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



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

Report 1: The issue of executive discretion has been at the center of constitutional debates in liberal democracies throughout the twentieth century  How to balance a commitment to the rule of law with the exigencies of modern political and economic crises has engaged legislators and scholars in the United States and around the world  The United States Constitution is silent on questions of emergency power  As such, over the past two centuries, Congress and the President have answered those questions in varied and often ad hoc ways  In the eighteenth and nineteenth centuries, the answer was often for the President to act without congressional approval in a time of crisis, knowingly risking impeachment and personal civil liability  Congress claimed primacy over emergency action and would decide subsequently to either ratify the President's actions or indemnify the President for any civil liability  By the twentieth century, a new pattern had begun to emerge  Instead of retroactively judging an executive's extraordinary actions in a time of emergency, Congress created statutory bases permitting the President to declare a state of emergency and make use of extraordinary delegated powers  The expanding delegation of emergency powers to the executive and the increase of governing via emergency power by the executive has been a common trajectory among twentieth-century liberal democracies  As innovation has quickened the pace of social change and global crises, some legislatures have felt compelled to delegate to the executive, who traditional political theorists assumed could operate with greater "dispatch" than deliberate, future-oriented legislatures  Whether such actions subvert the rule of law or are a standard feature of healthy modern constitutional orders has been a subject of extensive debate  The International Emergency Economic Powers Act (IEEPA) is one such example of a twentieth-century delegation of emergency authority  One of 123 emergency statutes under the umbrella of the National Emergencies Act (NEA), IEEPA grants the President extensive power to regulate a variety of economic transactions during a state of emergency  Congress enacted IEEPA in 1977 to rein in the expansive emergency economic powers that it had been delegated to the President under the Trading with the Enemy Act (TWEA)  Nevertheless, some scholars argue that judicial and legislative actions subsequent to IEEPA's enactment have made it, like TWEA, a source of expansive and unchecked executive authority in the economic realm  Others, however, argue that Presidents often use IEEPA to implement the will of Congress either as directed by law or as encouraged by congressional activity  Until recently, there has been little congressional discussion of modifying either IEEPA or its umbrella statute, the NEA  Recent presidential actions, however, have drawn attention to presidential emergency powers under the NEA of which IEEPA is the most frequently used  Should Congress consider changing IEEPA, there are two issues that Congress may wish to address  The first pertains to how Congress has delegated its authority under IEEPA and its umbrella statute, the NEA  The second pertains to choices made in the Export Control Reform Act of 2018  The First World War (1914-1918) saw an unprecedented degree of economic mobilization  The executive departments of European governments began to regulate their economies with or without the support of their legislatures  The United States, in contrast, was in a privileged position relative to its allies in Europe  Separated by an ocean from Germany and Austria-Hungary, the United States was never under substantial threat of invasion  Rather than relying on the inherent powers of the presidency, or acting unconstitutionally and waiting for congressional ratification, President Wilson sought explicit pre-authorization for expansive new powers to meet the global crisis  Between 1916 and the end of 1917, Congress passed 22 statutes empowering the President to take control of private property for public use during the war  These statutes gave the President broad authority to control railroads, shipyards, cars, telegraph and telephone systems, water systems, and many other sectors of the American economy  TWEA was one of those 22 statutes  It granted to the executive an extraordinary degree of control over international trade, investment, migration, and communications between the United States and its enemies  TWEA defined "enemy" broadly and included "any individual, partnership, or other body of individuals [including corporations], of any nationality, resident within the territory     of any nation with which the United States is at war, or resident outside of the United States and doing business within such a territory     " The first four sections of the act granted the President extensive powers to limit trading or communication with, or transporting enemies (or their allies) of the United States  These sections also empowered the President to censor foreign communications and place extensive restrictions on enemy insurance or reinsurance companies  It was Section 5(b) of TWEA, however, that would form one of the central bases of presidential emergency economic power in the twentieth century  Section 5(b), as originally enacted, states: That the President may investigate, regulate, or prohibit, under such rules and regulations as he may prescribe, by means of licenses or otherwise, any transactions in foreign exchange, export or earmarkings of gold or silver coin or bullion or currency, transfers of credit in any form (other than credits relating solely to transactions to be executed wholly within the United States), and transfers of evidences of indebtedness or of the ownership of property between the United States and any foreign country, whether enemy, ally of enemy or otherwise, or between residents of one or more foreign countries, by any person within the United States; and he may require any such person engaged in any such transaction to furnish, under oath, complete information relative thereto, including the production of any books of account, contracts, letters or other papers, in connection therewith in the custody or control of such person, either before or after such transaction is completed  The statute gave the President exceptional control over private international economic transactions in times of war  While Congress terminated many of the war powers in 1921, TWEA was specifically exempted because the U S  Government had yet to dispose of a large amount of alien property in its custody  The Great Depression, a massive global economic downturn that began in 1929, presented a challenge to liberal democracies in Europe and the Americas  To deal with the complexities presented by the crisis, nearly all such democracies began delegating discretionary authority to their executives to a degree that had only previously been done in times of war  The U S  Congress responded, in part, by dramatically expanding the scope of TWEA, delegating to the President the power to declare states of emergency in peacetime and assume expansive domestic economic powers  Such a delegation was made possible by analogizing economic crises to war  In public speeches about the crisis, President Franklin D  Roosevelt asserted that the Depression was to be "attacked," "fought against," "mobilized for," and "combatted" by "great arm[ies] of people " The economic mobilization of the First World War had blurred the lines between the executive's military and economic powers  As the Depression was likened to "armed strife" and declared to be "an emergency more serious than war" by a Justice of the Supreme Court, it became routine to use emergency economic legislation enacted in wartime as the basis for extraordinary economic authority in peacetime  As the Depression entered its third year, the newly-elected President Roosevelt sought from Congress "broad Executive power to wage a war against the emergency, as great as the power that would be given to me if we were in fact invaded by a foreign foe " In his first act as President, Roosevelt proclaimed a bank holiday, suspending all transactions at all banking institutions located in the United States and its territories for four days  In his proclamation, Roosevelt claimed to have authority to declare the holiday under Section 5(b) of TWEA  However, because the United States was not in a state of war and the suspended transactions were primarily domestic, the President's authority to issue such an order was dubious  Despite the tenuous legality, Congress ratified Roosevelt's actions by passing the Emergency Banking Relief Act three days after his proclamation  The act amended Section 5(b) of TWEA to read: During time of war or during any other period of national emergency declared by the President , the President may, through any agency that he may designate, or otherwise, investigate, regulate, or prohibit     This amendment gave the President the authority to declare that a national emergency existed and assume extensive controls over the national economy previously only available in times of war  By 1934, Roosevelt had used these extensive new powers to regulate "Every transaction in foreign exchange, transfer of credit between any banking institution within the United States and any banking institution outside of the United States " With America's entry into the Second World War in 1941, Congress again amended TWEA to grant the President extensive powers over the disposition of private property, adding the so-called "vesting" power, which authorized the permanent seizure of property  Now in its most expansive form, TWEA authorized the President to declare a national emergency and, in so doing, to regulate foreign exchange, domestic banking, possession of precious metals, and property in which any foreign country or foreign national had an interest  The Second World War ended in 1945  Following the conflict, the allied powers constructed institutions and signed agreements designed to keep the peace and to liberalize world trade  However, the United States did not immediately resume a peacetime posture with respect to emergency powers  Instead, the onset of the Cold War rationalized the continued use of TWEA and other emergency powers outside the context of a declared war  Over the next several decades, Presidents declared four national emergencies under Section 5(b) of TWEA and assumed expansive authority over economic transactions in the postwar period  