel, and Hugh Paquette  This is a work of the U S  government and is not subject to copyright protection in the United States  The published product may be reproduced and distributed in its entirety without further permission from GAO  However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately 

ground_truth: Several countries, primarily in Europe, and the European Commission have proposed or adopted taxes on revenue earned by multinational corporations (MNCs) in certain "digital economy" sectors from activities linked to the user-based activity of their residents. These proposals have generally been labeled as "digital services taxes" (DSTs). For example, beginning in 2019, Spain is imposing a DST of 3% on online advertising, online marketplaces, and data transfer service (i.e., revenue from sales of user activities) within Spain. Only firms with €750 million in worldwide revenue and €3 million in revenues with users in Spain are to be subject to the tax. In 2020, the UK plans to implement a 3% DST that would apply only to businesses whose revenues exceed £25 million per year and groups that generate global revenues from search engines, social media platforms, and online marketplaces in excess of £500 million annually. The UK labels its DST as an "interim" solution until international tax rules are modified to allow countries to tax the profits of foreign MNCs if they have a substantial enough "digital presence" based on local users. The member states of the European Commission are also actively considering such a rule. These policies are being considered and enacted against a backdrop of ongoing, multilateral negotiations among members and nonmembers of the Organization for Economic Cooperation and Development (OECD). These negotiations, prompted by discussions of the digital economy, could result in significant changes for the international tax system. Proponents of DSTs argue that digital firms are "undertaxed." This sentiment is driven in part by some high-profile tech companies that reduced the taxes they paid by assigning ownership of their income-producing intangible assets (e.g., patents, marketing, and trade secrets) to affiliate corporations in low-tax jurisdictions. Proponents of DSTs also argue that the countries imposing tax should be entitled to a share of profits earned by digital MNCs because of the "value" to these business models made by participation of their residents through their content, reviews, purchases, and other contributions. Critics of DSTs argue that the taxes target income or profits that would not otherwise be subject to taxation under generally accepted income tax principles. U.S. critics, in particular, see DSTs as an attempt to target U.S. tech companies, especially as minimum thresholds are high enough that only the largest digital MNCs (such as Google, Facebook, and Amazon) will be subject to these specific taxes. DSTs are structured as a selective tax on revenue (akin to an excise tax) and not as a tax on corporate profits. A tax on corporate profits taxes the return to investment in the corporate sector. Corporate profit is equal to total revenue minus total cost. In contrast, DSTs are "turnover taxes" that apply to the revenue generated from taxable activities regardless of costs incurred by a firm. Additionally, international tax rules do not allow countries to tax an MNC's cross-border income solely because their residents purchase goods or services provided by that firm. Rather, ownership of assets justifies a country to be allocated a share of that MNC's profits to tax. Under these rules and their underlying principles, the fact that a country's residents purchase digital services from an MNC is not a justification to tax the MNC's profits. DSTs are likely to have the economic effect of an excise tax on intermediate services. The economic incidence of a DST is likely to be borne by purchasers of taxable services (e.g., companies paying digital economy firms for advertising, marketplace listings, or user data) and possibly consumers downstream from those transactions. As a result, economic theory and the general body of empirical research on excise taxes predict that DSTs are likely to increase prices in affected markets, decrease quantity supplied, and reduce investment in these sectors. Compared to a corporate profits tax—which, on balance, tends to be borne by higher-income shareholders—DSTs are expected to be more regressive forms of raising revenue, as they affect a broad range of consumer goods and services. Certain design features of DSTs could also create inequitable treatment between firms and increase administrative complexity. For example, minimum revenue thresholds could be set such that primarily large, foreign (and primarily U.S.) corporations are subject to tax. Requirements to identify the location of users could also introduce significant costs on businesses. This report traces the emergence of DSTs from multilateral tax negotiations in recent years, addresses various purported policy justifications of DSTs, provides an economic analysis of their effects, and raises several issues for Congress.

prompt_front: You are given two reports by the government agency.



Question: Write a one-page summary of the report 2.

Report 1: T he term digital economy has fluid meaning in different policy contexts  Broadly speaking, this term can refer to any number of everyday economic activities that are connected over computers, mobile phones, or other internet-connected devices  In the realm of international tax policy, though, certain types of activities and markets have been singled out for selective taxation by some jurisdictions—primarily in Europe  Most of these digital economy business models operate in "two-sided markets" in which they provide services to individual users (sometimes at zero charge) and sell other services to businesses (e g , advertising to users)  Proponents of these "digital services taxes" (DSTs) justify them on a number of grounds, including the goal of having multinational corporations (MNCs) pay their "fair share" of taxes, taxing profits purportedly derived from consumers in their jurisdictions, or adapting traditional rules and systems of international taxation to account for new forms of "disruptive" business models that can be conducted virtually over the internet  U S  opposition to these unilateral taxes has been voiced by several government officials  Robert Stack, while Treasury Deputy Assistant Secretary for International Tax Affairs under President Obama, said that such efforts are primarily political efforts to target U S  corporations  More recently, Treasury Secretary Steven Mnuchin has issued multiple statements in opposition to unilateral taxation of digital economy businesses  Some Members of the tax-writing committees in Congress have also criticized these efforts  This report analyzes DST proposals from an economic and policy perspective as they have been introduced, discussed, and adapted in European countries  Some commentators and policymakers argue that MNCs in the digital economy are "undertaxed" or are not paying a "fair share" of taxes in their jurisdictions  Two issues that often underlie these sentiments are (1) the ability of digital economy MNCs to provide services without establishing a physical presence (or "permanent establishment") in the country in which their customers reside and (2) the ability of digital economy MNCs to shift their profits away from countries where they conduct real economy activity (e g , sales, development, production) toward low-tax jurisdictions where the MNCs are conducting little to no real economic activity  Even if a country is able to establish the right to tax an MNC's profits in the digital economy (via permanent establishment rules), the profits subject to tax in that jurisdiction could be reduced via transfer pricing rules  A commonly held principle across international tax law is that there must be a substantial enough connection between a country and a corporation's activities to establish "nexus" in that country, enabling the country the first right to tax the corporation's income or profits earned from sales in that country  Specific criteria for what constitutes a permanent establishment are written into bilateral tax treaties, but they often require a fixed, physical presence within the country  Once a right to tax has been created, a country can tax a portion of the MNC's cross-border profits that can be sourced to its jurisdiction  MNCs can earn income from local residents without creating a permanent establishment in that jurisdiction  Rules creating a permanent establishment based on physical nexus might not be triggered by digital activities over the internet because "the internet" is not physically located in any one country  The internet is a global network of computers  For example, Google can sell advertising space on its search results to a French business without creating a permanent establishment in France  The physical servers processing the payment and posting the advertisements do not have to be located in France  In response, different countries and intergovernmental organizations have tried or proposed modifying definitions and interpretations of permanent establishment rules to include "digital presence" criteria  These criteria include users, "clicks," or other digital activities with origins in the local jurisdiction  The " Select International Efforts to Tax the Digital Economy " section of this report discusses these proposals in more detail  Transfer pricing rules dictate how profits from transactions between related entities within the MNC should be divided among multiple countries for tax purposes  From the U S  perspective, transfer pricing rules are intended to prevent taxpayers from shifting income properly attributable to the United States to a related foreign company (and vice versa) through pricing that does not reflect an arm's-length result  In practice, though, the arm's-length standard can be difficult to administer on intra-company transactions within an MNC in which there is no market where independent parties bargain over price  Sophisticated transfer pricing strategies can result in an MNC's global profits being subject to a low effective tax rate across multiple tax jurisdictions  MNCs in the digital economy, in particular, can use transfer pricing strategies to reduce the effective tax rate imposed on their cross-border income, because their primary sources of income are often derived from intangible assets (e g , patents, algorithms, trademarks, and marketing licenses)  These assets are more challenging for "arm's-length" pricing because it is difficult to determine the value of a comparable sale of such unique technologies and services  Additionally, intangible assets can be sold to a corporate entity in a low-tax jurisdiction at relatively low cost as they do not require the relocation of corporate headquarters or physical factories, workforces, etc  The exact tax planning methods used by MNCs can vary, but generally they involve the parent (e g , located in the United States) selling the income-earning ownership rights to those intangible assets to a subsidiary corporation in a low-tax jurisdiction  Early on, a firm developing a potentially profitable intangible asset in a higher-tax jurisdiction might create a subsidiary in a low-tax jurisdiction and sell or assign the ownership rights to that subsidiary  Creation of this "shell corporation" is primarily a paper transaction for the purposes of holding ownership of the profit-generating intangible asset  One way that this could happen is through a cost-sharing agreement in which a U S  corporate owner of an existing intangible asset agrees to make the rights available to a foreign affiliate in exchange for other resources and funds to be applied toward the joint development of a new marketable product or service  Under a cost-sharing agreement, a foreign affiliate makes an initial buy-in payment for existing technology that, in theory, should reflect an "arm's-length" price that would be paid by an unrelated party  It then receives the income accruing to that asset  Subsequently, the foreign affiliate shares in the cost of continuing technological development  The cost-sharing payments made by the foreign affiliate to the U S  corporation are income to the U S  parent, and the foreign affiliate gains the right to use the advance in technology in a specified foreign market  This results in two outcomes  First, the MNC can use transfer pricing rules to maximize costs attributable to subsidiaries in higher-tax jurisdictions  Thus, the taxable income earned by the subsidiaries in higher-tax jurisdictions is reduced to as close to zero as possible  And second, taxable income realized by the shell corporation in the lower-tax jurisdiction is increased  For example, a U S  corporation establishes a subsidiary in Jersey, an island in the English Channel with a standard corporate tax rate of 0%  The subsidiary buys an existing mobile phone technology developed by its parent U S  corporation  The subsidiary has bought the right to earnings from marketing that technology in phones throughout Europe  The original cost-sharing payment to the parent would be subject to U S  tax  The agreement allows the Jersey subsidiary to use updated versions of that technology in the European market from research conducted in the United States  Although the intangible assets were originally developed and improved in the United States, earnings from the mobile phone sales in Europe flow to the Jersey subsidiary and are taxed at 0%  Concerns over the ability for MNCs to avoid corporate income taxes have led to much discussion within national governments and among developed countries in international economic settings  As some of these discussions have met impasse, for various reasons, some countries have unilaterally proposed or implemented policies to tax digital economy MNCs on specific grounds  This section of the report provides a brief historical overview of these recent discussions and select unilateral DST proposals in Europe  While efforts to tax the digital economy have not been limited to European countries, efforts to develop policy principles and justifications in support of these specific taxes on digital economy markets have primarily been driven by politicians and commentators in Europe, including the United Kingdom  This report will not provide a comprehensive account of each DST proposal or be updated to track the rapid pace of policy modifications and emerging proposals  In 2013, members of the Organization for Economic Cooperation and Development (OECD) and G-20 initiated the Base Erosion and Profit Shifting (BEPS) Project  The result of this multiyear effort is the 2015 BEPS Action Plan, which represents the consensus of the member countries that participated in the BEPS Project  Article 1 of the BEPS Action Plan analyzes the implications that the digital economy could have for modern tax systems, including taxes on corporate profits (i e , corporate income taxes), withholding taxes (e g , on royalties), and value-added taxes (VATs)  Article 1 acknowledges that "it would be difficult, if not impossible, to ring-fence the digital economy from the rest of the economy for tax purposes" given the importance of digital platforms and business models in modern economies  In light of this finding, though, Article 1 discusses potential new tax principles to enable countries to tax the profits earned by firms in the digital economy  Specifically, Article 1 discusses expanding on the widely accepted principle that profits should be taxed "where value is created" to include the notion that value-creating activities include user interaction  For example, YouTube profits when users post their videos and create content on its channels and generates more revenue in advertisement sales based on increased viewer traffic  Additionally, Article 1 considers using "significant economic presence" rather than physical presence as the standard nexus for sourcing which jurisdiction has the right to tax  "Significant economic presence" could be measured by a corporation's revenues earned from customers in a country  The various DST proposals in Europe share many of the features of digital taxation options discussed in the OECD BEPS report  Following the release of the 2015 BEPS Action Plan, the OECD has continued work in this area with its Task Force on the Digital Economy  On March 16, 2018, the task force released an interim report reflecting three different perspectives by its members  One perspective is that user-value creation has led to a "misalignment between the location in which profits are taxed and the location in which value is created" in some digital economy business models  This user-created value argument, discussed more throughout this report, has been used by many proponents of DSTs  A second perspective is that the challenges of tax policy presented by the digital economy are not exclusive to specific business models and should be addressed within the existing international tax framework for business profits  A third perspective is generally satisfied with recent BEPS recommendations and the existing international tax system and does not see a need for significant reform  Despite divisions reflected in the interim report, the task force aims to create an international consensus on principles for taxing the digital economy with a goal of releasing a final report on conclusions and recommendations by 2020  In March 2018, the European Commission announced a digital tax package containing two proposals  The first