During the Cold War, economic sanctions became an increasingly popular foreign policy and national security tool, and TWEA was a prominent source of presidential authority to use the tool  In 1950, President Harry S  Truman declared a national emergency, citing TWEA, to impose economic sanctions on North Korea and China  Subsequent Presidents referenced that national emergency as authority for imposing sanctions on Vietnam, Cuba, and Cambodia  Truman likewise used Section 5(b) of TWEA to maintain regulations on foreign exchange, transfers of credit, and the export of coin and currency that had been in place since the early 1930s  Presidents Richard M  Nixon and Gerald R  Ford invoked TWEA to continue export controls established under the Export Administration Act when the act expired  TWEA was also a prominent instrument of postwar presidential monetary policy  Presidents Dwight D  Eisenhower and John F  Kennedy used TWEA and the national emergency declared by President Roosevelt in 1933 to maintain and modify regulations controlling the hoarding and export of gold  In 1968, President Lyndon B  Johnson explicitly used Truman's 1950 declaration of emergency under Section 5(b) of TWEA to limit direct foreign investment by U S  companies in an effort to strengthen the balance of payments position of the United States after the devaluation of the pound sterling by the United Kingdom  In 1971, after President Nixon ended the convertibility of the U S  dollar to gold, effectively ending the postwar monetary order, he made use of Section 5(b) of TWEA to declare a state of emergency and place a 10% ad valorem supplemental duty on all dutiable goods entering the United States  The reliance by the executive on the powers granted by Section 5(b) of TWEA meant that postwar sanctions regimes and significant parts of U S  international monetary policy relied on continued states of emergency for their operation  By the mid-1970s, in the wake of U S  military involvement in Vietnam, revelations of domestic spying, assassinations of foreign political leaders, the Watergate break-in, and other related abuses of power, Congress increasingly focused on checking the executive branch  The Senate formed a bipartisan special committee chaired by Senators Frank Church and Charles Mathias to reevaluate the expansive delegations of emergency authority to the President  The special committee issued a report surveying the President's emergency powers in which it asserted that the United States had technically "been in a state of national emergency since March 9, 1933" and that there were four distinct declarations of national emergency in effect  The report also noted that the United States had "on the books at least 470 significant emergency statutes without time limitations delegating to the Executive extensive discretionary powers, ordinarily exercised by the Legislature, which affect the lives of American citizens in a host of all-encompassing ways " In the course of its investigations, Senator Mathias, committee co-chair, noted, "A majority of the people of the United States have lived all of their lives under emergency government " Senator Church, the other co-chair, said the central question before the committee was "whether it [was] possible for a democratic government such as ours to exist under its present Constitution and system of three separate branches equal in power under a continued state of emergency " Among the more controversial statutes highlighted by the committee was TWEA  In 1977, during the House markup of a bill revising TWEA, Representative Jonathan Bingham, Chairperson of the House International Relations Committee's Subcommittee on Economic Policy, described TWEA as conferring "on the President what could have been dictatorial powers that he could have used without any restraint by Congress " According to the Department of Justice, TWEA granted the President four major groups of powers in a time of war or other national emergency: (a) Regulatory powers with respect to foreign exchange, banking transfers, coin, bullion, currency, and securities; (b) Regulatory powers with respect to "any property in which any foreign country or a national thereof has any interest"; (c) The power to vest "any property or interest of any foreign country or national thereof"; and (d) The powers to hold, use, administer, liquidate, sell, or otherwise deal with "such interest or property" in the interest of and for the benefit of the United States  The House report on the reform legislation called TWEA "essentially an unlimited grant of authority for the President to exercise, at his discretion, broad powers in both the domestic and international economic arena, without congressional review " The criticisms of TWEA centered on the following: (a) It required no consultation or reports to Congress with regard to the use of powers or the declaration of a national emergency  (b) It set no time limits on a state of emergency, no mechanism for congressional review, and no way for Congress to terminate it  (c) It stated no limits on the scope of TWEA's economic powers and the circumstances under which such authority could be used  (d) The actions taken under the authority of TWEA were rarely related to the circumstances in which the national emergency was declared  In testimony before the House Committee on International Relations, Professor Harold G  Maier summed up the development and the main criticisms of TWEA: Section 5(b)'s effect is no longer confined to "emergency situations" in the sense of existing imminent danger  The continuing retroactive approval, either explicit or implicit, by Congress of broad executive interpretations of the scope of powers which it confers has converted the section into a general grant of legislative authority to the President…" Congress's reforms to emergency powers under TWEA came in two acts  First, Congress enacted the National Emergencies Act (NEA) in 1976  The NEA provided for the termination of all existing emergencies in 1978, except those making use of Section 5(b) of TWEA, and placed new restrictions on the manner of declaring and the duration of new states of emergency, including: Requiring the President to immediately transmit to Congress of the declaration of national emergency  Requiring a biannual review whereby "each House of Congress shall meet to consider a vote on a concurrent [now joint, see below] resolution to determine whether that emergency shall be terminated " Authorizing Congress to terminate the national emergency through a privileged concurrent [now joint] resolution  Second, Congress tackled the thornier question of TWEA  Because the authorities granted by TWEA were heavily entwined with postwar international monetary policy and the use of sanctions in U S  foreign policy, unwinding it was a difficult undertaking  The exclusion of Section 5(b) reflected congressional interest in preserving existing regulations regarding foreign assets, foreign funds, and exports of strategic goods  Similarly, establishing a means to continue existing uses of TWEA reflected congressional interest in "improving future use rather than remedying past abuses " The subcommittee charged with reforming TWEA spent more than a year preparing reports, including the first complete legislative history of TWEA, a tome that ran nearly 700 pages  In the resulting legislation, Congress did three things  First, Congress amended TWEA so that it was, as originally intended, only applicable "during a time of war " Second, Congress expanded the Export Administration Act to include powers that previously were authorized by reference to Section 5(b) of TWEA  Finally, Congress wrote the International Emergency Economic Powers Act (IEEPA) to confer "upon the President a new set of authorities for use in time of national emergency which are both more limited in scope than those of section 5(b) and subject to procedural limitations, including those of the [NEA] " The Report of the House Committee on International Relations summed up the nature of an "emergency" in their "new approach" to international emergency economic powers: [G]iven the breadth of the authorities, and their availability at the President's discretion upon a declaration of a national emergency, their exercise should be subject to various substantive restrictions  The main one stems from a recognition that emergencies are by their nature rare and brief, and are not to be equated with normal ongoing problems  A national emergency should be declared and emergency authorities employed only with respect to a specific set of circumstances which constitute a real emergency, and for no other purpose  The emergency should be terminated in a timely manner when the factual state of emergency is over and not continued in effect for use in other circumstances  A state of national emergency should not be a normal state of affairs  IEEPA, as currently amended, empowers the president to: (A) investigate, regulate, or prohibit: (i) any transactions in foreign exchange, (ii) transfers of credit or payments between, by, through, or to any banking institution, to the extent that such transfers or payments involve any interest of any foreign country or national thereof, (iii) the importing or exporting of currencies or securities; and (B) investigate, block during the pendency of an investigation, regulate, direct and compel, nullify, void, prevent or prohibit, any acquisition, holding, withholding, use, transfer, withdrawal, transportation, importation or exportation of, or dealing in, or exercising any right, power, or privilege with respect to, or transactions involving, any property in which any foreign country or a national thereof has any interest by any person, or with respect to any property, subject to the jurisdiction of the United States  (C) when the United States is engaged in armed hostilities or has been attacked by a foreign country or foreign nationals, confiscate any property, subject to the jurisdiction of the United States, of any foreign person, foreign organization, or foreign country that he determines has planned, authorized, aided, or engaged in such hostilities or attacks against the United States; and all right, title, and interest in any property so confiscated shall vest, when, as, and upon the terms directed by the President, in such agency or person as the President may designate from time to time, and upon such terms and conditions as the President may prescribe, such interest or property shall be held, used, administered, liquidated, sold, or otherwise dealt with in the interest of and for the benefit of the United States, and such