proposal would expand the definition of permanent establishment to include cases where a company had significant economic activity through a "digital presence," thereby allowing EU members to tax profits that are generated in their jurisdiction even if a firm does not have a physical presence  Under the proposal, a digital platform would be deemed to have established a "virtual permanent establishment" in an EU member state if it (1) exceeds a threshold of €7 million in annual revenues in a member state, (2) has more than 100,000 users in a member state in a taxable year, or (3) has over 3,000 business contracts for digital services business users in a taxable year  Until that more systemic change in permanent establishment rules is adopted, the second proposal would impose an "interim tax" on certain revenue from digital activities: selling online advertising, online marketplaces (facilitating the buying and selling of goods and services between users), and sales of data generated from user-provided information  The interim DST would apply only to companies with total annual worldwide revenues of at least €750 million and EU revenues of at least €50 million  The European Commission estimated that a 3% tax rate would raise €5 billion annually for member states  Media reports indicate that the EU-wide proposals have stalled partly due to disagreement among member states with different economic interests and questions as to whether the proposals would be legal under EU law  In support of its digital tax proposals, the European Commission argues that existing tax rules do not account for how value is "created by users" in the digital economy: Today's international corporate tax rules are not fit for the realities of the modern global economy and do not capture business models that can make profit from digital services in a country without being physically present  Current tax rules also fail to recognise the new ways in which profits are created in the digital world, in particular the role that users play in generating value for digital companies  As a result, there is a disconnect—or 'mismatch'—between where value is created and where taxes are paid  In discussing "value creation in the digital economy," the European Commission states: In the digital economy, value is often created from a combination of algorithms, user data, sales functions and knowledge  For example, a user contributes to value creation by sharing his/her preferences (e g , liking a page) on a social media forum  This data will later be used and monetised for targeted advertising  The profits are not necessarily taxed in the country of the user (and viewer of the advert), but rather in the country where the advertising algorithms has been developed, for example  This means that the user contribution to the profits is not taken into account when the company is taxed  Despite the policy pronouncements of the European Commission, member states of the EU disagree on both the long-term (changes to the permanent establishment rules to include digital presence factors) and interim (an EU-wide DST) proposed policies regarding the digital economy  On December 4, 2018, the economics and finance ministers of various EU member states met as part of the EU's Economic and Financial Affairs (Ecofin) Council  As part of its agenda, the Ecofin Council was scheduled to consider a vote on the EU's DST proposal  According to media reports, a vote was not formally considered, as it was apparent that multiple members held out in opposition against the DST  As of the publication date of this report, the issues are still under consideration by the Ecofin Council  Even if opponents to the broad, EU-wide DST proposed by the European Commission successfully block adoption of such a tax, this does not mean that individual members states are also barred from imposing their own national-level DSTs  Policy and political pressure for DSTs still exist within many EU member states  According to one media report, approximately 11 of the 28 EU member states were considering or had adopted DSTs before the Ecofin meeting  In April 2018, Spain announced that it would introduce a DST of 3% to the gross income derived from certain digital services  According to a preliminary text of the proposal, beginning in 2019, the tax will be imposed on certain digital services, including online advertising, online marketplaces, and data transfer service (i e , revenue from the sales of online user activities) determined from internet protocol (IP) addresses within Spain  The tax would apply only to companies with global revenues for the previous calendar year exceeding €750 million and €3 million in revenues earned in that current year from activities with users in Spain  On October 29, 2018, the Conservative Party introduced a DST as part of its 2018 budget proposal  Specifically, the tax would be levied at 2% on the applicable revenues of "certain digital businesses which derive value from their UK users " Revenue subject to tax include search engines, social media platforms, and online marketplaces derived from the participation of UK users  Users is defined broadly and can include interactions (e g , payments made or clicks) from UK participants on either side of a two-sided digital market  The tax would apply only to businesses whose revenues from covered business activities exceed £25 million per year and groups that generate global revenues from search engines, social media platforms, and online marketplaces in excess of £500 million annually  There would also be a safe harbor provision that exempts "loss-makers and reduces the effective rate of tax on businesses with very low profit margins " A "review clause" would be included in the DST to ensure that it is still required following further international tax reform discussions  The specifics of the DST are to be detailed in legislation to be considered by Parliament that is expected to be introduced in April 2020  The UK Treasury estimates that the DST will raise £400m by 2022-2023 and £440m by 2023-2024  According to the UK Treasury, the DST serves as "interim action" to "ensure that digital businesses pay tax that reflects the value they derive from UK users" until international corporate tax reform efforts determine a comprehensive method to tax income earned from these types of multinational corporate business models  On December 17, 2018, Bruno Le Maire, Finance Minister of France, announced that the government was going to impose a DST beginning on January 1, 2019  Le Maire said that the tax is estimated to raise around €500 million annually  Details on what activities would be covered and the rate of tax were not provided but may be addressed in legislative sessions  Le Maire's announcement came the week after EU finance ministers did not reach agreement on an EU-wide DST at the December 2018 Ecofin meeting and shortly after President Emmanuel Macron announced billions of euros in tax cuts and spending in response to domestic social unrest  According to media coverage of the announcement, the decision to impose a DST seems to be motivated at least in part by a perceived unfairness in the amount of taxes paid by foreign corporations compared to domestic corporations  This section of the report first identifies the fundamentals of a corporate profits tax before addressing justifications that some have offered for DSTs  DSTs have been characterized as extensions of different types of tax regimes ranging from a tax on corporate profits in the digital economy to something more like a selective or excise tax on specific types of activities that is standalone from income tax regimes  Based policy analysis, though, DSTs resemble a selective tax on revenue (akin to an excise tax) and not as a tax on corporate profits  A tax on corporate profits taxes the return to investment in the corporate sector  Investment is giving up income for consumption today for the promises of higher returns, or earnings, in the future  Investment can be made in tangible assets, such as factories or equipment, or intangible assets, such as patents or trade secrets  The earnings eventually generated by the assets owned by corporations are taxed under the corporate profits tax  As discussed in the "Permanent Establishment" section of this report, domestic tax laws and international agreements provide the first right to tax income at its physical source—that is, where the asset is owned  The locations of a corporation's customers do not determine which country has a right to tax its income  For example, if a U S  firm manufactures goods in the United States and exports those goods to European countries, then those European countries do not have a right to tax the earnings of the U S  firm just because of its sale to European customers  Under some tax regimes, countries retain the right to impose a residual tax by taxing foreign-source income (i e , income earned from overseas) and allowing a foreign tax credit  But the right to impose that residual tax on income from foreign incorporated subsidiaries is based on a domestic corporation owning some minimum percentage of the foreign business entity (i e , a controlled foreign corporation, or CFC)  In the United States, income from foreign branches is taxed currently and eligible for a credit  For example, the United States could tax the income that a firm earned from overseas sales if that firm is owned in part or in full by a U S  parent in the year that the foreign-source income was earned (i e , "currently," or not subject to deferral)  However, most countries do not exercise this residual right to tax foreign-source income outside of income that can be easily shifted to low-tax countries  European Commission authorities appear to be characterizing their DST proposal as an extension of national-level corporate income taxes  In contrast, the UK has framed its DST as a gross receipts tax and specifically says that it is not an income tax  Regardless of these mixed characterizations, a policy analysis of DSTs indicate that they do not resemble a tax on corporate profits  First, as explained above, international tax rules do not provide countries a right to tax an MNC's cross-border income solely because their residents purchase goods or services provided by that firm  Rather, ownership of assets justifies a country to tax that MNC's profits  Second, DSTs, as they have been introduced thus far, are not structured as taxes on corporate profits  Corporate accounting profit is equal to total revenue minus total cost  Many corporate income tax systems tax corporate profits (along some policy spectrum of resident-based or worldwide-based rules)  In contrast, DSTs are structured as "turnover taxes" that apply to the revenue generated from taxable activities regardless of costs incurred to a firm  The first section of the Appendix provides an algebraic illustration to show that a DST may have different consequences for the after-tax accounting profits of a firm than an income tax levied at the same tax rate  Third, DSTs are economically equivalent to excise taxes on intermediate services in the supply chains of various markets  As explained in the "Economic Efficiency" section of this report, the economic incidence of a DST is likely to be borne by purchasers of taxable services (e g , companies paying digital economy firms for advertising, marketplace listings, or user data) and possibly consumers downstream from those transactions, depending on supply-and-demand conditions in each stage of the supply chain  It could be possible under specific market conditions (i e , in which firms subject to the statutory incidence of a DST earn supernormal economic profits or have monopoly power) that DSTs could reduce corporate profits of firms in the digital economy  Under this scenario, even though DSTs would not still be structured as a tax on profits (from a plain reading of the implementing law), they could have the economic effect of a tax on profits  For reasons discussed later in this report, though, it would be difficult to demonstrate that digital economy firms generate supernormal economic profits or are monopolies within the larger markets in which they operate  Proponents of DSTs argue that profits earned by MNCs in the digital economy are not adequately taxed on a worldwide basis, as many of these firms have reduced their effective tax rates through international tax planning strategies  As discussed earlier in the " Tax Issues Highlighted by the Digital Economy " section of this report, two prongs of these tax planning strategies include avoiding permanent establishments in higher-tax jurisdictions and using transfer pricing to shift profits to lower-tax jurisdictions  Other strategies that help MNCs, both inside the digital economy and outside, avoid income tax include debt and earnings stripping, avoiding withholding taxes, and contract manufacturing  Critics of basing DSTs on this position could make several arguments  First, revenues lost from profit shifting are lost revenues to the country with the right to tax the corporation that owns the asset, not the country that is home to the corporation's customers  Although many developed economies are concerned with ensuring that profits are taxed from their proper source under international tax laws, a country that imposes a DST on foreign MNCs' income (in which they have no right to tax) is not consistent with the rationale of recouping revenue lost from the profit-shifting practices of that country's firms  Second, tax strategies enabling MNCs to pay little to no tax have been used by a broad array of firms that rely on intangible assets for the majority of their profits, and these firms are not limited to industries in the "digital economy " For example, European Commission authorities recently opened investigations into tax benefits conferred by its members on McDonald's (over royalty payments made by franchisees for use of the company's brand) and Starbucks (over royalty payments for coffee roasting "know-how" and the price of its unroasted beans)  Thus, it can be argued that DSTs arbitrarily target firms within the digital economy for allegedly excessive profit shifting  Third, tax policies in a number of countries have recently changed or are scheduled to change in ways that will reduce incentives for profit shifting  These changes will most likely affect firms with the most aggressive profit-shifting strategies, including some digital economy firms  In the United States, a number of provisions enacted in P L  115-97 have reduced or will likely reduce economic incentives for U S  MNCs to engage in profit shifting and tax avoidance  In addition to reducing the top marginal corporate tax rate from 35% to 21% —and, thus, the potential tax savings from profit shifting— P L  115-97 contains several other policy changes discouraging profit shifting, such as "Thin capitalization" rules limiting the benefits to earnings and debt stripping, such as reducing the share deductions of interest from 50% to 30% of adjusted taxable income for businesses with gross receipts greater than $25 million and eliminating a safe harbor that exempted firms without high debt-to-equity ratios  A new tax on "global intangible low-taxed income" (GILTI), effectively imposing a 10 5% minimum tax rate on the intangible income of CFCs in years 2018-2025 and 13 125% after 2025  In other words, if U S  corporations are largely the center of concerns about digital economy MNCs not paying a "fair share" of their worldwide profits in tax, then GILTI provides a "floor" in the amount of tax owed by firms that previously sought out tax homes for their intangible assets in countries that imposed low or zero income tax  A "deemed repatriation" tax on accumulated post-1986 earnings at rates of 15 5% (if held in cash) and 8% (other, noncash assets), with applicable foreign tax credits similarly reduced  In other words, retained earnings of U S  MNCs that were held abroad (often in low-tax jurisdictions) are now subject to tax  U S  firms that invert are subject to a number of penalties, such as higher tax rates on the stock compensation of the inverting company's executives, a recapture of the deemed repatriation rate on post-1986 earnings (subjecting these earnings instead to 35% instead of 8% or 15 5%), and application of ordinary individual income tax rates instead of lower qualified dividend/long-term capital gains rates on certain dividends issued from the new foreign parent of the inverting U S  company  Some European countries have taken efforts to change policies that were characterized by some as enabling tax avoidance among digital economy MNCs  For example, Ireland is phasing out tax provisions by 2020 behind the "double Irish sandwich " Some digital economy firms reportedly used this tax planning strategy to reduce the effective rate of tax on their cross-border income (e g , advertising sales in Europe) and shift their profits to "tax havens" that impose no tax on corporate income  Furthermore, the Netherlands is considering imposing a withholding tax on royalty payments to low-tax jurisdictions by 2021  Although tax-minimizing international tax planning still exists, policy changes have reduced the benefits of using past strategies that raised concerns of MNCs routing income through a complicated series of international business entities for the primary purpose of reducing tax owed  Fourth, DST proposals are unlikely to affect profit-shifting behavior  As explained above, a tax on corporate profits, in a very general sense, taxes corporate income minus the costs of production  In contrast, DSTs are imposed on gross revenue derived from certain business activities (or "turnover") and do not take into account costs or net profits earned by the taxable firm  Thus, economic incentives for MNCs to shift profits remain unchanged by DSTs as they do not affect profit-maximizing decisions at the margins  As discussed in the " Select International Efforts to Tax the Digital Economy " section of this report, statements by the European Commission and United Kingdom claim that tax regimes are not adequately taxing the "value" created by user contributions and behavioral data that forms a key part of the business models of firms in the digital economy  The user-based value creation argument says that some digital platforms benefit from "network effects," in which the contributions of one user benefit other users and draw more users to utilize the platform  For example, a UK user creates a video on YouTube that is widely shared or promoted among other UK users  The increased user traffic benefits YouTube because more users are seeing advertisements that it has placed on its site  Thus, the video content creator has created "value" to YouTube by generating more advertising revenue to the platform  As another example, Yelp is a website and mobile application that allows users to provide restaurant and business reviews  Yelp generates revenue primarily from targeted advertising placed on its website  As more users provide higher-quality reviews, more users will rely on Yelp  Thus, the quality of user contributions creates "value" for Yelp's business model by increasing advertising revenue  Critics of this user-based "value-creation" argument could make various rebuttals  First, business models in the digital economy do not raise novel or "disruptive" challenges to income tax frameworks  In the digital economy, it is common for firms to operate in two-sided markets, where they sell or provide services to two sets of customers  For example, a social media company could use revenue earned from customers on one side of the market (advertising sales to businesses) to subsidize the free provision of services to customers on the other side of the market (individual platform users)  A company providing free health and athletic tracking services can charge lower prices for a wearable device if it can sell aggregated user data to another marketer  This method of earning income across two-sided markets, though, is not new  For example, the advent of radio and television broadcasting in the 1900s operated on the same business model, where individual users consumed free programming in exchange for listening or viewing advertisements from sponsors  Just because French households along the border with Italy listen to Italian advertisements on an Italian radio station does not give France the right to tax the Italian radio station's advertising revenues  By analogy, just because French households are able to view online advertisements placed by a U S  company on a U S -owned social media platform does not give France the right to tax the U S  social media firm's advertising revenue  Second, the "value created" in the digital economy is achieved by the innovations and assets of the companies themselves, not by the actions of a single user  The companies—not the customers—bear the risk associated with investments in innovative technologies and platforms  They hire the workers, conduct the research, and develop the software, algorithms, and patentable innovations  For example, a key capability of many digital economy platforms is the ability to aggregate large amounts of data points across millions (if not billions) of users and repurpose that information for targeted adverting or directly selling goods and services  The technology enabling the aggregation of the user data and identifying patterns in consumer behavior is what adds value for resale to potential advertisers or retailers  Third, user contributions can be viewed as inputs to digital economy business models  It can be argued that the value of a single user's data or input is worth little to no market value in isolation  This is why users are generally willing to let companies track and collect these data without charge  Even if digital business models that allow individual users to monetize and sell their individual data grow, any income earned by individual users would be subject to tax under existing tax systems  For example, property owners on Airbnb are subject to income taxes and other hospitality fees levied by their national and local governments  YouTube "influencers" that are sponsored by companies pay personal income tax on those earnings to their home countries  Fourth, user contributions can be viewed as a substitute for money exchanged by consumers for the provision of digital services  "Direct provision," in this context, has the same meaning as "sale of" digital services, except there is no money exchanged in the transaction (i e , bartering)  For example, take the market for data generated by user-provided information  Google users agree to have Google track their search queries in exchange for the free use of Google's search engine  Similarly, Facebook users agree to have their likes, posts, and network connections tracked and aggregated for sale to advertisers in exchange for the use of Facebook's social media platform at zero cost  These transactions, it is argued, maximize the economic welfare of both consumers and producers  Consumers benefit because the behavioral data of any one user has little to zero market value (as discussed above), but consumers do value the provision of digital goods and services  Producers of digital services benefit because they are able to generate revenue from repurposing aggregated user data in exchange for operating their digital platforms at little to no cost to users  As another example, Amazon's business model can be viewed like a catalog retail merchant that features the goods of different manufacturers  A catalog retail merchant earns income by selling space to manufacturers for the privilege of featuring their products in the merchant's catalog  The catalog merchant's customers place an order, and the goods—which are typically manufactured from outside of the jurisdiction where the customer is located—are then shipped to the customer  The customers did not "create value" in that business-to-business transaction via their subscription and purchases of the catalog  By analogy, just because a final consumer of goods sold via Amazon resides in the UK or France does not give those countries the right to tax Amazon's revenues  Fifth, the distinction that customers in the digital economy create value while customers in other industries do not could be viewed as arbitrary  Consumers engage in a countless array of activities that enhance a company's "value" in the course of everyday life  Customer reviews and referrals for services—everything from dog walkers to dry cleaners to dentists—have existed for years and can increase a business's revenues  However, consumers usually do not expect a share of those revenues, nor does the act of providing a review give the country in which that customer resides a right to tax the service provider's profits  Additionally, consumers promote certain brands and companies simply by using their goods or services  This sort of "free marketing" improves the reputation of the brand or firm but does not trigger tax liability based on the location of the consumer  The flow of users to one digital economy platform or another are similar in that mass consumer attraction drives revenue  What the digital economy has changed, though, is the speed and scope in which consumer actions can be relayed to others  Excise taxes are typically justified by economic principles or as revenue-raising measures  From an economic perspective, there are four common types of excise taxes: (1) sumptuary (or "sin") taxes, (2) regulatory or environmental taxes, (3) benefit-based taxes (or user charges), and (4) luxury taxes  The first two categories of excise taxes attempt to correct for a perceived "market failure" in which the actions of individuals in the market have negative spillover effects to society  The third category is typically used to limit the burden of funding a government program that tends to benefit a relatively defined or narrow set of beneficiaries  The fourth category, largely repealed in the United States, uses specific taxes as a means to raise revenue in a more progressive manner  Based on these classifications of excise taxes, it appears that a DST primarily serves as a revenue raising measure  The use of digital platforms does not appear to create negative spillovers to society, creating the economic justification for use of excise taxes to raise the price of individual transactions as a means to reduce the burden on society  DSTs do not appear to be a benefit-based tax, as proponents have not called for dedicating the revenue to specific government programs that benefit digital economy MNCs subject to tax  DSTs also do not appear to be clearly a more progressive method of financing government activities compared to income taxes or broad-based consumption taxes (e g , value-added taxes) that are common in Europe  As discussed below in the " Vertical Equity (Progressivity) " section of this report, DSTs could be a regressive method of financing government spending in the countries that impose them  This section analyzes DST proposals under the standard tax evaluation criteria used by economists  These criteria are used to understand how a tax affects consumer demand and producer supply, whether a tax aligns with common notions of fairness, and administrative issues that could increase tax compliance costs for taxpayers or affect the ability of governments to collect revenue from a tax  Economic efficiency is typically defined as optimal production and distribution of resources in a market  Taxes typically impede, or distort, that optimal allocation of resources by raising the price of the taxed activity  Central to estimating the magnitude of these distortions is determining who bears the economic burden, or incidence, of the tax  The economic incidence of a tax can differ from the statutory incidence (i e , who is obligated by law to pay the tax) depending on conditions in the affected market  Once the economic incidence of a tax is established, the exact distortions to consumers and producers can be determined as well as any other economic activity that is typically discouraged by a tax  The statutory incidence of the DST is borne by firms that provide covered services  For example, under the Spanish DST, companies that sell online advertising services, provide platforms for online marketplaces and intermediation services, and data transfer services—all to users with IP addresses within Spain's jurisdiction—will be subject to the DST (providing that they meet the threshold requirements)  The economic incidence of such a tax could vary depending on the structure and characteristics of those individual markets, as explained in more technical detail in the Appendix   Under one scenario, digital economy firms providing services subject to the DST are perfectly competitive, and the economic burden is borne by the consumers of the digital services in the form of higher prices over the long term  For example, Spain levies its DST on firms that place digital advertisements, based on the revenue earned from showing advertisements on the search results and web pages of users with Spanish IP addresses  In a perfectly competitive market, firms providing digital advertisements earn zero economic profit in that they could not earn a higher rate of return via alternative investments  When faced with the DST, these advertising firms can either (a) exit the industry and pursue higher returns in other industries that are not subject to tax or (b) pass along the tax in the form of higher prices to businesses that purchase the advertising services  The firms purchasing digital advertising could be Spanish companies, but they could also be foreign firms purchasing advertisements that are ultimately targeted to Spanish users  In this case, the imposition of a DST in a competitive market will increase the price of taxable services and lead to a decline in the quantity demanded  The exact magnitude of these changes will depend on the responsiveness, or "elasticity," of the companies purchasing the internet advertising to changes in price  Assuming that companies purchasing the advertising services are also operating in a perfectly competitive market, they are faced with the same options as the firms that sell internet advertising: exit the industry or pass the tax along to consumers of their goods  Higher prices could result in lower consumer demand for the advertised product  The magnitude of this reduced demand depends on the responsiveness of consumer demand to changes in price (i e , the price elasticity of demand)  Thus, a DST imposed on intermediary services can have ripple effects downstream within markets  Under perfect competition, the economic incidence of an upstream DST is ultimately borne by the final consumers of those advertised products  Under an alternative scenario, sellers of digital services (e g , Google, Facebook, Amazon) could be monopolies, or a small number of firms could have "market power" (the ability to influence the price for their services prevailing in the market), and at least part of the tax is borne by these firms in the form of reduced economic profits  Firms can derive market power from a number of factors  For example, lack of competition could enable one firm to have a significant effect on the prevailing rate of digital advertising services  Also, the presence of complements and substitutes could affect market power  In contrast to firms in perfectly competitive markets, firms that have market power are able to earn positive economic profits, also known as "supernormal profits," because they are able to set a price above their marginal cost of production  Some have argued that digital economy firms are more likely to generate supernormal profits because the marginal cost of scaling production of their business model is relatively low, if not costless  For example, the marginal cost for Facebook to display an advertisement to a user is basically zero  Others argue that some firms generate supernormal profits because they are operating in an oligopoly or near-monopoly  For example, most search results are conducted through Google, and Facebook has the most users among social media platforms  These arguments, though, may not provide clear indication of supernormal profits  A variation of the first argument could have been made during the rise of the retail catalog industry, where the marginal cost of producing a single magazine and mailing it to a consumer was relatively small  However, the presence of competing catalog retailers should have driven the prices of firms down close to their marginal costs (which encompass more than just the cost of printing one additional catalog)  The second argument could be seen to misidentify the structure of "two-sided markets" in which many digital economy firms provide services to individual users as well as businesses  For example, Google provides search engine results to individual users (at no cost) and sells advertising space on those search results to businesses  Even if Google dominates the search engine market, it still competes against other firms, such as Facebook, for digital advertising  Digital economy firms also compete with nondigital economy methods of providing advertising services (e g , television, print, and radio), which could constrain their ability to set prices well above their marginal cost of production  When faced with the DST, a monopolist or firms with market power bear at least some of the tax in the form of lower profit  This analysis is explained in more detail in the Appendix   How much of the tax is passed along to companies buying the advertising placement (and their customers) depends on the elasticities of supply and demand in those markets  Like the analysis in the competitive market, consumers in the affected industries reduce their demand in response to higher prices  The ultimate implication of the analyses above is that DSTs introduce distortions in various markets by reducing the financial return to capital in digital economy industries or by raising the cost of goods and services intermediated through digital platforms  Investment in affected markets would be expected to decrease  An example of the former would shift investment out of digital economy firms (e g , as retailers purchase more print, television, or radio advertisement instead of internet advertisement or increased sales via brick-and-mortar or catalog outlets instead of digital), while an example of the latter would involve a reduction in demand of the final goods  The exact magnitude of these changes will vary based on the responsiveness of supply and demand in those various markets  Distortions can also arise in different ways depending on how a particular country's DST is applied to different firms  These issues are described more in the " Differential Treatment of Firms " section below  The principle of vertical equity generally implies that taxpayers with a greater ability to pay the tax should generally pay a greater share of their household income in taxes compared to households with a lesser ability  A tax is "progressive" if higher income households pay a greater share of their income in tax than lower-income households, whereas the opposite is true in a regressive tax system  If the economic