designated agency or person may perform any and all acts incident to the accomplishment or furtherance of these purposes  These powers may be exercised "to deal with any unusual and extraordinary threat, which has its source in whole or substantial part outside the United States, to the national security, foreign policy, or economy of the United States, if the President declares a national emergency with respect to such threat " Presidents may invoke IEEPA under the procedures set forth in the NEA  When declaring a national emergency, the NEA requires that the President "immediately" transmit the proclamation declaring the emergency to Congress and publish it in the Federal Register   The President must also specify the provisions of law that he or she intends to use  In addition to the requirements of the NEA, IEEPA provides several further restrictions  Preliminarily, IEEPA requires that the President consult with Congress "in every possible instance" before exercising any of the authorities granted under IEEPA  Once the President declares a national emergency invoking IEEPA, he or she must immediately transmit a report to Congress specifying: (1) the circumstances which necessitate such exercise of authority; (2) why the President believes those circumstances constitute an unusual and extraordinary threat, which has its source in whole or substantial part outside the United States, to the national security, foreign policy, or economy of the United States; (3) the authorities to be exercised and the actions to be taken in the exercise of those authorities to deal with those circumstances; (4) why the President believes such actions are necessary to deal with those circumstances; and (5) any foreign countries with respect to which such actions are to be taken and why such actions are to be taken with respect to those countries  The President subsequently is to report on the actions taken under the IEEPA at least once in every succeeding six-month interval that the authorities are exercised  As per the NEA, the emergency may be terminated by the President, by a privileged joint resolution of Congress, or automatically if the President does not publish in the Federal Register and transmit to Congress a notice stating that such emergency is to continue in effect after such anniversary  Congress has amended IEEPA eight times ( Table 1 )  Five of the eight amendments have altered civil and criminal penalties for violations of orders issued under the statute  Other amendments excluded certain informational materials and expanded IEEPA's scope following the terrorist attacks of September 11, 2001  Congress also amended the NEA in response to a ruling by the Supreme Court to require a joint rather than a concurrent resolution to terminate a national emergency  As originally enacted, IEEPA protected the rights of U S  persons to participate in the exchange of "any postal, telegraphic, telephonic, or other personal communication, which does not involve a transfer of anything of value" with a foreign person otherwise subject to sanctions  Amendments in 1988 and 1994 updated this list of protected rights to include the exchange of published information in a variety of formats  The act currently protects the exchange of "information or informational materials, including but not limited to, publications, films, posters, phonograph records, photographs, microfilms, microfiche, tapes, compact disks, CD ROMs, artworks, and news wire feeds," provided such exchange is not otherwise controlled for national security or foreign policy reasons related to weapons proliferation or international terrorism  Unlike the Trading with the Enemy Act (TWEA), IEEPA did not allow the President to vest assets as originally acted  In 2001, at the request of George W  Bush Administration, Congress amended IEEPA as part of the USA PATRIOT Act to return to the President the authority to vest frozen assets, but only under certain circumstances:     the President may     when the United States is engaged in armed hostilities or has been attacked by a foreign country or foreign nationals, confiscate any property, subject to the jurisdiction of the United States, of any foreign person, foreign organization, or foreign country that [the President] determines has planned, authorized, aided, or engaged in such hostilities or attacks against the United States; and all right, title, and interest in any property so confiscated shall vest, when, as, and upon the terms directed by the President, in such agency or person as the President may designate from time to time, and upon such terms and conditions as the President may prescribe, such interest or property shall be held, used, administered, liquidated, sold, or otherwise dealt with in the interest of and for the benefit of the United States, and such designated agency or person may perform any and all acts incident to the accomplishment or furtherance of these purposes  Speaking about the efforts of intelligence and law enforcement agencies to identify and disrupt the flow of terrorist finances, Attorney General John Ashcroft told Congress: At present the President's powers are limited to freezing assets and blocking transactions with terrorist organizations  We need the capacity for more than a freeze  We must be able to seize  Doing business with terrorist organization must be a losing proposition  Terrorist financiers must pay a price for their support of terrorism, which kills innocent Americans  Consistent with the President's [issuance of E O  13224 ] and his statements [of September 24, 2001], our proposal gives law enforcement the ability to seize the terrorists' assets  Further, criminal liability is imposed on those who knowingly engage in financial transactions, money-laundering involving the proceeds of terrorist acts  The House Judiciary Committee report explaining the amendments described its purpose as follows: Section 203 of the International Emergency Economic Powers Act (50 U S C  § 1702) grants to the President the power to exercise certain authorities relating to commerce with foreign nations upon his determination that there exists an unusual and extraordinary threat to the United States  Under this authority, the President may, among other things, freeze certain foreign assets within the jurisdiction of the United States  A separate law, the Trading With the Enemy Act, authorizes the President to take title to enemy assets when Congress has declared war  Section 159 of this bill amends section 203 of the International Emergency Economic Powers Act to provide the President with authority similar to what he currently has under the Trading With the Enemy Act in circumstances where there has been an armed attack on the United States, or where Congress has enacted a law authorizing the President to use armed force against a foreign country, foreign organization, or foreign national  The proceeds of any foreign assets to which the President takes title under this authority must be placed in a segregated account can only be used in accordance with a statute authorizing the expenditure of such proceeds  Section 159 also makes a number of clarifying and technical changes to section 203 of the International Emergency Economic Powers Act, most of which will not change the way that provision currently is implemented  The government has apparently never employed the vesting power to seize Al Qaeda assets within the United States  Instead, the government has sought to confiscate them through forfeiture procedures  The first, and to date, apparently only, use of this power under IEEPA occurred on March 20, 2003  On that date, in Executive Order 13290, President George W  Bush ordered the blocked "property of the Government of Iraq and its agencies, instrumentalities, or controlled entities" to be vested "in the Department of the Treasury     [to] be used to assist the Iraqi people and to assist in the reconstruction of Iraq " However, the President's order excluded from confiscation Iraq's diplomatic and consular property, as well as assets that had, prior to March 20, 2003, been ordered attached in satisfaction of judgments against Iraq rendered pursuant to the terrorist suit provision of the Foreign Sovereign Immunities Act and § 201 of the Terrorism Risk Insurance Act (which reportedly totaled about $300 million)   A subsequent executive order blocked the property of former Iraqi officials and their families, vesting title of such blocked funds in the Department of the Treasury for transfer to the Development Fund for Iraq (DFI) to be "used to meet the humanitarian needs of the Iraqi people, for the economic reconstruction and repair of Iraq's infrastructure, for the continued disarmament of Iraq, for the cost of Iraqi civilian administration, and for other purposes benefitting of the Iraqi people " The DFI was established by UN Security Council Resolution 1483, which required member states to freeze all assets of the former Iraqi government and of Saddam Hussein, senior officials of his regime and their family members, and transfer such assets to the DFI, which was then administered by the United States  Most of the vested assets were used by the Coalition Provision Authority (CPA) for reconstruction projects and ministry operations  The USA PATRIOT Act made three other amendments to Section 203 of IEEPA  After the power to investigate, it added the power to block assets during the pendency of an investigation  It clarified that the type of interest in property subject to IEEPA is an "interest by any person, or with respect to any property, subject to the jurisdiction of the United States " It also added subsection (c), which provides: In any judicial review of a determination made under this section, if the determination was based on classified information (as defined in section 1(a) of the Classified Information Procedures Act) such information may be submitted to the reviewing court ex parte and in camera  This subsection does not confer or imply any right to judicial review  As described in the House Judiciary Committee report, these provisions were meant to clarify and codify existing practices  Like TWEA prior to its amendment in 1977, the President and Congress together have often turned to IEEPA to impose economic sanctions in furtherance of U S  foreign policy and national security objectives  While initially enacted to rein in presidential emergency authority, presidential emergency use of IEEPA has expanded in scale, scope, and frequency since the statute's enactment  The House report on IEEPA stated, "emergencies are by their nature rare and brief, and are not to be equated