incidence of DSTs resemble that of an excise tax rather than a tax on corporate profits, as discussed in the " Economic Efficiency " section, this finding also has an impact on the vertical equity analysis of DSTs  A review of the economic literature shows that the majority of the corporate income tax is borne by capital (i e , the corporation's shareholders) with the residual being borne by labor, or workers  Capital, here in the form of stock ownership, tends to be disproportionately concentrated in higher-income households  In contrast, excise taxes are commonly borne by consumers in the form of higher prices  Excise taxes are often regressive, as lower-income households bear a higher share of their pre-tax income on consuming goods and services than higher-income households  The exact equity effects of DSTs could vary based on different abilities for intermediate firms to pass the tax along to consumers, the nature of the goods and services that they sell, and the responsiveness of consumers in those relative markets  For example, assume that Facebook charges higher prices for advertising on the social media platform to companies, and companies are able to pass those higher advertising costs in full to their customers in the form of higher prices  If one of those companies sells luxury cars and another sells consumer household goods, the DST has more progressive effects in the former case and more regressive effects in the latter  In the aggregate, though, there is little reason to assume that final consumers of goods and services sold through taxable activities in digitized business models are disproportionately higher-income  Thus, it can be expected that a DST affecting a broad range of goods and services is more likely to be regressive than not, especially when compared to a tax on corporate profits  DSTs create unequal economic treatment between similarly situated firms inside and outside of the digital economy  Firms outside of the digital economy can earn just as much global or local revenue as firms taxed under DSTs without being subject to an additional layer of tax on their revenue  Firms outside or inside the digital economy can also engage in profit shifting and "aggressive" transfer pricing to reduce their taxes owed in a country  DSTs, as they have been presented thus far, also create inequalities for firms of similar size based on certain exemptions and thresholds  For example, each of the specific European DST proposals use different or multiple thresholds based on total cross-border profits, revenue generated from covered business activities, "clicks" or interaction based from local users, etc  While proponents of these DSTs with minimum thresholds might have other policy goals in mind (e g , exempting smaller businesses from potentially costly tax compliance burdens), the exact levels at which these thresholds are drawn among larger MNCs are arbitrary from a policy perspective  Critics of DSTs would argue that the thresholds are drawn to exclude domestic MNCs or to target the taxes to a narrow set of foreign MNCs  Regardless of their rationale, these thresholds create concerns of inequitable treatment between different sectors  In the situation where the tax is fully passed along to consumers, digital firms either charge a higher price (reducing demand) or exit the industry  Where the MNCs subject to the statutory incidence of the tax bear at least a portion of the economic incidence of the DST, then they face a lower return to business investment in that country compared to firms not subject to the DST  Additionally, the UK DST's proposed exemption or "safe harbor" for "low profit" firms could create another layer of equity concerns  If the exemption is based on low profits as calculated by UK tax rules, then firms that are not subject to the UK corporate income tax (because they do not have a permanent establishment in the UK) will not be eligible for the exemption  In other words, if a firm must be subject to the UK corporate income tax to be eligible for exemption then, by definition, the exemption is not available to foreign MNCs  MNCs with similar amounts of global revenue would be subject to different effective tax rates on their worldwide consolidated earnings (across all related entities) based on whether they were subject to UK income taxes or not  An alternative exemption being considered by the UK, based on global consolidated profits, could have some administrative issues, as discussed in the next section of this report  DSTs present several administrative challenges to both the public and private sectors  With regard to the public sector, lawmakers and revenue-collecting agencies will have to clarify exactly what types of activities are subject to tax and which parties bear the statutory burden of paying tax  These decisions affect the costs of administering the tax or the gross revenue collected by the tax  With regard to the private sector, the decisions made by lawmakers and agencies could affect the costs of complying with DST regimes  Technology could present administrative challenges to the implementation of DST proposal  First, some digital economy platforms allow users to opt out of having their data tracked or resold to third parties  Without this information a digital service provider may be able to fulfill a user's desire for privacy, but the absence of the information limits the provider's ability to apply proper taxes based on the customer's jurisdiction  "Do not track" or internet browser plugins that make it more difficult for companies to track users' activities could affect the measurement of data collected from local users  Second, users could reroute their internet traffic to servers outside of the country imposing the DST and mask their physical location  Virtual private network services (VPNs) allow users to access websites while making it appear that their IP addresses are from locations other than their actual locations  VPNs connect users to servers located in different parts of the world  Websites will see that a user's web traffic is originating from the VPN server, which could or could not be in the same jurisdiction as the user  Typically, VPNs are used for anonymity reasons or to bypass firewalls and website censors imposed in certain jurisdictions  VPNs are not sufficient to protecting a user's IP address, as other unmasking techniques (some requiring more effort) can be used  Still, users could use VPNs located outside of the taxing jurisdiction to reduce the flow of user activity attributed to IPs within the taxing jurisdiction, thereby reducing revenue collected from "local" user activity  Even if this does not completely eliminate the revenue base for a DST, VPN use still results in mismeasurement of the amount of revenue attributed to local users  Overall, lawmakers writing DSTs would likely need to consider specifying what level of enforcement would be sufficient for companies to make good faith efforts to source their revenues to local users  More due diligence required by companies to determine the source of their users or unmask user efforts designed to preserve their privacy will impose higher costs to the companies  A lower standard might require fewer resources from firms and be less intrusive on user privacy but reduce the amount of tax raised from local users  Thus, DSTs could present policy tradeoffs between individual privacy concerns and tax revenue collection  Two features of the UK's proposed DST create additional administrative challenges  An exemption based on low UK-source profits could also have unintended consequences for proponents of the DST in the form of reduced revenue  Some digital economy MNCs do have subsidiaries physically located in Europe  For example, these firms might have the purpose of providing customer service or call centers that speak the local language or market the company's lines of business  Generally, these types of business activities are low profit margin  If a digital economy MNC does have a permanent establishment in the UK that earns close to zero profits, thereby owing little to no income tax in the UK, does the tax situation of this local subsidiary justify an exemption for the entire MNC controlled group? If so, the MNC could still be technically generating millions of British pounds in revenue from sales to UK customers over the internet  In contrast, an MNC that does not have a UK subsidiary but also has millions in revenue from sales to UK customers would not be eligible for the low-profit exemption  The clear tax planning implication of such an interpretation of the low-profit exemption is that MNCs should establish a low-profit subsidiary in the UK as a means to claim the low-profit margin exemption  If allowed, then the UK DST would likely raise little to no revenue  Alternatively, the UK could base its low-profit exemption based on worldwide profits of the MNC  In the United States, corporations are required to report a number of tax-related calculations and information on their annual Securities and Exchange Commission filings for shareholders  Among these tax-related data are their effective tax rate and tax paid across all jurisdictions where the firm is subject to tax  However, the tax data reported under financial accounting rules typically varies from actual tax paid  This phenomenon is described as "book-tax differences " For example, different rules for depreciation are typically used for accounting purposes compared to actual tax policy in a jurisdiction (e g , if the lawmakers in that country decided to speed up cost recovery with the intent of increasing business investment)  Thus, an exemption based on financial disclosure forms may not accurately reflect taxable income  U S  corporations are allowed to claim a tax credit against U S  corporate income tax liability for income taxes paid to foreign jurisdictions  The rationale is to prevent double taxation of foreign-source income  DSTs are taxes on revenue earned from specific business activities and should not be eligible for U S  foreign tax credit treatment for several reasons  First, such taxes are not income taxes under common bilateral tax treaty language  Statements from some countries imposing DSTs, such as the UK, indicate that they do not intend DST payments to be creditable against taxes that an MNC might owe in its home country  Nor are DSTs "in lieu of income taxes," as the countries imposing DSTs do have a corporate income tax system  The Internal Revenue Service (IRS) could clarify that U S  bilateral income tax treaties do not provide for a foreign tax credit against U S  tax for U S  corporations that make DST payments to foreign jurisdictions  If the IRS does not do so, then Congress could enact legislation denying a U S  foreign tax credit for such payments  Denying a foreign tax credit could increase the total taxes paid by U S  MNCs in jurisdictions around the world, but allowing DST payments to be creditable would effectively force the U S  Treasury (and U S  taxpayers) to subsidize tax rates imposed by foreign jurisdictions  Policymakers who sympathize with the premise that MNCs in the digital economy are unfairly able to shift profits to low-tax jurisdictions could still disagree with the unilateral response of foreign countries to impose DSTs  The tax on GILTI serves as an alternative policy tool intended to impose higher effective tax rates on U S  firms in the digital economy  For example, in the 115 th Congress, the No Tax Break for Outsourcing Act ( H R  5108 ; S  2459 ) would have increased the GILTI tax rate to 21% and eliminated the deduction for the return on tangible assets derived by domestic corporations from serving foreign markets in computing GILTI tax liability, among other provisions  As discussed, above, DSTs have the same economic effects as an excise tax  It is not controversial for countries to levy excise taxes on imported as well as domestically consumed goods or services  Such taxes are considered to not distort trade  However, some DST proponents have not explicitly labeled them as "excise taxes," making it unclear how these taxes should be viewed in terms of international agreements  Regardless of the label attached to them, some commentators argued that DSTs violate restrictions on tariffs under the rules of the World Trade Organization  For example, some scholars argue that the high-revenue thresholds for taxation and the exclusion of certain revenues earned by European firms effectively discriminate against the digital exports of U S  firms  Many proponents of DSTs argue that they are "interim measures" until the international community adopts broader reforms in international tax rules  As mentioned in the discussion of the European Commission's DST proposal, the commission prefers changes, both inside and outside of the EU, in the permanent establishment rules to incorporate some measure of "digital presence " This goal aligns with the EU's goal of a consolidated tax base among its members and formulary apportionment of corporate tax revenue based on a set of factors (e g , sales, assets, employment), which would result in a shift away from tax allocation based on assets  The form and rationale of DSTs appear to better comport with a formulary apportionment tax being pursued in the EU than a traditional national corporate income tax  The inability for consensus to impose a DST at the European Commission level could lead more individual member states to unilaterally impose their own DSTs  Even if the United States objects to unilateral DSTs, these sovereign countries are generally able to impose their own tax systems (within the boundaries of any other international agreements, such as EU membership)  Congress could consider creating "carrots" or "sticks" affecting the policy choices of DST proponents  Tax policy and legal scholars have debated the merits of "potential compromises" that would not require fundamental rewrites of international tax rules  Some of these options would rely on the executive branch for day-to-day negotiations at a bilateral or multilateral level (e g , at the OECD)  Any modification to existing or new tax treaties, though, would require Senate approval  Congress could also direct the executive branch to impose incentives (and disincentives) that would affect key sectors of the EU economy  An evaluation of these emerging ideas and concepts is, however, beyond the scope of this report  DSTs Are Not Structured as Taxes on Profits Corporate profit is generally defined as: (1) π=TR-TC Where π is profit, TR is total revenue, and TC is total cost  This is before taxes  After tax corporate profit, π t , for a firm after imposition of a percentage tax ( t ) on corporate profit, is defined as: 2 πt=(1-t)(TR-TC) In contrast, a DST ( dst ) is levied as a percent of total, gross revenue yielding an after tax profit, π dst , of: 3 πdst=(1-dst)TR-TC Algebraically, equations (2) and (3) are not equivalent  To further illustrate, the following amounts can be substituted: TR = $1,000, TC = $500, and t = 0 03 (or a 3% tax rate)  Using these parameters, πt based on a 3% profit tax would be: 4 πt=(1-0 03)($1,000-$500) 5 πt=$485 Using these parameters, πdst based on a 3% DST revenue tax would be: 6 πdst=(1-0 03)$1,000-$500 7 πdst=$470 As shown above, after-tax profit for a corporation subject to a 3% income tax rate (equation 5) is greater than after-tax profit for a corporation subject to a 3% DST (equation 7) in lieu of an income tax  The two taxes are not the same  Effects of a DST on Supply-Demand Conditions in Digital Markets To analyze the economic effects of a DST, the different markets in which digital economy firms operate must be conceptualized  In a general sense, the consumers or buyers in these markets are those that pay money to the supplier or seller for the provision of a service  Many firms in digital economies operate in "two-sided markets" in which they provide services to two different consumers: individual users and businesses  While both sides of these markets could be relevant for calculating DST liability, the markets for the latter group of services are the starting point for analyzing the economic effects of a DST, because these business-to-business transactions are where the statutory incidence of a DST is typically first imposed  For example, in the market for internet advertisements, a clothing company could be the consumer and Google or Facebook could be the seller or supplier  In the market for marketplace sales, a vendor could be the consumer and Amazon could be the seller or supplier  In the market for user data sales, a data transfer firm could be the consumer and Facebook, Google, or Fitbit could the supplier  From an economic perspective, there are two extremes of market structure: perfect competition and monopoly  Most market structures lie somewhere in between  Monopolies rarely exist, and they are typically regulated  For reasons explained below, there are specific reasons why monopolies are likely not to exist in the markets in which DSTs apply  However, firms could have market power if there are barriers to entry  The following analyses examine how a DST would apply, over the long run, in the two extremes of market structure for a digital economy firm facing a downward sloping demand curve  Analysis of a DST in a Competitive Market In perfect competition, firms face a downward-sloping demand curve, and the supply curve is perfectly elastic (horizontal) as increases in output are achieved by new firms entering the industry over the long run  Each firm earns no economic profit, meaning that the opportunity cost of investing in alternative ventures is zero, and