with normal, ongoing problems " National emergencies invoking IEEPA, however, have increased in frequency and length since its enactment  Since 1977, Presidents have invoked IEEPA in 54 declarations of national emergency  On average, these emergencies last nearly a decade  Most emergencies have been geographically specific, targeting a specific country or government  However, since 1990, Presidents have declared non-geographically-specific emergencies in response to issues like weapons proliferation, global terrorism, and malicious cyber-enabled activities  The erosion of geographic limitations has been accompanied by an expansion in the nature of the targets of sanctions issued under IEEPA authority  Originally, IEEPA was used to target foreign governments; however, Presidents have increasingly targeted groups and individuals  While Presidents usually make use of IEEPA as an emergency power, Congress has also directed the use of IEEPA or expressed its approval of presidential emergency use in several statutes  IEEPA is the most frequently cited emergency authority when the President invokes NEA authorities to declare a national emergency  ( Figure 1 )  Rather than referencing the same set of emergencies, as had been the case with TWEA, IEEPA has required the President to declare a national emergency for each independent use  As a result, the number of national emergencies declared under the terms of the NEA has proliferated over the past four decades  Presidents declared only four national emergencies under the auspices of TWEA in the four decades prior to IEEPA's enactment  In contrast, Presidents have invoked IEEPA in 54 of the 61 declarations of national emergency issued under the National Emergen cies Act  As of March 1, 2019, there were 32 ongoing national emergencies; all but three involved IEEPA  Each year since 1990, Presidents have issued roughly 4 5 executive orders citing IEEPA and declared 1 5 new national emergencies citing IEEPA  ( Figure 2 )  On average, emergencies invoking IEEPA last nearly a decade  The longest emergency was also the first  President Jimmy Carter, in response to the Iranian hostage crisis of 1979, declared the first national emergency under the provisions of the National Emergencies Act and invoked IEEPA  Six successive Presidents have renewed that emergency annually for nearly forty years  As of March 1, 2019, that emergency is still in effect, largely to provide a legal basis for resolving matters of ownership of the Shah's disputed assets  That initial emergency aside, the length of emergencies invoking IEEPA has increased each decade  The average length of an emergency invoking IEEPA declared in the 1980s was four years  That average extended to 10 years for emergencies declared in the 1990s and 11 years for emergencies declared in the 2000s ( Figure 3 )  As such, the number of ongoing national emergencies has grown nearly continuously since the enactment of IEEPA and the NEA ( Figure 4 )  Between January 1, 1979, and January 1, 2019, there were on average 14 ongoing national emergencies each year, 13 of which invoked IEEPA  In most cases, the declared emergencies citing IEEPA have been geographically specific ( Figure 5 )  For example, in the first use of IEEPA, President Jimmy Carter issued an executive order that both declared a national emergency with respect to the "situation in Iran" and "blocked all property and interests in property of the Government of Iran [   ] " Five months later, President Carter issued a second order dramatically expanding the scope of the first EO and effectively blocked the transfer of all goods, money, or credit destined for Iran by anyone subject to the jurisdiction of the United States  A further order expanded the coverage to block imports to the United States from Iran  Together, these orders touched upon virtually all economic contacts between any place or legal person subject to the jurisdiction of the United States and the territory and government of Iran  Many of the executive orders invoking IEEPA have followed this pattern of limiting the scope to a specific territory, government, or its nationals  Executive Order 12513, for example, prohibited "imports into the United States of goods and services of Nicaraguan origin" and "exports from the United States of goods to or destined for Nicaragua " The order likewise prohibited Nicaraguan air carriers and vessels of Nicaraguan registry from entering U S  ports  Executive Order 12532 prohibited various transactions with the "Government of South Africa or to entities owned or controlled by that Government " While the majority (38) of national emergencies invoking IEEPA have been geographically specific, ten have lacked explicit geographic limitations  President George H W  Bush declared the first geographically nonspecific emergency in response to the threat posed by the proliferation of chemical and biological weapons  Similarly, President George W  Bush declared a national emergency in response to the threat posed by "persons who commit, threaten to commit, or support terrorism " President Barack Obama declared emergencies to respond to the threats of "transnational criminal organizations" and "persons engaging in malicious cyber-enabled activities " Without explicit geographic limitations, these orders have included provisions that are global in scope  These geographically nonspecific emergencies have increased in frequency over the past 40 years—three of the ten have been declared since 2015  In addition to the erosion of geographic limitations, the stated motivations for declaring national emergencies have expanded in scope as well  Initially, stated rationales for declarations of national emergency citing IEEPA were short and often referenced either a specific geography or the specific actions of a government  Presidents found that circumstances like "the situation in Iran," or the "policies and actions of the Government of Nicaragua," constituted "unusual and extraordinary threat[s] to the national security and foreign policy of the United States" and would therefore declare a national emergency  The stated rationales have, however, expanded over time in both the length and subject matter  Presidents have increasingly declared national emergencies, in part, to respond to human and civil rights abuses, slavery, denial of religious freedom, political repression, public corruption, and the undermining of democratic processes  While the first reference to human rights violations as a rationale for a declaration of national emergency came in 1985, most of such references have come in the past twenty years  Table A-2   Presidents have also expanded the nature of the targets of IEEPA sanctions  Originally, the targets of sanctions issued under IEEPA were foreign governments  The first use of IEEPA targeted "Iranian Government Property " Use of IEEPA quickly expanded to target geographically defined regions  Nevertheless, Presidents have also increasingly targeted groups, such as political parties or terrorist organizations, and individuals, such as supporters of terrorism or suspected narcotics traffickers  The first instances of orders directed at groups or persons were limited to foreign groups or persons  For example, in Executive Order 12978, President Bill Clinton targeted specific "foreign persons" and "persons determined [   ] to be owned or controlled by, or to act for or on behalf of" such foreign persons  An excerpt is included below: Except to the extent provided in section 203(b) of IEEPA (50 U S C  1702(b)) and in regulations, orders, directives, or licenses that may be issued pursuant to this order, and notwithstanding any contract entered into or any license or permit granted prior to the effective date, I hereby order blocked all property and interests in property that are or hereafter come within the United States, or that are or hereafter come within the possession or control of United States persons, of: (a) the foreign persons listed in the Annex to this order; (b)  foreign persons determined by the Secretary of the Treasury, in consultation with the Attorney General and the Secretary of State: (i) to play a significant role in international narcotics trafficking centered in Colombia; or (ii) materially to assist in, or provide financial or technological support for or goods or services in support of, the narcotics trafficking activities of persons designated in or pursuant to this order; and (c) persons determined by the Secretary of the Treasury, in consultation with the Attorney General and the Secretary of State, to be owned or controlled by, or to act for or on behalf of, persons designated in or pursuant to this order  However, in 2001, President George W  Bush issued Executive Order 13219 to target "persons who threaten international stabilization efforts in the Western Balkans " While the order was similar to that of Executive Order 12978, it removed the qualifier "foreign " As such, persons in the United States, including U S  citizens, could be targets of the order  The following is an excerpt of the order: Except to the extent provided in section 203(b)(1), (3), and (4) of IEEPA (50 U S C  1702(b)(1), (3), and (4)), the Trade Sanctions Reform and Export Enhancement Act of 2000 (title IX, P L  106-387 ), and in regulations, orders, directives, or licenses that may hereafter be issued pursuant to this order, and notwithstanding any contract entered into or any license or permit granted prior to the effective date, all property and interests in property of: (i)  the persons listed in the Annex to this order; and (ii)  persons designated by the Secretary of the Treasury, in consultation with the Secretary of State, because they are found: (A) to have committed, or to pose a significant risk of committing, acts of violence    Several subsequent invocations of IEEPA have similarly not been limited to foreign targets  In sum, presidential emergency use of IEEPA was directed at foreign states initially, with targets that were delimited by geography or nationality  Since the 1990s, however, Presidents have expanded the scope of their declarations to include individual persons, regardless of nationality or geographic location, who are engaged in specific activities  While IEEPA is often categorized as an emergency statute, Congress has used IEEPA outside of the context of national emergencies  When Congress legislates sanctions, it often authorizes or directs the President to use IEEPA authorities to impose those sanctions  In the Nicaragua Human Rights and Anticorruption Act of 2018, the most recent example, Congress directed the President to exercise "all powers granted to the President [by IEEPA] to the extent necessary to block and prohibit [certain transactions] " Penalties for violations by a person of a measure imposed by the President under the Act would be, likewise, determined by reference to IEEPA  The trend has been long-term  Congress first directed the President to make use of IEEPA authorities in 1986 as part of an effort to assist Haiti in the recovery of assets illegally diverted by its former government  That statute provided: The President shall exercise the authorities granted by section 203 of the International Emergency Economic Powers Act [50 USC 1702] to assist the Government of Haiti in its efforts to recover, through legal proceedings, assets which the Government of Haiti alleges were stolen by former president-for-life Jean Claude Duvalier and other individuals associated with the Duvalier regime  This subsection shall be deemed to satisfy the requirements of section 202 of that Act  [50 USC 1701] In directing the President to use IEEPA, Congress waived the requirement that he declare a national emergency (and none was declared)  Subsequent legislation has followed this general pattern, with slight variations in language and specificity  The following is an example of current legislative language that has appeared in several recent statutes: (a) IN GENERAL —The President shall impose the sanctions described in subsection (b) with respect to—     (b) SANCTIONS DESCRIBED — (1) IN GENERAL —The sanctions described in this subsection are the following: (A) ASSET BLOCKING —The exercise of all powers granted to the President by the International Emergency Economic Powers Act (50 U S C  1701 et seq ) to the extent necessary to block and prohibit all transactions in all property and interests in property of a person determined by the President to be subject to subsection (a) if such property and interests in property are in the United States, come within the United States, or are or come within the possession or control of a United States person      (2) PENALTIES —A person that violates, attempts to violate, conspires to violate, or causes a violation of paragraph (1)(A) or any regulation, license, or order issued to carry out paragraph (1)(A) shall be subject to the penalties set forth in subsections (b) and (c) of section 206 of the International Emergency Economic Powers Act (50 U S C  1705) to the same extent as a person that commits an unlawful act described in subsection (a) of that section  Congress has also expressed, retroactively, its approval of unilateral presidential invocations of IEEPA in the context of a national emergency  In the Countering Iran's Destabilizing Activities Act of 2017, for example, Congress declared, "It is the sense of Congress that the Secretary of the Treasury and the Secretary of State should continue to implement Executive Order No  13382 " Presidents, however, have also used IEEPA to preempt or modify parallel congressional activity  On September 9, 1985, President Reagan, finding "that the policies and actions of the Government of South Africa constitute an unusual and extraordinary threat to the foreign policy and economy of the United States," declared a national emergency and limited transactions with South Africa  The President declared the emergency despite the fact that legislation limiting transactions with South Africa was quickly making its way through Congress  In remarks about the declaration, President Reagan stated that he had been opposed to the bill contemplated by Congress because unspecified provisions "would have harmed the very people [the U S  was] trying to help " Nevertheless, members of the press at the time (and at least one scholar since) noted that the limitations imposed by the Executive Order and the provisions in legislation then winding its way through Congress were "substantially similar " In general, IEEPA has served as an integral part of the postwar international sanctions regime  The President, either through a declaration of emergency or via statutory direction, has used IEEPA to limit economic transactions in support of administrative and congressional national security and foreign policy goals  Much of the action taken pursuant to IEEPA has involved blocking transactions and freezing assets  Once the President declares that a national emergency exists, he may use the authority in Section 203 of IEEPA (Grants of Authorities; 50 U S C  § 1702) to investigate, regulate, or prohibit foreign exchange transactions, transfers of credit, transfers of securities, payments, and may take specified actions relating to property in which a foreign country or person has interest—freezing assets, blocking property and interests in property, prohibiting U S  persons from entering into transactions related to frozen assets and blocked property, and in some instances denying entry into the United States  Pursuant to Section 203, Presidents have prohibited transactions with and blocked property of those designated as engaging in malicious cyber-enabled activities, including "interfering with or undermining election processes or institutions" [Executive Order 13694 of April 1, 2015, as amended; 50 U S C  § 1701 note  See also Executive Order 13848 of September 12, 2018; 83 F R  46843 ]; prohibited transactions with and blocked property of those designated as illicit narcotics traffickers including foreign drug kingpins; prohibited transactions with and blocked property of those designated as engaging in human rights abuses or significant corruption; prohibited transactions related to illicit trade in rough diamonds; prohibited transactions with and blocked property of those designated as Transnational Criminal Organizations; prohibited transactions with "those who disrupt the Middle East peace process;" prohibited transactions related to overflights with certain nations; instituted and maintained maritime restrictions; prohibited transactions related to weapons of mass destruction, in coordination with export controls authorized by the Arms Export Control Act and the Export Administration Act of 1979, and in furtherance of efforts to deter the weapons programs of specific countries (i e , Iran, North Korea); prohibited transactions those designated as "persons who commit, threaten to commit, or support terrorism;" maintained the dual-use export control system at times when its then-underlying authority, the Export Administration Act authority had lapsed; blocked property of and transactions with those designated as engaged in cyber activities that compromise critical infrastructures including election processes or the private sector's trade secrets; blocked property of and prohibited transactions with those designated as responsible for serious human rights abuse or engaged in corruption; blocked certain property of and transactions with foreign nationals of specific countries those designated as engaged in activities that constitute an extraordinary threat  No President has used IEEPA to place tariffs on imported products from a specific country or on products imported to the United States in general  However, IEEPA's similarity to TWEA, coupled with its relatively frequent use to ban imports and exports, suggests that such an action could happen  In addition, no President has used IEEPA to enact a policy that was primarily domestic in effect  Some scholars argue, however, that the interconnectedness of the global economy means it would probably be permissible to use IEEPA to take an action that was primarily domestic in effect  The ultimate disposition of assets frozen under IEEPA may serve as an important part of the leverage economic sanctions provide to influence the behavior of foreign actors  The President and Congress have each at times determined the fate of blocked assets to further foreign policy goals  Presidents have used frozen assets as a bargaining tool during foreign policy crises and to bring a resolution to such crises, at times by unfreezing the assets, returning them to the sanctioned entity or channeling them to a follow-on government  The following are some examples of how Presidents have made use of blocked assets to resolve foreign policy issues  President Carter invoked authority under IEEPA to impose trade sanctions against Iran, freezing Iranian assets in the United States, in response to the hostage crisis in 1979  On January 19, 1981, the United States and Iran entered into a series of executive agreements brokered by Algeria under which the hostages were freed, a portion of the blocked assets ($5 1 billion) was used to repay outstanding U S  bank loans to Iran, another part ($2 8 billion) was returned directly to Iran, another $1 billion was transferred into a security account in the Hague to pay other U S  claims against Iran as arbitrated by the Iran-U S  Claims Tribunal (IUSCT), and an additional $2 billion remained blocked pending further agreement with Iran or decision of the Tribunal  The United States also undertook to freeze the assets of the former Shah's estate along with those of the Shah's close relatives pending litigation in U S  courts to ascertain Iran's right to their return  Iran's litigation was unsuccessful, and none of the contested assets were returned to Iran  Presidents have also been able to channel frozen assets to opposition governments in cases where the United States continued to recognize a previous government that had been removed by coup d'état or otherwise replaced as the legitimate government of a country  For example, after Panamanian President Eric Arturo Delvalle tried to dismiss de facto military ruler General Manuel Noriega from his post as head of the Panamanian Defense Forces, which resulted in Delvalle's own dismissal by the Panamanian Legislative Assembly, President Reagan recognized Delvalle as the legitimate head of government and instituted economic sanctions against the Noriega regime  The Department of State advised U S  banks not to disburse funds to the Noriega regime, and Delvalle was able to obtain court orders permitting him access to the funds  President Reagan issued Executive Order 12635, which blocked all property and interests in payments of the government of Panama, and the Department of the Treasury issued regulations requiring companies who owed money to Panama to pay those funds into an escrow account established at the Federal Reserve Bank of New York, which also held payments owed by the United States for the operation of the Panama Canal Commission  Some of the funds in the escrow account were used to pay the operating expenses of the Delvalle government  After the U S  invasion of