each is a price taker in the market (i e , an individual firm cannot influence the price prevailing in the market)  In this scenario, when the government imposes an excise tax, firms must ultimately pass on the cost of the tax to their consumers or exit the market  The market for services provided by firms in the digital economy could be depicted as "perfectly competitive " Under this scenario, many firms are willing to provide a relatively similar service  These markets can be outlined more narrowly to encompass only activities by other digital economy firms (e g , internet advertising, marketplace sales, data transfer), or they can be outlined more broadly (e g , consumer advertising, retail outlets, consumer marketing research)  In other words, although users typically associate Facebook as primarily a social network and Google as primarily a search engine, both firms may operate and compete in the same market for internet advertising  Additionally, both firms compete in the larger market for consumer advertising alongside television, print, and radio advertisers  If a clothing seller is deciding where to spend his advertising budget, that seller can purchase advertising placements on Facebook, Google, etc  (not to mention television, print, and radio)  Similarly, a data transfer company looking to purchase and analyze user data then selling marketing services for another good or service not only has the choice to purchase data from Facebook, Google, etc ; it can also collect data from other companies that collect data and surveys on consumer preferences  Figure A-1 and Figure A-2 illustrate the long-run effects of a DST in a perfect competition scenario with demand curves of different slopes  The demand curves are downward-sloping because consumers demand less of the taxed service as price increases  The different slopes represent scenarios where consumer demand is more responsive, or elastic, to changes in price ( Figure A-1 ) and less responsive, or inelastic ( Figure A-2 )  The supply curves in both figures are flat, or "infinitely elastic" because suppliers, in the aggregate, are able to adjust their capacity to meet whatever level of consumer demand prevails in the market  In both figures, the initial equilibrium (E), before the tax, between the prevailing market price (P) and quantity (Q) is denoted by an asterisk superscript (*)  After the tax is applied, the change in equilibrium between price and quantity is denoted by a subscript ( t )  In both figures, the tax is also passed forward to consumers in the form of higher prices  Firms reduce output or some firms exit the market because participants earn zero economic profit  If the DST rate is 3%, for example, then suppliers in a competitive market are assumed to increase price by 3% minus any tax savings (i e , deductions for excise tax payments from any income tax owed to the jurisdiction imposing the DST)  In Figure A-1 , imposition of a DST causes prices to rise and quantity demanded to fall in the market  The magnitude of the change in quantity is roughly similar to the change in price in the illustration below, but in a market with relatively elastic demand, the change in quantity can exceed the change in price  One cause for this phenomenon is the availability of near-substitutes  For example, if television advertisement is equally as effective as internet advertising, then a tax increasing prices of the latter will lead to a larger decline in demand as more companies purchase advertisements on television instead of the internet  In Figure A-2 , imposition of a DST also causes prices to rise and quantity demanded to fall in the market  With a relatively inelastic demand curve, though, the magnitude of the change in price exceeds the change in quantity  This could be caused, for example, by a lack of substitutes (e g , a strong preference for internet advertising or lack of alternative outlets to online marketplaces to sell goods and services)  In this case, the change in price is greater than the change in quantity demanded  Many of the services subject to a DST are intermediate inputs to the final sales of other goods and services  This means that the method of analyzing the effects of the DST would be replicated for each stage in the supply chain  For example, if a DST increases the price of advertising a clothing company's products over the internet, then that clothing company will likely increase the cost of the clothing that it charges its customers (the retail consumer in the country levying the tax)  The exact magnitude of the effects will vary depending on elasticities of supply and demand in that downstream market for retail clothing sales  In a perfectly competitive retail clothing market, though, it is anticipated that prices will increase and quantity demanded will decrease  In addition to effects on price and quantity prevailing within a market, DSTs can also have "welfare effects " Under this method of analysis, economists consider changes to consumer surplus, producer surplus, and deadweight loss  Consumer surplus is the total benefit of value of a good or service that consumers receive beyond what they actually pay in the market  It is depicted on a supply-demand graph as the area below the demand curve and above the price  Producer surplus is the benefit to producers from selling a good or service at a price higher than their marginal cost of producing one additional unit  It is depicted on a supply-demand graph as the area above the supply curve and below the price  Deadweight loss is an inefficiency in the market that is typically introduced by government intervention, such as a tax, that results in a loss in economic activity and potential losses to consumer or producer surpluses  In a supply-demand graph of a competitive market, like the ones above, deadweight loss is depicted as the center triangle created after the imposition of a tax  Welfare analyses of the DSTs depicted in Figure A-1 and Figure A-2 indicate that they reduce consumer surplus, have no effect on producer surplus, and create deadweight loss inefficiencies  Before the imposition of a DST, consumer welfare is measured as the areas a + b + c in both figures  This area indicates that consumers are receiving benefits from consuming goods or services subject to DSTs in excess of the price they actually pay for them  This could be in part because social media platforms, shopping on online marketplaces, or using search engines are free to consumers  After the imposition of a DST, though, consumer welfare is reduced to the area a   As producers increase the cost of goods and services subject to a DST, consumer welfare decreases due to higher costs  The area b becomes revenue collected by the government and the area c becomes deadweight loss in economic activity discouraged by the DST  There is no effect on producer surplus, because it does not exist in a perfectly competitive market  In a perfectly competitive market, producers are price takers and earn no economic profit  The main differences in Figure A-1 and Figure A-2 are due to the slope of the demand curve  The relatively inelastic demand in Figure A-2 leads to greater reductions in consumer welfare, more tax revenue collected, and smaller deadweight losses  This is because a relatively inelastic demand curve indicates that consumers are less responsive to changes in price  If consumers are unable to substitute away from goods or services subject to DSTs toward nontaxed activities, then they pay higher prices for taxed activities, and the government collects more revenue  Analysis of a DST in a Monopoly Market Some argue that major firms in the digital economy have "monopoly power " Proponents of this assertion could point out that Facebook is the largest social media platform or that Google is the predominant search engine  Others may say that digital economy platforms create network effects that prevent competition  For example, Facebook is able to maintain its status as the most popular social media platform because the value of interacting on a network with billions of users exceeds a new platform with only a few users  Similarly, Amazon might be characterized as a monopoly because many customers shop and provide reviews on its website, so a vendor looking for exposure to the largest customer base will choose to pay for the service of listing its products on that site compared to a smaller internet marketplace  These views may be seen, by others, as misguided because they are viewing the opposite side of the two-sided markets in the digital economy or defining the "market" too narrowly  As explained in the perfect competition analysis, above, Google and Facebook can be viewed as competitors in the market for selling digital advertising space or data transfer services even if they have some degree of market power on the other side of the market (e g , search engines and social networks)  Additionally, digital economy firms also compete against "non-digital" competitors  For example, in the larger markets for consumer product advertising, internet companies compete with advertising via television, print, and radio  Whether firms have supernormal profits or economic rents in an industry is often difficult to determine  In general, the presence of high accounting profits (total revenue minus total costs) is not indicative of whether a firm has profits in an economic sense  Economic profits take into consideration the opportunity costs of investing in a different income-producing activity  There is typically a risk-free portion of the return to any investment  For example, in the corporate sector this could be the average rate of return of the stock market  However, riskier investments generally require a higher potential return in order to attract capital (also known as the "risk premium")  The point of this distinction is that high accounting profits can be an indication of a higher risk premium  For the sake of argument, Figure A-3 illustrates the effects of a DST in a hypothetical monopoly market where there is one producer  An example of this phenomenon in the digital economy could be a single firm that sells internet advertising, marketplace sales, or data transfers to a potential buyer  Figure A-3 illustrates a monopoly market before the imposition of a tax  In a monopoly market, the seller still faces a downward-sloping demand curve  However, the monopolist does not have a supply curve because it does not accept the price prevailing in the market (like individual sellers in a competitive market)  Instead, it sets price (P M ) and output (Q M ) at the intersection of marginal revenue (MR) and marginal cost (MC) to arrive at a profit-maximizing equilibrium (E M ) along the demand curve  The upward-sloping MC represents the fact that the monopolist firm faces increasing marginal costs as it increases the quantity supplied in the market  The monopolist also has an upward-sloping average total cost (ATC) curve, which includes the upward-sloping function of the MC curve plus added fixed costs of production  Unlike producers in the competitive markets in Figure A-1 and Figure A-2 , the monopolist in Figure A-3 earns economic profits, or rents  Economic profit per unit sold is the difference between the price charged by the monopolist (P M ) and the ATC curve, or the distance bc   That average profit per unit times the total number of units sold ( dc ) equals the total economic profit earned by the monopolist, as shown in the gray shaded box ( abcd )  The effects of a DST on a monopoly market are illustrated in Figure A-4   A DST shifts the demand curve in as consumers of taxed services respond to higher after-tax prices  As a result of the reduced demand, the marginal revenue earned by the monopolist declines, and the MR curve shifts from MR M to MR t   The equilibrium in the market shifts from E M to E t   Quantity decreases from Q M to Q t   The price faced by the consumer in the market increases from P M to P t   The price received by the monopolist, though, decreases from P M to P Mt   The economic profit earned by the monopolist under the new post-tax demand and MR t curves is represented by the gray shaded box ( fghi )  The revenue collected by the government is represented by the dashed-line area just above the monopolist's profit  Changes to deadweight loss is not illustrated on Figure A-4 , but they can be explained in qualitative terms  The presence of a monopoly market creates deadweight loss relative to a competitive market because P M is set higher than the price where supply and demand intersect in the competitive market (e g , in Figure A-1 and Figure A-2 )  When a tax is introduced on top of the distortions caused by the monopolist, the size of the deadweight loss in the market is further increased 


Report 2: Since 1952, when a cabal of Egyptian Army officers, known as the Free Officers Movement, ousted the British-backed king, Egypt's military has produced four presidents; Gamal Abdel Nasser (1954-1970), Anwar Sadat (1970-1981), Hosni Mubarak (1981-2011), and Abdel Fattah el Sisi (2013-present)  In general, these four men have ruled Egypt with strong backing from the country's security establishment  The only significant and abiding opposition has come from the Egyptian Muslim Brotherhood, an organization that has opposed single party military-backed rule and advocated for a state governed by a vaguely articulated combination of civil and Shariah (Islamic) law  Egypt's sole departure from this general formula took place between 2011 and 2013, after popular demonstrations sparked by the "Arab Spring," which had started in neighboring Tunisia, compelled the military to force the resignation of former President Hosni Mubarak in February 2011  During this period, Egypt experienced tremendous political tumult, culminating in the one-year presidency of the Muslim Brotherhood's Muhammad Morsi  When Morsi took office on June 30, 2012, after winning Egypt's first truly competitive presidential election, his ascension to the presidency was supposed to mark the end of a rocky 16-month transition period  Proposed time lines for elections, the constitutional drafting process, and the military's relinquishing of power to a civilian government had been constantly changed, contested, and sometimes even overruled by the courts  Instead of consolidating democratic or civilian rule, Morsi's rule exposed the deep divisions in Egyptian politics, pitting a broad cross-section of Egypt's public and private sectors, the Coptic Church, and the military against the Brotherhood and its Islamist supporters  The atmosphere of mutual distrust, political gridlock, and public dissatisfaction that permeated Morsi's presidency provided Egypt's military, led by then-Defense Minister Sisi, with an opportunity to reassert political control  On July 3, 2013, following several days of mass demonstrations against Morsi's rule, the military unilaterally dissolved Morsi's government, suspended the constitution that had been passed during his rule, and installed an interim president  The Muslim Brotherhood and its supporters declared the military's actions a coup d'etat and protested in the streets  Weeks later, Egypt's military and national police launched a violent crackdown against the Muslim Brotherhood, resulting in police and army soldiers firing live ammunition against demonstrators encamped in several public squares and the killing of at least 1,150 demonstrators  The Egyptian military justified these actions by decrying the encampments as a threat to national security  As Egyptian President Abdel Fattah al Sisi consolidates his power amid a continuing macroeconomic recovery, Egypt is poised to play an increasingly active role in the region, albeit from a more independent position vis-a-vis the United States than in the past  Although Egyptian relations with the Trump Administration are solid, and Egypt has relied on the International Monetary Fund (IMF) program to guide its economic recovery, Egypt seems committed to broadening its international base of support  The United States plays a key role in that international base, but Egypt also has other significant partners, including the Arab Gulf states, Israel, Russia, and France  The Egyptian government blames American criticism of its human rights record for preventing closer U S -Egyptian ties  From the U S  perspective, some Members of Congress, U S  media outlets, and advocacy groups document how Egyptian authorities have widened the scope of a crackdown against dissent, which initially was aimed at the Muslim Brotherhood but has evolved to encompass a broader range of political speech  Egypt's parliament is currently considering whether to adopt a package of draft constitutional amendments that would extend presidential term limits and executive branch control over the judiciary  If Egypt's 2019 constitutional amendments are approved, President Sisi will attain unprecedented power in the political system over the military and the judiciary and, if reelected, will have the potential to remain in office until 2034  He has inserted his older brother and oldest son into key security and intelligence positions while stymying all opposition to his rule and criticism of his government  This consolidation of power and crackdown against dissent has taken place during a period of steady economic growth, which has not benefitted wide swaths of the population  The state has enacted a series of austerity measures to reduce debt in compliance with IMF-mandated reforms  In the year ahead, economists anticipate gross domestic product (GDP) growth of 5 3%, driven by an expansion in tourism and natural gas production  