Panama, President George H W  Bush lifted economic sanctions and used some of the frozen funds to repay debts owed by Panama to foreign creditors, with remaining funds returned to the successor government  In a similar more recent case, the Trump Administration's recognition of Venezuelan opposition leader Juan Guaidó as Venezuela's interim president permitted Guaidó access to Venezuelan government assets held at the United States Federal Reserve and other insured United States financial institutions  President Barrack Obama initially froze Venezuelan government assets in 2015, pursuant to IEEPA and the Venezuela Defense of Human Rights and Civil Society Act of 2014  After official recognition of Guaidó, the Trump Administration imposed new sanctions under IEEPA to freeze the assets of the main Venezuelan state-owned oil company, Petróleos de Venezuela (Pdvsa), which could both significantly reduce funds available to the regime of Nicolas Maduro and channel them to Guaidó  There is also precedent for using frozen foreign assets for purposes authorized by the U N  Security Council  After the first war with Iraq, President George H W  Bush ordered the transfer of frozen Iraqi assets derived from the sale of Iraqi petroleum held by U S  banks to be transferred to a holding account in the Federal Reserve Bank of New York to fulfill "the rights and obligations of the United States under U N  Security Council Resolution No  778 " The President cited a section of the United Nations Participation Act (UNPA), as well as IEEPA, as authority to take the action  The transferred funds were used to provide humanitarian relief and to finance the United Nations Compensation Commission, which was established to adjudicate claims against Iraq arising from the invasion  Other Iraqi assets remained frozen and accumulated interest until they were vested in 2003 (see below)  In some cases, the United States has ended sanctions and returned frozen assets to successor governments  In the case of the former Yugoslavia, for example, in 2003, $237 6 million in frozen funds belonging to the Central Bank of the Socialist Federal Republic of Yugoslavia were transferred to the central banks of the successor states  In the case of Afghanistan, $217 million in frozen funds belonging to the Taliban were released to the Afghan Interim Authority in January 2002  The executive branch has traditionally resisted congressional efforts to vest foreign assets to pay U S  claimants without first obtaining a settlement agreement with the country in question  Congress has overcome such resistance in the case of foreign governments that have been designated as "State Supporters of Terrorism " U S  nationals who are victims of state-supported terrorism involving designated states have been able to sue those countries for damages under an exception to the Foreign Sovereign Immunities Act (FSIA) since 1996  To facilitate the payment of judgments under the exception, Congress passed Section 117 of the Treasury and General Government Appropriations Act, 1999, which further amended the FSIA by allowing attachment and execution against state property with respect to which financial transactions are prohibited or regulated under Section 5(b) TWEA, Section 620(a) of the Foreign Assistance Act (authorizing the trade embargo against Cuba), or Sections 202 and 203 of IEEPA, or any orders, licenses or other authority issued under these statutes  Because of the Clinton Administration's continuing objections, however, Section 117 also gave the President authority to "waive the requirements of this section in the interest of national security," an authority President Clinton promptly exercised in signing the statute into law  The Section 117 waiver authority protecting blocked foreign government assets from attachment to satisfy terrorism judgments has continued in effect ever since, prompting Congress to take other actions to make frozen assets available to judgment holders  Congress enacted §2002 of the Victims of Trafficking and Violence Protection Act of 2000 (VTVPA) to mandate the payment from frozen Cuban assets of compensatory damages awarded against Cuba under the FSIA terrorism exception on or prior to July 20, 2000  The Department of the Treasury subsequently vested $96 7 million in funds generated from long-distance telephone services between the United States and Cuba in order to compensate claimants in Alejandre v  Republic of Cuba , the lawsuit based on the1996 downing of two unarmed U S  civilian airplanes by the Cuban air force  Another payment of more than $7 million was made using vested Cuban assets to a Florida woman who had won a lawsuit against Cuba based on her marriage to a Cuban spy  As unpaid judgments against designated state sponsors of terrorism continued to mount, Congress enacted the Terrorism Risk Insurance Act (TRIA)  Section 201 of TRIA overrode long-standing objections by the executive branch to make the frozen assets of terrorist states available to satisfy judgments for compensatory damages against such states (and organizations and persons) as follows: Notwithstanding any other provision of law, and except as provided in subsection (b), in every case in which a person has obtained a judgment against a terrorist party on a claim based upon an act of terrorism, or for which a terrorist party is not immune under section 1605(a)(7) of title 28, United States Code, the blocked assets of that terrorist party (including the blocked assets of any agency or instrumentality of that terrorist party) shall be subject to execution or attachment in aid of execution in order to satisfy such judgment to the extent of any compensatory damages for which such terrorist party has been adjudged liable  Subsection (b) of Section 201 provided waiver authority "in the national security interest," but only with respect to frozen foreign government "property subject to the Vienna Convention on Diplomatic Relations or the Vienna Convention on Consular Relations " When Congress amended the FSIA in 2008 to revamp the terrorism exception, it provided that judgments entered under the new exception could be satisfied out of the property of a foreign state notwithstanding the fact that the property in question is regulated by the United States government pursuant to TWEA or IEEPA  Congress has also directed that the proceeds from certain sanctions violations be paid into a fund for providing compensation to the former hostages of Iran and terrorist state judgment creditors  To fund the program, Congress designated that certain real property and bank accounts owned by Iran and forfeited to the United States could go into the United States Victims of State Sponsored Terrorism Fund, along with the sum of $1,025,000,000, representing the amount paid to the United States pursuant to the June 27, 2014, plea agreement and settlement between the United States and BNP Paribas for sanctions violations  The fund is replenished through criminal penalties and forfeitures for violations of IEEPA or TWEA-based regulations, or any related civil or criminal conspiracy, scheme, or other federal offense related to doing business or acting on behalf of a state sponsor of terrorism  Half of all civil penalties and forfeitures relating to the same offenses are also deposited into the fund  A number of lawsuits seeking to overturn actions taken pursuant to IEEPA have made their way through the judicial system, including challenges to the breadth of congressionally delegated authority and assertions of violations of constitutional rights  As demonstrated below, most of these challenges have failed  The few challenges that succeeded did not seriously undermine the overarching statutory scheme for sanctions  The breadth of presidential power under IEEPA is illustrated by the Supreme Court's 1981 opinion in Dames & Moore v  Regan   In Dames & Moore , petitioners had challenged President Carter's executive order establishing regulations to further compliance with the terms of the Algiers Accords, which the President had entered into to end the hostage crisis with Iran  Under these agreements, the United States was obligated (1) to terminate all legal proceedings in U S  courts involving claims of U S  nationals against Iran, (2) to nullify all attachments and judgments, and (3) to resolve outstanding claims exclusively through binding arbitration in the Iran-U S  Claims Tribunal (IUSCT)  The President, through executive orders, revoked all licenses that permitted the exercise of "any right, power, or privilege" with regard to Iranian funds, nullified all non-Iranian interests in assets acquired after a previous blocking order, and required banks holding Iranian assets to transfer them to the Federal Reserve Bank of New York to be held or transferred as directed by the Secretary of the Treasury  Dames and Moore had sued Iran for breach of contract to recover compensation for work performed  The district court had entered summary judgment in favor of Dames and Moore and issued an order attaching certain Iranian assets for satisfaction of any judgment that might result, but stayed the case pending appeal  The executive orders and regulations implementing the Algiers Accords resulted in the nullification of this prejudgment attachment and the dismissal of the case against Iran, directing that it be filed at the IUSCT  In response, Dames and Moore sued the government  The plaintiffs claimed that the President and the Secretary of the Treasury exceeded their statutory and constitutional powers to the extent they adversely affected Dames and Moore's judgment against Iran, the execution of that judgment, the prejudgment attachments, and the plaintiff's ability to continue to litigate against the Iranian banks  The government defended its actions, relying largely on IEEPA, which provided explicit support for most of the measures taken—nullification of the prejudgment attachment and transfer of the property to Iran—but could not be read to authorize actions affecting the suspension of claims in U S  courts  Justice Rehnquist wrote for the majority: Although we have declined to conclude that the IEEPA…directly authorizes the President's suspension of claims for the reasons noted, we cannot ignore the general tenor of Congress' legislation in this area in trying to determine whether the President is acting alone or at least with the acceptance of Congress  As we have noted, Congress cannot anticipate and legislate with regard to every possible action the President may find it necessary to take or every possible situation in which he might act  Such failure of Congress specifically to delegate