Nevertheless, Egyptians continue to endure double-digit inflation stemming in part from the 2016 flotation of the currency, tax increases, and reductions in food and fuel subsidies  While it is difficult to ascertain how dissatisfied the public is with rising prices, President Sisi has responded to criticisms of his economic policies, stating: "The path of real reform is difficult and cruel and causes a lot of suffering     But there is no doubt that the suffering resulting from the lack of reform is much worse " The IMF has praised the Egyptian government's record of reform implementation, while also highlighting the need for private sector growth "that will absorb the rapidly growing labor force and ensure that the benefits are perceived more widely " After several years of observers seeing Egypt as more inwardly focused, several recent developments suggest an increasingly active foreign policy  In January 2019, Egypt hosted an international forum on Mediterranean gas which included European and Arab countries together with Israel  A month later, President Sisi was elected head of the African Union for a year-long term  In February 2019, Egypt hosted the first-ever European Union- Arab summit in Sharm el Sheikh, where officials discussed terrorism, migration, and the need for greater European-Arab cooperation to counter a perceived growing Chinese and Russian interest in the Middle East  Personnel moves and other developments in Egypt highlight apparent efforts by President Sisi to consolidate power with the help of political allies, including colleagues from Egypt's security establishment  In June 2018, Sisi reshuffled his cabinet, making key changes to the defense and interior ministries, among other appointments  Sisi appointed Mohamed Ahmed Zaki, former head of the Republican Guard, as defense minister and Mahmoud Tawfik, former head of the National Security Service, as interior minister  According to one account, Sisi may have been rewarding Zaki for his role in arresting former Egyptian President Mohamed Morsi in 2013  In July 2018, parliament passed Law 161 of 2018, providing judicial immunity to senior military commanders for military acts committed during the two-and-a-half-year period beginning with the military coup of July 2013  The new law grants immunity to senior commanders while potentially keeping high-ranking officers on reserve duty for life, making them ineligible to run for president  In order for a senior commander to be prosecuted under this new law, a case would have to be first authorized by the Supreme Council of the Armed Forces (SCAF), which President Sisi appoints  According to one analysis, the law deters senior officers from challenging President Sisi (for example, some challenges occurred during the run-up to the 2018 presidential election), thereby acting "as a guarantor of President Sisi's authoritarian rule, setting the stage for him to remain president for life " Per the 2014 Egyptian constitution (article 140), President Sisi, who was reelected in April 2018, may only serve two four-year terms in office (current term ends in 2022)  However, his supporters have proposed a set of amendments to the constitution which, if approved by parliament and public referendum, have the potential to make President Sisi eligible for an additional two six-year terms when his current term ends in 2022  Other proposed changes to the constitution include granting the president the authority to appoint all chief justices of Egyptian judicial bodies, and the public prosecutor; requiring that at least one-quarter of the seats in the parliament be allocated to women and reducing the number of the seats in the House of Representatives from 596 to 450; and establishing an upper house of parliament (Senate) consisting of 250 members, two-thirds of whom would be elected and one-third of whom would be appointed by the president  President Sisi has come under repeated international criticism for an ongoing government crackdown against various forms of political dissent and freedom of expression  Certain practices of Sisi's government, the parliament, and the security apparatus have been contentious  According to the U S  State Department's report on human rights conditions in Egypt in 2017: The most significant human rights issues included arbitrary or unlawful killings by the government or its agents; major terrorist attacks; disappearances; torture; harsh or potentially life-threatening prison conditions; arbitrary arrest and detention; including the use of military courts to try civilians; political prisoners and detainees; unlawful interference in privacy; limits on freedom of expression, including criminal "defamation of religion" laws; restrictions on the press, internet, and academic freedom; and restrictions on freedoms of assembly and association, including government control over registration and financing of NGOs [nongovernmental organizations]  LGBTI persons faced arrests, imprisonment, and degrading treatment  The government did not effectively respond to violence against women, and there were reports of child labor  Select international human rights, democracy, and development monitoring organizations provide the following rankings for Egypt globally: Other human rights issues of potential interest to Congress may include the 2013 convictions of American, European, and Egyptian civil society representatives; the controversial 2017 NGO law; the detention of American citizens in Egypt; and the treatment of Coptic Christians, discussed in the following sections  In 2013, an Egyptian court convicted and sentenced 43 individuals from the United States, Egypt, and Europe, including the Egypt country directors of the National Democratic Institute (NDI) and the International Republican Institute (IRI), for spending money from organizations that were operating in Egypt without a license and for receiving foreign funds (known as Case 173 or the "foreign funding case")  Some lawmakers had protested that those individuals were wrongfully convicted and had requested that the Egyptian government and judiciary resolve the matter  In 2018, a retrial began and, on December 20, 2018, the individuals were acquitted of all charges  In January 2019, U S  Secretary of State Michael R  Pompeo traveled to Cairo, where he remarked: "I was happy to see our citizens, wrongly convicted of improperly operating NGOs here, finally be acquitted  And we strongly support President Sisi's initiative to amend Egyptian law so that this does not happen again  More work certainly needs to be done to maximize the potential of the Egyptian nation and its people  I'm glad that America will be a partner in those efforts " However, Case 173 remains active, as the judiciary has imposed asset freezes and travel bans on several Egyptian civil society activists  In May 2017, President Sisi signed Law 70 of 2017 on Associations and Other Foundations Working in the Field of Civil Work  The parliament had passed this bill six months earlier, and both the passage and signing drew widespread international condemnation  The new law (which replaced a 2002 NGO law) requires NGOs to receive prior approval from internal security before accepting foreign funding  It also restricts the scope of permitted NGO activities and increases penalties for violations, including possible imprisonment for up to five years  However, the government did not issue implementing regulations for the new NGO law  At Egypt's November 2018 World Youth Forum in Sharm el Sheikh, President Sisi announced plans to amend Law 70  According to Sisi, "I want to reassure those who are listening to me inside Egypt and outside of Egypt, that in Egypt, we are keen that the law becomes balanced and achieves what is required of it to regulate the work of these groups in a good way  This is not just political talk " Since then, Egypt's Ministry of Social Solidarity has held multiple rounds of talks with local NGOs aimed at determining which articles of the law need to be amended  A draft proposal is expected to be ready in the spring of 2019, when it will be sent to parliament for consideration  The detention of American citizens in Egypt has continued to strain U S -Egyptian relations  Some Members of Congress are concerned about the case of 53-year-old New York resident Mustafa Kassem, who was detained by authorities in 2013 and sentenced to 15 years in prison in a mass trial in September 2018  These lawmakers insist that Kassem, who has been on a limited hunger strike, was wrongfully arrested and convicted, and they have sought Trump Administration support in securing his release from the government of Egypt  In January 2018, Vice President Pence raised Kassem's case directly with President Sisi in a meeting in Cairo, saying "I told him we'd like to see those American citizens restored to their families and restored to our country " Since taking office, President Sisi has publicly called for greater Muslim-Christian coexistence and national unity  In January 2019, he inaugurated Egypt's Coptic Cathedral of Nativity in the new administrative capital east of Cairo saying, "This is an important moment in our history     We are one and we will remain one " Despite these public calls for improved interfaith relations in Egypt, the minority Coptic Christian community continues to claim that they face professional and social discrimination, along with occasional sectarian attacks by terrorists and vigilantes  Coptic Christians have also voiced concern about state regulation of church construction  They have long demanded that the government reform long-standing laws (with two dating back to 1856 and 1934, respectively) on building codes for Christian places of worship  Article 235 of Egypt's 2014 constitution mandates that parliament reform these building code regulations  In 2016, parliament approved a church construction law (Law 80 of 2016) that expedited the government approval process for the construction and restoration of Coptic churches, among other structures  Although Coptic Pope Tawadros II welcomed the law, others claim that it continues to be discriminatory  According to Human Rights Watch , "the new law allows governors to deny church-building permits with no stated way to appeal, requires that churches be built 'commensurate with' the number of Christians in the area, and contains security provisions that risk subjecting decisions on whether to allow church construction to the whims of violent mobs " For 2019, the IMF projects 5 3% GDP growth for the Egyptian economy, noting that the outlook remains "favorable, supported by strong policy implementation " In 2016, the IMF and Egypt reached a three-year, $12 billion loan agreement, $10 billion of which has been disbursed as of March 2019  Key sources of foreign exchange (tourism and remittances) are up and unemployment is at its lowest level since 2011  In line with IMF recommendations, the government has taken several steps to reform the economy, including depreciating the currency, reducing fuel subsidies, enacting a value-added tax (VAT), and providing cash payments to the poor in lieu of subsidizing household goods (though many food subsidies continue)  Egypt's energy sector also is contributing to the economy's rebound  Egypt is the largest oil producer in Africa outside of the Organization of the Petroleum Exporting Countries (OPEC) and the third-largest natural gas producer on the continent following Algeria and Nigeria  In December 2017, an Egyptian and Italian partnership began commercial output from the Zohr natural gas field (est  30 trillion cubic feet of gas), the largest ever natural gas field discovered in the Mediterranean Sea (see Figure 3 )  The Egyptian government also has repaid debts owed to foreign energy companies, allowing for new investments from BP and BG Group  Egypt is attempting to position itself as a regional gas hub, whereby its own gas fields meet domestic demand while imported gas from Israel and Cyprus can be liquefied in Egypt and reexported  Israeli and Egyptian companies have bought significant shares of an unused undersea pipeline connecting Israel to the northern Sinai Peninsula (see Figure 4 )  The pipeline will be used to transport natural gas from Israel to Egypt for possible reexport, as part of an earlier 10-year, $15 billion gas deal between the U S  Company Noble Energy, its Israeli partner Delek, and the Egyptian company Dolphinus Holdings  In January 2019, Egypt convened the first ever Eastern Mediterranean Gas Forum (EMGF), a regional consortium consisting of Egypt, Israel, Jordan, the Palestinian Authority, Cyprus, Greece, and Italy, intended to consolidate regional energy policies and reduce costs  Despite Egypt's positive economic outlook, significant challenges remain  Inflation remains over 11%, making the cost of goods high for many Egyptians  In addition, while the fiscal deficit may be decreasing, Egypt's overall public and foreign debt have grown significantly in recent years and remain high, leading the government to allocate resources (nearly 38% of Egypt's budget) toward debt-service payments and away from spending on health and education  Economists forecast that total public debt will reach 84 8% of GDP and external debt 32% of GDP ($101 7 billion) in 2019  Some observers assert that Egypt's recent economic reforms, while successful in the short term, have not addressed deeper structural impediments to growth  For example, Egypt's industrial sector is heavily dependent upon imports and, as the economy expands, the demand for foreign currency increases  According to Bloomberg , "this means, the more the economy grows, the greater the pressure on dollar reserves  It doesn't help that these were built up almost entirely through foreign borrowing, pushing Egypt's foreign debt from $55 billion in 2016 to $92 billion in late 2018  It won't be long before the country's finances are once again in crisis " Many experts argue that to sustain growth over the long term, Egypt requires dramatic expansion of the nonhydrocarbon private sector  For decades, Egypt's military has played a key role in the nation's economy as a food producer and low-cost domestic manufacturer of consumable products; however, due to political sensitivities, the extent of its economic power is rarely quantified  Egypt's military is largely economically self-sufficient  It produces what it consumes (food and clothes) and then sells surplus goods for additional revenue  Egyptian military companies have been the main beneficiaries of the massive infrastructure contracts Sisi has commissioned  Moreover, military-owned manufacturing companies have expanded into new markets, producing goods (appliances, solar panels, some electronics, and some medical equipment) that are cheaper than either foreign imports or domestically produced goods made by the private sector  President Sisi, who led the 2013 military intervention and was elected president in mid-2014, came to power promising not only to defeat violent Salafi-Jihadi terrorist groups militarily, but also to counter their foundational ideology, which President Sisi and his supporters often attribute to the Muslim Brotherhood  President Sisi has outlawed the Muslim Brotherhood while launching a more general crackdown against a broad spectrum of opponents, both secular and Islamist  While Egypt is no longer beset by the kind of large-scale civil unrest and public protest it faced during the immediate post-Mubarak era, it continues to face terrorist and insurgent violence, both in the Sinai Peninsula and in the rest of Egypt  Terrorists based in the Sinai Peninsula (the Sinai) have been waging an insurgency against the Egyptian government since 2011  While the terrorist landscape in Egypt is evolving and encompasses several groups, the Islamic State's Sinai Province affiliate (IS-SP) is known as the most lethal  Since its affiliation with the Islamic State in 2014, IS-SP has attacked the Egyptian military continually, targeted Coptic Christian individuals and places of worship, and occasionally fired rockets into Israel  In October 2015, IS-SP targeted Russian tourists departing the Sinai by planting a bomb aboard Metrojet Flight 9268, which exploded midair, killing all 224 passengers and crew aboard  Two years later, on November 24, 2017, IS-SP gunmen launched an attack against the Al Rawdah mosque in the town of Bir al Abed in northern Sinai  That attack killed at least 305 people, making it the deadliest terrorist attack in Egypt's modern history  Combating terrorism in the Sinai is particularly challenging due to an array of factors, including the following: Geograph y : The peninsula's interior is mountainous and sparsely populated, providing militants with ample freedom of movement  Demograph y and Culture : The Sinai's northern population is a mix of Palestinians and Bedouin Arab tribes whose relationship to the state is filled with distrust  Sinai Bedouin have faced discrimination and exclusion from full citizenship and access to the economy  In the absence of development, a black market economy based primarily on smuggling has thrived, further contributing to the popular portrayal of Bedouin as outlaws  State authorities charge that the Sinai Bedouin seek autonomy from the central government, while residents insist on obtaining basic rights, such as property rights, full citizenship, and access to government services such as education and health care  Econom ics : Bedouins claim that Egypt has underinvested in northern Sinai, channeling development toward southern tourist destinations that cater to foreign visitors  Northern Sinai consists of mostly flat desert terrain inhospitable to large-scale agriculture without significant investment in irrigation  For decades, the Egyptian state has claimed to follow successive Sinai development plans  However, Egyptian governance and development of the Sinai has been hampered by corruption  Diploma cy : The 1979 Israeli-Egyptian peace treaty limits the number of soldiers that Egypt can deploy in the Sinai, subject to the parties' ability to negotiate changes as circumstances necessitate  Egypt and Israel mutually agree upon any short-term increase of Egypt's military presence in the Sinai  Since Israel returned control over the Sinai to Egypt in 1982, the area has been partially demilitarized, and the Sinai has served as an effective buffer zone between the two countries  The Multinational Force and Observers, or MFO, are deployed in the Sinai to monitor the terms of the Israeli-Egyptian peace treaty (see Figure 5 )  Egypt and Israel reportedly continue to cooperate in countering terrorism in the Sinai  In a televised interview, President Sisi responded to a question on whether Egyptian-Israeli military cooperation was the closest it has ever been, saying "That is correct  The [Egyptian] Air Force sometimes needs to cross to the Israeli side  And that's why we have a wide range of coordination with the Israelis " One news account suggests that Israel, with Egypt's approval, has used its own drones, helicopters, and aircraft to carry out more than 100 covert airstrikes inside Egypt against militant targets  In order to counter IS-SP in northern Sinai, the Egyptian armed forces and police have declared a state of emergency, imposed curfews and travel restrictions, and erected police checkpoints along main roads  Authorities also have limited domestic and foreign media access to the northern Sinai, declaring it an active combat zone and unsafe for journalists  According to Jane's Defence Weekly , Egypt may be upgrading an old air base in the Sinai (Bir Gifgafa), where it could deploy Apache attack helicopters and unmanned aerial vehicles for use in counterterrorism operations  While an increased Egyptian military presence in the Sinai may be necessary to stabilize the area, many observers have argued that military means alone are insufficient  These critics say that force should be accompanied by policies to reduce the appeal of antigovernment militancy by addressing local political and economic grievances  According to one account: Sinai residents are prohibited from joining any senior post in the state  They cannot work in the army, police, judiciary, or in diplomacy  Meanwhile, no development projects have been undertaken in North Sinai the past 40 years  The villages of Rafah and Sheikh Zuwayed have no schools or hospitals and no modern system to receive potable water  They depend on rainwater and wells, as if it were the Middle Ages  Egyptian counterterrorism efforts in the Sinai appear to have reduced the frequency of terrorist attacks somewhat  In February 2018, the military launched an offensive campaign, dubbed "Operation Sinai 2018 " During the campaign, the military deployed tens of thousands of troops to the peninsula and was able to eliminate several senior IS-SP leaders  One report suggests that unlike previous military operations against militants in the Sinai, this time the Egyptian military armed progovernment tribesmen to assist conventional forces in combating IS-SP  According to one analysis, the military's recent campaign has "to some degree, restricted the militants' movements, destroyed a number of hideouts, and most importantly eliminated several trained and influential elements " However, as in previous major operations, once the military reduces its presence in northern Sinai, terrorist groups may reconstitute themselves  In March 2019, CENTCOM Commander General Joseph L  Votel testified before Congress, stating that the "Egyptian Armed Forces have more effectively fought ISIS in the Sinai and are now taking active measures to address the underlying issues that give life to—to these violent extremist groups and are helping to contain the threat " Outside of the Sinai, either in the western desert near the Libya border or other areas (Cairo, Nile Delta, Upper Egypt), small nationalist insurgent groups, such as Liwa al Thawra (The Revolution Brigade) and Harakat Sawaed Misr (Arms of Egypt Movement, referred to by its Arabic acronym HASM), have carried out high-level assassinations of military/police officials and bombings of infrastructure  According to one expert, these insurgent groups are comprised mainly of former Muslim Brotherhood activists who have splintered off from the main organization to wage an insurgency against the government  On January 31, 2018, the U S  State Department designated Liwa al Thawra and HASM as Specially Designated Global Terrorists (SDGTs) under Section 1(b) of Executive Order (E O ) 13224  The State Department noted that some of the leaders of both groups "were previously associated with the Egyptian Muslim Brotherhood " Terrorist attacks against key sectors of the economy continue  In December 2018, a bus carrying a group of Vietnamese tourists to the pyramids in Giza hit a roadside bomb killing 4 people and injuring 11 others  No group claimed responsibility for the attack  In February 2019, a terrorist detonated a suicide bomb he was carrying while being pursued by police, killing himself and two officers near Cairo's popular Khan el Khalili market and famous Al Azhar Mosque  Egypt and Israel have continued to find specific areas in which they can cooperate  In 2018, Israeli and Egyptian companies entered into a decade-long agreement by reaching a $15 billion natural gas deal, according to which Israeli off-shore natural gas will be exported to Egypt for liquefaction before being exported elsewhere (see " The Economy " above)  While people-to-people relations remain cold, Israel and Egypt continue to cooperate against Hamas in the Gaza Strip  In mid-November 2018, Egyptian mediation between Israel and Hamas helped calm tensions after an Israeli raid inside Gaza escalated tensions  Egypt reportedly continues to broker indirect Israel-Hamas talks aimed at establishing a long-term cease-fire  Egypt is opposed to Islamist groups wielding political power across the Middle East, and opposes Turkish and Qatari support for Hamas  On the Egyptian-Gaza border, Egypt has tried to thwart arms tunnel smuggling into Gaza and has accused Palestinian militants in Gaza of aiding terrorist groups in the Sinai  In order to weaken Hamas's rule in Gaza, Egypt has sought to restore a Palestinian Authority (PA) presence in Gaza by reconciling it with the PA  Though Egypt has helped broker several agreements aimed at ending the West Bank-Gaza split, Hamas still effectively controls Gaza  Egypt controls the Rafah border crossing into Gaza, the only non-Israeli-controlled entryway into the Strip, which it periodically closes for security reasons  Control over the Rafah border crossing provides Egypt with some leverage over Hamas, though Egyptian authorities use it carefully in order not to spark a humanitarian crisis on their border  Egypt's relations with most Gulf Arab monarchies are strong  Saudi Arabia, the United Arab Emirates (UAE), and Kuwait have provided billions of dollars in financial assistance to Egypt's military-backed government since 2013  Saudi Arabia also hosts nearly 3 million Egyptian expatriates who work in the kingdom, providing a valuable source of remittances for Egyptians back home  From 2013 onward, Emirati companies have made significant investments in the Egyptian economy  Egypt transferred sovereignty to Saudi Arabia over two islands at the entrance to the Gulf of Aqaba—Tiran and Sanafir—that had been under Egyptian control since 1950, in a move that sparked rare public criticism of President Sisi  In June 2017, Egypt joined other Gulf Arab monarchies in boycotting Qatar  In Yemen, Egypt is officially part of the Saudi-led coalition against Houthi forces, though its contribution to the war effort has been minimal  The Egyptian government supports Field Marshal Khalifa Haftar and the Libyan National Army (LNA) movement, which controls most of eastern Libya  Haftar's politics closely align with President Sisi's, as both figures hail from the military and broadly oppose Islamist political forces  From a security standpoint, Egypt seeks the restoration of order on its western border, which has experienced occasional terrorist attacks and arms smuggling  From an economic standpoint, thousands of Egyptian guest workers were employed in Libya's energy sector prior to unrest in Libya in 2011, and Egypt seeks their return to Libya and a resumption of the vital remittances those workers provided the Egyptian economy  Diplomatically, Egypt has tried to leverage its close ties to Haftar and the LNA in order to play the role of mediator between the LNA and Fayez al Sarraj, the Chairman of the Presidential Council of Libya and Prime Minister of the U N -backed Government of National Accord  Egypt's policy toward Libya also is closely aligned with other foreign backers of the LNA, including France and the United Arab Emirates (UAE)  Reportedly, the three countries are working in concert to strengthen the position of Haftar in order to facilitate the eventual reunification of the Libyan army  A 2019 LNA offensive into southern Libya has placed additional pressure on the Government of National Accord and may complicate U S -backed efforts by the United Nations to facilitate a national dialogue, constitutional referendum, and elections in 2019  To Egypt's south, the government is embroiled in regional disputes with Nile Basin countries, such as Ethiopia, which is nearing completion of the $4 2 billion Grand Ethiopian Renaissance Dam, a major hydroelectric project  Egypt argues that the dam, once filled, will limit the flow of the Nile River below Egypt's agreed share  However, many analysts expect that Egypt will address the dispute by increasing water-use efficiency and investing in desalination, rather than using its military to bomb the dam  Reduced Nile flow into Egypt may exacerbate existing water shortages and cause short-term political problems for the Egyptian government, which faces extensive domestic water needs  In February 2019, President Sisi assumed the one-year chairmanship of the African Union, during which he is expected to promote closer relations with fellow African states  Egypt and Russia, close allies in early years of the Cold War, have again strengthened bilateral ties under President Sisi, who has promised to restore Egyptian stability and international prestige  His relationship with Russian President Vladimir Putin has rekindled, in the words of one observer, "a romanticized memory of relations with Russia during the Nasser era " President Sisi first turned to Russia during the Obama Administration, when U S -Egyptian ties were strained, and Egypt seemed intent on signaling its displeasure with U S  policy  Since 2014, Egypt and Russia have improved ties in a number of ways, including through arms deals  Reportedly, Egypt is upgrading its aging fleet of legacy Soviet MiG-21 aircraft to a fourth generation MiG-29M variant with additional deliveries to Egypt in 2018 (first delivered in April 2017)  Egypt also has purchased 46 standard Ka-52 Russian attack helicopters for its air force  Egypt reportedly also has purchased the naval version of the Ka-52 for use on Egypt's two French-procured Mistral-class helicopter dock vessels (see below), and the S-300VM surface-to-air missile defense system from Russia  In August 2018, Egyptian Defense Minister Mohamed Zaki visited Russia, where he attended a Russian arms exhibition  Additionally, Egypt and Russia reportedly have expanded their cooperation on nuclear energy  In 2015, Egypt reached a deal with Russian state energy firm Rosatom to construct a 4,800-megawatt nuclear power plant in the Egyptian Mediterranean coastal town of Daba'a, 80 miles northwest of Cairo  Russia is lending Egypt $25 billion over 35 years to finance the construction and operation of the nuclear power plant (this will cover 85% of the project's total costs)  The contract also commits Russia to supply the plant's nuclear fuel for 60 years and transfer and store depleted nuclear fuel from the reactors  As Egyptian and Russian foreign policies have become more closely aligned in conflict zones such as eastern Libya, bilateral military cooperation has expanded  One report suggests that Russian Special Forces based out of an airbase in Egypt's western desert (Sidi Barrani) may be aiding General Haftar  In November 2017, Egypt and Russia signed a draft agreement governing the use of each other's air space  While Egyptian-Russian ties have grown warmer in recent years, they are not without complications  In the aftermath of an October 2015 terrorist attack against a Russian passenger jet departing from Sharm El Sheikh, visits to Egypt by Russian tourists, previously the country's largest source of tourists, dropped significantly  Russian commercial aircraft have resumed direct flights to Cairo but not to Sharm El Sheikh  Egypt and Russia also engaged in a trade dispute in 2016 over Russian wheat imports  Egypt is the largest global importer of wheat, and the largest export market for Russian wheat  Aside from Russia, France stands out as a non-U S  country with which President Sisi has sought to build a diplomatic and military procurement relationship  In the last five years, as French-Egyptian ties have improved, Egypt has purchased major air and naval defense systems from French defense contractors, including the following: Four Gowind Corvettes (produced by Naval Group)—This deal was signed in July 2014  As part of the French-Egyptian arrangement, some of the Corvette construction has taken place at the Alexandria Shipyard in Egypt  One FREMM multi-mission Frigate (produced by Naval Group)—Named the Tahya Misr (Long Live Egypt), this vessel was delivered to Egypt in 2015  This ship has participated in an annual joint French-Egyptian naval exercise, known as Cleopatra  In February 2015, Egypt purchased 24 Rafale multirole fighters (produced by Dassault Aviation)  Under the initial agreement, Egypt and France may enter into a new procurement agreement for 12 additional Rafale fighters  According to the manufacturer, the Rafale has flown in combat in Afghanistan, Libya, Mali, Iraq, and Syria and is used by Egypt, Qatar, and India  In 2018, French officials said that the United States would not permit France to export the SCALP air-launched land-attack cruise missile used on the Rafale to Egypt under the International Trade in Arms Regulation (ITAR) agreement  The United States may have been concerned over the transfer of sensitive technology to Egypt  Two Mistral-class Helicopter Carriers (produced by Naval Group)—In the fall of 2015, France announced that it would sell Egypt two Mistral-class Landing Helicopter Dock (LHD) vessels (each carrier can carry 16 helicopters, 4 landing craft, and 13 tanks) for $1 billion  The LHDs (ENS Anwar El Sadat and ENS Gamal Abdel Nasser ) were delivered in 2016  In 2017, Egypt announced that it would purchase Russian 46 Ka-52 Alligator helicopters, which can operate on the LHDs  In January 2019, French President Emmanuel Macron paid a three-day visit to Egypt, where he raised human rights issues in public and with Egyptian authorities and civil society representatives  According to Macron, "I can't see how you can pretend to ensure long-term stability in this country, which was at the heart of the Arab Spring and showed its taste for freedom, and think you can continue to harden beyond what's acceptable or justified for security reasons " President Trump has praised the Egyptian government's counterterrorism efforts while his Administration has worked to restore high-level diplomatic engagement, joint military exercises, and arms sales  Many commentators initially expected President Trump to bring the United States and Egypt closer together, and that largely has been the case  The Administration has withheld some foreign assistance for policy reasons on at least one occasion, however, and the United States has not had an ambassador in Cairo since June 30, 2017  As evidence of improved bilateral ties, the U S  Defense Department notified Congress in November 2018 of a major $1 billion sale of defense equipment to Egypt, consisting of 10 AH-64E Apache Attack Helicopters, among other things  The Egyptian Air Force already possesses 45 less advanced versions of the Apache that were acquired between 2000 and 2014  In January 2019, U S  Secretary of State Michael Pompeo delivered a major policy speech at the American University in Cairo, where he stated: "And as we seek an even stronger partnership with Egypt, we encourage President Sisi to unleash the creative energy of Egypt's people, unfetter the economy, and promote a free and open exchange of ideas  The progress made to date can continue " U S  officials have not yet publicly criticized efforts by supporters of President Sisi to advance amendments to the constitution (see above) to extend the possibility of Sisi's continued presidency  Human rights advocates have called for Western governments to withhold assistance to Egypt if the amendments are approved  According to Human Rights Watch , "Al-Sisi's government is encouraged by the continued silence of its allies, and if the US, UK, and France want to avoid the destabilizing consequences of entrenching authoritarian rule in Egypt, they should act now " On February 22, 2019, a bipartisan group of national security experts called on U S  officials to "express