authority does not, "especially       in the areas of foreign policy and national security," imply "congressional disapproval" of action taken by the Executive  On the contrary, the enactment of legislation closely related to the question of the President's authority in a particular case which evinces legislative intent to accord the President broad discretion may be considered to "invite" "measures on independent presidential responsibility " At least this is so where there is no contrary indication of legislative intent and when, as here, there is a history of congressional acquiescence in conduct of the sort engaged in by the President  The Court remarked that Congress's implicit approval of the long-standing presidential practice of settling international claims by executive agreement was critical to its holding that the challenged actions were not in conflict with acts of Congress  For support, the Court cited to Justice Frankfurter's concurrence in Youngstown Sheet and Tube Co  v  Sawyer stating that "a systematic, unbroken, executive practice, long pursued to the knowledge of the Congress and never before questioned … may be treated as a gloss on 'Executive Power' vested in the President by § 1 of Art  II " Consequently, it may be argued that Congress's exclusion of certain express powers in IEEPA do not necessarily preclude the President from exercising them, at least where a court finds sufficient precedent exists  Lower courts have examined IEEPA under a number of other constitutional doctrines  Courts have reviewed whether Congress violated the non-delegation principle of separation of powers by delegating too much power to the President to legislate, in particular by creating new crimes  These challenges have generally failed  As the U S  Court of Appeals for the Second Circuit explained while evaluating IEEPA, delegations of congressional authority are constitutional so long as Congress provides through a legislative act an "intelligible principle" governing the exercise of the delegated authority  Even if the standards are higher for delegations of authority to define criminal offenses, the court held, IEEPA provides sufficient guidance  The court stated: The IEEPA "meaningfully constrains the [President's] discretion," by requiring that "[t]he authorities granted to the President     may only be exercised to deal with an unusual and extraordinary threat with respect to which a national emergency has been declared " And the authorities delegated are defined and limited  The Second Circuit found it significant that "IEEPA relates to foreign affairs—an area in which the President has greater discretion," bolstering its view that IEEPA does not violate the non-delegation doctrine  The U S  Court of Appeals for the Eleventh Circuit considered whether Section 207(b) of IEEPA is an unconstitutional legislative veto  That provision states: The authorities described in subsection (a)(1) may not continue to be exercised under this section if the national emergency is terminated by the Congress by concurrent resolution pursuant to section 202 of the National Emergencies Act [50 U S C  § 1622] and if the Congress specifies in such concurrent resolution that such authorities may not continue to be exercised under this section  In U S  v  Romero-Fernandez , two defendants convicted of violating the terms of an executive order issued under IEEPA argued on appeal that IEEPA was unconstitutional, in part, because of the above provision  The Eleventh Circuit accepted that the provision was an unconstitutional legislative veto (as conceded by the government) based on INS v  Chadha , in which the Supreme Court held that Congress cannot void the exercise of power by the executive branch through concurrent resolution, but can act only through bicameral passage followed by presentment of the law to the President  The Eleventh Circuit nevertheless upheld the defendants' convictions for violations of IEEPA regulations, holding that the legislative veto provision was severable from the rest of the statute  Courts have also addressed whether certain actions taken pursuant to IEEPA have effected an uncompensated taking of property rights in violation of the Fifth Amendment  The Fifth Amendment's Takings Clause prohibits "private property [from being] taken for public use, without just compensation " The Fifth Amendment's prohibitions apply as well to regulatory takings, in which the government does not physically take property but instead imposes restrictions on the right of enjoyment that decreases the value of the property or right therein  The Supreme Court has held that the nullification of prejudgment attachments pursuant to regulations issued under IEEPA was not an uncompensated taking, suggesting that the reason for this position was the contingent nature of the licenses that had authorized the attachments  The Court also suggested that the broader purpose of the statute supported the view that there was no uncompensated taking: This Court has previously recognized that the congressional purpose in authorizing blocking orders is "to put control of foreign assets in the hands of the President    " Such orders permit the President to maintain the foreign assets at his disposal for use in negotiating the resolution of a declared national emergency  The frozen assets serve as a "bargaining chip" to be used by the President when dealing with a hostile country  Accordingly, it is difficult to accept petitioner's argument because the practical effect of it is to allow individual claimants throughout the country to minimize or wholly eliminate this "bargaining chip" through attachments, garnishments, or similar encumbrances on property  Neither the purpose the statute was enacted to serve nor its plain language supports such a result  Similarly, a lower court held that the extinguishment of contractual rights due to sanctions enacted pursuant to IEEPA does not amount to a regulatory taking requiring compensation under the Fifth Amendment  Even though the plaintiff suffered "obvious economic loss" due to the sanctions regulations, that factor alone was not enough to sustain plaintiff's claim of a compensable taking  The court quoted long-standing Supreme Court precedent to support its finding: A new tariff, an embargo, a draft, or a war may inevitably bring upon individuals great losses; may, indeed, render valuable property almost valueless  They may destroy the worth of contracts  But whoever supposed that, because of this, a tariff could not be changed, or a non-intercourse act, or an embargo be enacted, or a war be declared?      [W]as it ever imagined this was taking private property without compensation or without due process of law? Accordingly, it seems unlikely that entities whose business interests are harmed by the imposition of sanctions pursuant to IEEPA will be entitled to compensation from the government for their losses  Persons whose assets have been directly blocked by the U S  Department of the Treasury Office of Foreign Assets Control (OFAC) pursuant to IEEPA have likewise found little success challenging the loss of the use of their assets as uncompensated takings  Many courts have recognized that a temporary blocking of assets does not constitute a taking because it is a temporary action that does not vest title in the United States  This conclusion is apparently so even if the blocking of assets necessitates the closing altogether of a business enterprise  In some circumstances, however, a court may analyze at least the initial blocking of assets under a Fourth Amendment standard for seizure  One court found a blocking to be unreasonable under a Fourth Amendment standard where there was no reason that OFAC could not have first obtained a judicial warrant  Some persons whose assets have been blocked have asserted that their right to due process has been violated  The Due Process Clause of the Fifth Amendment provides that no person shall be deprived of life, liberty, or property, without due process of law  Where one company protested that the blocking of its assets without a pre-deprivation hearing violated its right to due process, a district court found that a temporary deprivation of property does not necessarily give rise to a right to notice and an opportunity to be heard  A second district court stated that the exigencies of national security and foreign policy considerations that are implicated in IEEPA cases have meant that OFAC historically has not provided pre-deprivation notice in sanctions programs  A third district court stated that OFAC's failure to provide a charitable foundation with notice or a hearing prior to its designation as a terrorist organization and blocking of its assets did not violate its right to procedural due process, because the OFAC designation and blocking order serve the important governmental interest of combating terrorism by curtailing the flow of terrorist financing  That same court also held that prompt action by the government was necessary to protect against the transfer of assets subject to the blocking order  In Al Haramain Islamic Foundation v  U S  Department of Treasury , the U S  Court of Appeals for the Ninth Circuit considered whether OFAC's use of classified information without any disclosure of its content in its decision to freeze the assets of a charitable organization, and its failure to provide adequate notice and a meaningful opportunity to respond, violated the organization's right to procedural due process  The court applied the balancing test set forth by the Supreme Court in its landmark administrative law case Mathews v  Eldridge to resolve these questions  Under the Eldridge test, to determine if an individual has received constitutional due process, courts must weigh: (1) [the person's or entity's] private property interest, (2) the risk of an erroneous deprivation of such interest through the procedures used, as well as the value of additional safeguards, and (3) the Government's interest in maintaining its procedures, including the burdens of additional procedural requirements " While weighing the interests and risks at issue in Al Haramain , the Ninth Circuit found the organization's property interest to be significant: By design, a designation by OFAC completely shutters all domestic operations of an entity  All assets are frozen  No person or organization may conduct any business whatsoever with the entity, other than a very narrow category of actions such as legal defense  Civil penalties attach even for unwitting violations  Criminal penalties, including up to 20 years' imprisonment, attach for willful violations  For domestic