strong concern about the amendments to the Egyptian constitution now moving through a rapid approval process " Egypt's poor record on human rights and democratization has sparked regular criticism from U S  officials and some Members of Congress  Since FY2012, Members have passed appropriations legislation that withholds the obligation of FMF to Egypt until the Secretary of State certifies that Egypt is taking various steps toward supporting democracy and human rights  With the exception of FY2014, lawmakers have included a national security waiver to allow the Administration to waive these congressionally mandated certification requirements under certain conditions  Over the last year, the Administration has obligated several tranches of FMF to Egypt, including the following: In September 2018, the Administration obligated $1 billion in FY2018 FMF  Per Section 7041(a)(3)(A) of P L  115-141 , the Consolidated Appropriations Act, FY2018, $300 million in FMF remains withheld from obligation until the Secretary of State certifies that Egypt is taking various steps toward supporting democracy and human rights  In previous acts, the amount withheld had been $195 million  FY2018 FMF for Egypt remains available to be expended until September 30, 2019  In August 2018, the Administration waived the certification requirement in Section 7041(a)(3)(B) of P L  115-31 , the Consolidated Appropriations Act, FY2017, allowing for the obligation of $195 million in FY2017 FMF, which occurred in September 2018  However, according to one report, Senator Patrick Leahy has placed a hold on $105 million in FY2017 FMF and is seeking more information on the plight of detained Egyptian-American Moustafa Kassem  In January 2018, the Administration notified Congress of its intent to obligate $1 039 billion in FY2017 FMF out of a total of $1 3 billion appropriated for FY2017  It chose not to obligate $65 7 million in FY2017 FMF  The remaining $195 million had been withheld until a national security waiver was issued in August 2018 (see above)  For FY2019, the President requested a total of $1 381 billion in foreign assistance for Egypt, the same amount requested for the previous year  Nearly all of the requested funds for Egypt are for the FMF account  For FY2020, the request is nearly identical from previous years, as the President is seeking a total of $1 382 billion in bilateral assistance for Egypt  The FY2019 Omnibus ( P L  116-6 ) provides the following for Egypt: a total of $1 419 billion in bilateral U S  foreign assistance for Egypt, of which $1 3 billion is in FMF, $112 5 million in ESF, $3 million in NADR, $2 million in INCLE, and $1 8 million in IMET; and a reauthorization of ESF to support future loan guarantees to Egypt; P L  116-6 sets the following conditions for Egypt: As in previous years, it requires that funds may only be made available when the Secretary of State certifies that the government of Egypt is sustaining the strategic relationship with the United States and meeting its obligations under the 1979 Egypt-Israel Peace Treaty  As in previous years, the act withholds ESF that "the Secretary determines to be equivalent to that expended by the United States Government for bail, and by nongovernmental organizations for legal and court fees, associated with democracy-related trials in Egypt until the Secretary certifies and reports to the Committees on Appropriations that the Government of Egypt has dismissed the convictions issued by the Cairo Criminal Court on June 4, 2013, in Public Prosecution Case No  1110 for the Year 2012 and has not subjected the defendants to further prosecution or if convicted they have been granted full pardons  " This last condition (bolded) was added in 2019 to account for the acquittal of the 43 foreign defendants in Case 173 (see above)  As in previous years, the FY2019 Omnibus also includes a limitation on ESF, stating that no FY2018 ESF or prior-year ESF "may be made available for a contribution, voluntary or otherwise, to the Civil Associations and Foundations Support Fund, or any similar fund, established pursuant to Law 70 on Associations and Other Foundations Working in the Field of Civil Work [informally known as the NGO law] " As in previous years, the act also includes a provision that withholds $300 million of FMF funds until the Secretary of State certifies that the Government of Egypt is taking effective steps to advance, among other things, democracy and human rights in Egypt  The Secretary of State may waive this certification requirement, though any waiver must be accompanied by, among other things, an assessment of the Government of Egypt's compliance with United Nations Security Council Resolution 2270 and other such resolutions regarding North Korea  There has been some concern in the Administration and Congress over Egypt's alleged weapons procurement from North Korea in recent years  P L  115-245 , the Department of Defense (DOD) and Labor, Health and Human Services, and Education Appropriations Act, 2019 and Continuing Appropriations Act, 2019, specifies that the Secretary of Defense may provide Egypt with funds from the Counter-ISIS Train and Equip Fund (CTEF) to enhance its border security  To date, Egypt has not received security assistance from DOD-managed accounts  Between 1946 and 2016, the United States provided Egypt with $78 3 billion in bilateral foreign aid (calculated in historical dollars—not adjusted for inflation)  The 1979 Peace Treaty between Israel and Egypt ushered in the current era of U S  financial support for peace between Israel and its Arab neighbors  In two separate memoranda accompanying the treaty, the United States outlined commitments to Israel and Egypt, respectively  In its letter to Israel, the Carter Administration pledged to "endeavor to take into account and will endeavor to be responsive to military and economic assistance requirements of Israel " In his letter to Egypt, former U S  Secretary of Defense Harold Brown wrote the following: In the context of the peace treaty between Egypt and Israel, the United States is prepared to enter into an expanded security relationship with Egypt with regard to the sales of military equipment and services and the financing of, at least a portion of those sales, subject to such Congressional review and approvals as may be required  All U S  foreign aid to Egypt (or any foreign recipient) is appropriated and authorized by Congress   The 1979 Egypt-Israel Peace Treaty is a bilateral peace agreement between Egypt and Israel, and the United States is not a legal party to the treaty  The treaty itself does not include any U S  aid obligations, and any assistance commitments to Israel and Egypt that could be potentially construed in conjunction with the treaty were through ancillary documents or other communications and were—by their terms—subject to congressional approval (see above)  However, as the peace broker between Israel and Egypt, the United States has traditionally provided foreign aid to both countries to ensure a regional balance of power and sustain security cooperation with both countries  In some cases, an Administration may sign a bilateral "Memorandum of Understanding" (MOU) with a foreign country pledging a specific amount of foreign aid to be provided over a selected time period subject to the approval of Congress  In the Middle East, the United States has signed foreign assistance MOUs with Israel and Jordan  Currently, there is no U S -Egyptian MOU specifying a specific amount of total U S  aid pledged to Egypt over a certain time period  Congress typically specifies a precise allocation of most foreign assistance for Egypt in the foreign operations appropriations bill  Egypt receives the bulk of foreign aid funds from three primary accounts: Foreign Military Financing (FMF), Economic Support Funds (ESF), and International Military Education and Training (IMET)  The United States offers IMET training to Egyptian officers in order to facilitate U S -Egyptian military cooperation over the long term  Since the 1979 Israeli-Egyptian Peace Treaty, the United States has provided Egypt with large amounts of military assistance  U S  policymakers have routinely justified this aid to Egypt as an investment in regional stability, built primarily on long-running military cooperation and sustaining the treaty—principles that are supposed to be mutually reinforcing  Egypt has used U S  military aid through the FMF to (among other things) purchase major U S  defense systems, such as the F-16 fighter aircraft, the M1A1 Abrams battle tank, and the AH-64 Apache attack helicopter  For decades, FMF grants have supported Egypt's purchases of large-scale conventional military equipment from U S  suppliers  However, as mentioned above, the Obama Administration announced that future FMF grants may only be used to purchase equipment specifically for "counterterrorism, border security, Sinai security, and maritime security" (and for sustainment of weapons systems already in Egypt's arsenal)  It is not yet clear how the Trump Administration will determine which U S -supplied military equipment would help the Egyptian military counter terrorism and secure its land and maritime borders  Overall, some defense experts continue to view the Egyptian military as inadequately prepared, both doctrinally and tactically, to face the threat posed by terrorist/insurgent groups such as Sinai Province  According to a former U S  National Security Council official, "they [the Egyptian military] understand they have got a problem in Sinai, but they have been unprepared to invest in the capabilities to deal with it " To reorient the military toward unconventional warfare, the Egyptian military needs, according to one assessment, "heavy investment into rapid reaction forces equipped with sophisticated infantry weapons, optics and communication gear     backed by enhanced intelligence, surveillance and reconnaissance platforms  In order to transport them, Egypt would also need numerous modern aviation assets " In addition to substantial amounts of annual U S  military assistance, Egypt has benefited from certain aid provisions that have been available to only a few other countries  For example Early Disbursal and Interest - Bearing Account : Between FY2001 and FY2011, Congress granted Egypt early disbursement of FMF funds (within 30 days of the enactment of appropriations legislation) to an interest-bearing account at the Federal Reserve Bank of New York  Interest accrued from the rapid disbursement of aid has allowed Egypt to receive additional funding for the purchase of U S -origin equipment  In FY2012, Congress began to condition the obligation of FMF, requiring the Administration to certify certain conditions had been met before releasing FMF funds, thereby eliminating their automatic early disbursal  However, Congress has permitted Egypt to continue to earn interest on FMF funds already deposited in the Federal Reserve Bank of New York  The Excess Defense Articles (EDA) program provides one means by which the United States can advance foreign policy objectives—assisting friendly and allied nations through provision of equipment in excess of the requirements of its own defense forces  The Defense Security Cooperation Agency (DSCA) manages the EDA program, which enables the United States to reduce its inventory of outdated equipment by providing friendly countries with necessary supplies at either reduced rates or no charge  As a designated "major non-NATO ally," Egypt is eligible to receive EDA under Section 516 of the Foreign Assistance Act and Section 23(a) of the Arms Export Control Act  Over the past two decades, U S  economic aid to Egypt has been reduced by over 90%, from $833 million in FY1998 to a request of $75 million for FY2019  Beginning in the mid to late 1990s, as Egypt moved from an impoverished country to a lower-middle-income economy, the United States and Egypt began to rethink the assistance relationship, emphasizing "trade not aid " Congress began to scale back economic aid both to Egypt and Israel due to a 10-year agreement reached between the United States and Israel in the late 1990s known as the "Glide Path Agreement," which gradually reduced U S  economic aid to Egypt to $400 million by 2008  U S  economic aid to Egypt stood at $200 million per year by the end of the George W  Bush Administration, whose relations with then-President Hosni Mubarak suffered over the latter's reaction to the Administration's democracy agenda in the Arab world  During the final years of the Obama Administration, distrust of U S  democracy promotion assistance led the Egyptian government to obstruct many U S -funded economic assistance programs  According to the Government Accountability Office (GAO), the Department of State and the U S  Agency for International Development (USAID) reported hundreds of millions of dollars ($460 million as of 2015) in unobligated prior year ESF funding  As these unobligated balances grew, it created pressure on the Obama Administration to reobligate ESF funds for other purposes  In 2016, the Obama Administration notified Congress that it was reprogramming $108 million of ESF that had been appropriated for Egypt in FY2015 but remained unobligated for other purposes  The Administration claimed that its actions were due to "continued government of Egypt process delays that have impeded the effective implementation of several programs " In 2017, the Trump Administration also reprogrammed FY2016 ESF for Egypt  U S  economic aid to Egypt is divided into two components: (1) USAID-managed programs (public health, education, economic development, democracy and governance); and (2) the U S -Egyptian Enterprise Fund  Both are funded primarily through the Economic Support Fund (ESF) appropriations account  

ground_truth: Historically, Egypt has been an important country for U.S. national security interests based on its geography, demography, and diplomatic posture. Egypt controls the Suez Canal, which is one of the world's most well-known maritime chokepoints, linking the Mediterranean and Red Seas. Egypt, with its population of more than 100 million people, is by far the most populous Arabic-speaking country. Although it may not play the same type of leading political or military role in the Arab world as it has in the past, Egypt may retain some "soft power" by virtue of its history, media, and culture. Cairo plays host both to the 22-member Arab League and Al Azhar University, which claims to be the oldest continuously operating university in the world and has symbolic importance as a leading source of Islamic scholarship. Additionally, Egypt's 1979 peace treaty with Israel remains one of the most significant diplomatic achievements for the promotion of Arab-Israeli peace. While people-to-people relations remain cold, the Israeli and Egyptian governments have increased their cooperation against Islamist militants and instability in the Sinai Peninsula and Gaza Strip. Personnel moves and possible amendments to the Egyptian constitution highlight apparent efforts by President Sisi to consolidate power with the help of political allies, including colleagues from Egypt's security establishment. President Sisi has come under repeated international criticism for an ongoing government crackdown against various forms of political dissent and freedom of expression. The Egyptian government has defended its human rights record, asserting that the country is under pressure from terrorist groups seeking to destabilize Arab nation-states. The Trump Administration has tried to normalize ties with the Sisi government that were generally perceived as strained under President Obama. In January 2019, U.S. Secretary of State Michael Pompeo delivered a major policy speech at the American University in Cairo, where he stated, "And as we seek an even stronger partnership with Egypt, we encourage President Sisi to unleash the creative energy of Egypt's people, unfetter the economy, and promote a free and open exchange of ideas." The United States has provided significant military and economic assistance to Egypt since the late 1970s. Successive U.S. Administrations have justified aid to Egypt as an investment in regional stability, built primarily on long-running cooperation with the Egyptian military and on sustaining the 1979 Egyptian-Israeli peace treaty. All U.S. foreign aid to Egypt (or any recipient) is appropriated and authorized by Congress. Since 1946, the United States has provided Egypt with over $83 billion in bilateral foreign aid (calculated in historical dollars—not adjusted for inflation). Annual appropriations legislation includes several conditions governing the release of these funds. All U.S. military aid to Egypt finances the procurement of weapons systems and services from U.S. defense contractors. For FY2019, Congress has appropriated $1.4 billion in total bilateral assistance for Egypt, the same amount it provided in FY2018. For FY2020, the President is requesting a total of $1.382 billion in bilateral assistance for Egypt. Nearly all of the U.S. funds for Egypt come from the FMF account (military aid). In November 2018, the U.S. Defense Department notified Congress of a major $1 billion sale of defense equipment to Egypt, consisting of 10 AH-64E Apache Attack Helicopters, among other things. Beyond the United States, President Sisi has broadened Egypt's international base of support to include several key partners, including the Arab Gulf states, Israel, Russia, and France. In the last five years, as French-Egyptian ties have improved, Egypt has purchased major air and naval defense systems from French defense companies.