organizations such as AHIF–Oregon, a designation means that it conducts no business at all  The designation is indefinite  Although an entity can seek administrative reconsideration and limited judicial relief, those remedies take considerable time, as evidenced by OFAC's long administrative delay in this case and the ordinary delays inherent in our judicial system  In sum, designation is not a mere inconvenience or burden on certain property interests; designation indefinitely renders a domestic organization financially defunct  Nevertheless, the court found "the government's interest in national security [could not] be understated " In evaluating the government's interest in maintaining its procedures, the Ninth Circuit explained that the Constitution requires that the government "take reasonable measures to ensure basic fairness to the private party and that the government follow procedures reasonably designed to protect against erroneous deprivation of the private party's interests " While the Ninth Circuit had previously held that the use of undisclosed information in a case involving the exclusion of certain longtime resident aliens should be considered presumptively unconstitutional, the court found that the presumption had been overcome in this case  The Ninth Circuit noted that all federal courts that have considered the argument that OFAC may not use undisclosed classified information in making its determinations have rejected it  Although the court found that OFAC's failure to provide even an unclassified summary of the information at issue was a violation of the organization's due process rights, the court deemed the error harmless because it would not likely have affected the outcome of the case  In the same case, the Ninth Circuit also considered the organization's argument that it had been denied adequate notice and an opportunity to be heard  Specifically, the organization asserted that OFAC had refused to disclose its reasons for investigating and designating the organization, leaving it unable to respond adequately to OFAC's unknown suspicions  Because OFAC had provided the organization with only one document to support its designation over the four-year period between the freezing of its assets and the redesignation of the organization as a specially designated global terrorist (SDGT), the court agreed that the organization had been deprived of due process rights  However, the court found that this error too was harmless  Some courts have considered whether asset blocking or penalties imposed pursuant to regulations promulgated under IEEPA have violated the subjects' First Amendment rights to free association, free speech, or religion  Challenges on these grounds have typically failed  Courts have held that there is no First Amendment right to support terrorists  The U S  Court of Appeals for the District of Columbia Circuit distinguished advocacy from financial support and held that the blocking of assets affected only the ability to provide financial support, but did not implicate the organization's freedom of association  Similarly, a district court interpreted relevant case law to hold that government actions prohibiting charitable contributions are subject to intermediate scrutiny rather than strict scrutiny, a higher standard that applies to political contributions  With respect to a free speech challenge brought by a charitable organization whose assets were temporarily blocked during the pendency of an investigation, a district court explained that "when 'speech' and 'nonspeech' elements are combined in the same course of conduct, a sufficiently important government interest in regulating the nonspeech element can justify incidental limitations on First Amendment freedoms " Accordingly, the district court applied the following test to determine whether the designations and blocking actions were lawful  Citing the Supreme Court's opinion in United States v  O'Brien , the court stated that a government regulation is sufficiently justified if: it is within the constitutional power of the government; it furthers an important or substantial governmental interest; the governmental interest is unrelated to the suppression of free expression; and the incidental restriction on alleged First Amendment freedoms is no greater than is essential to the furtherance of that interest  The court found the government's actions to fall within the bounds of this test: First, the President clearly had the power to issue the Executive Order  Second, the Executive Order promotes an important and substantial government interest—that of preventing terrorist attacks  Third, the government's action is unrelated to the suppression of free expression; it prohibits the provision of financial and other support to terrorists  Fourth, the incidental restrictions on First Amendment freedoms are no greater than necessary  However, with respect to an organization that was not itself designated as an SDGT but wished to conduct coordinated advocacy with another organization that was so designated, one appellate court found that an OFAC regulation barring such coordinated advocacy based on its content was subject to strict scrutiny  Accordingly, the court rejected the government's reliance on the Supreme Court's decision in Holder v  Humanitarian Law Project to find that the regulation impermissibly implicated the organization's right to free speech  Accordingly, there may be some circumstances where the First Amendment protects speech coordinated with (but not on behalf of) an organization designated as an SDGT  Until the recent enactment of the Export Control Reform Act of 2018, export of dual use goods and services was regulated pursuant to the authority of the Export Administration Act (EAA), which was subject to periodic expiry and reauthorization  President Reagan was the first President to use IEEPA as a vehicle for continuing the enforcement of the EAA's export controls  After Congress did not extend the expired EAA, President Reagan issued Executive Order 12444 in 1983, finding that "unrestricted access of foreign parties to United States commercial goods, technology, and technical data and the existence of certain boycott practices of foreign nations constitute, in light of the expiration of the Export Administration Act of 1979, an unusual and extraordinary threat to the national security " Although the EAA had been reauthorized for short periods since its initial expiration in 1983, every subsequent President utilized the authorities granted under IEEPA to maintain the existing system of export controls during periods of lapse  Figure 1   In the latest iteration, President George W  Bush issued Executive Order 13222 in 2001, finding the existence of a national emergency with respect to the expiration of the EAA and directing—pursuant to the authorities allocated under IEEPA—that "the provisions for administration of the [EAA] shall be carried out under this order so as to continue in full force and effect…the export control system heretofore maintained " Presidents Obama and Trump annually extended the 2001 executive order  Courts have generally treated this arrangement as authorized by Congress, although certain provisions of the EAA in effect under IEEPA have led to challenges  The determining factor appears to be whether IEEPA itself provides the President the authority to carry out the challenged action  In one case, the U S  Court of Appeals for the Fifth Circuit upheld a conviction for an attempt to violate the regulations even though the EAA had expired and did not expressly criminalize such attempts  The circuit court rejected the defendants' argument that the President had exceeded his delegated authority under the EEA by "enlarging" the crimes punishable under the regulations  Nevertheless, a district court held that the conspiracy provisions of the EAA regulations were rendered inoperative by the lapse of the EAA and "could not be repromulgated by executive order under the general powers that IEEPA vests in the President " The district court found that, even if Congress intended to preserve the operation of the EAA through IEEPA, that intent was limited by the scope of the statutes' substantive coverage at the time of IEEPA's enactment, when no conspiracy provision existed in either statute  The U S  Court of Appeals for the D C  Circuit upheld the application of the EAA as a statute permitting the government to withhold information under exemption 3 of the Freedom of Information Act (FOIA), which exempts from disclosure information exempted from disclosure by statute, even though the EAA had expired  Referring to legislative history it interpreted as congressional approval of the use of IEEPA to continue the EAA provisions during periods of lapse, the court stated: Although the legislative history does not refer to the EAA's confidentiality provision, it does evince Congress's intent to authorize the President to preserve the operation of the export regulations promulgated under the EAA  Moreover, it is significant for purposes of determining legislative intent that Congress acted with the knowledge that the EAA's export regulations had long provided for confidentiality and that the President's ongoing practice of extending the EAA by executive order had always included these confidentiality protections  The D C  Circuit distinguished this holding in a later case involving appellate jurisdiction over a decision by the Department of Commerce to apply sanctions for a company's violation of the EAA regulations  Pursuant to the regulations and under the direction of the Commerce Department, the company sought judicial review directly in the D C  Circuit  The D C  Circuit, however, concluded that it lacked jurisdiction: This court would have jurisdiction pursuant to the President's order only if the President has the authority to confer jurisdiction—an authority that, if it exists, must derive from either the Executive's inherent power under the Constitution or a permissible delegation of power from Congress  The former is unavailing, as the Constitution vests the power to confer jurisdiction in Congress alone  Whether the executive order can provide the basis of our jurisdiction, then, turns on whether the President can confer jurisdiction on this court under the auspices of IEEPA…  We conclude that the President lacks that power  Nothing in the text of IEEPA delegates to the President the authority to grant jurisdiction to any federal court  Consequently, the appeal of the agency decision was determined to belong in the district court according to the default rule under the Administrative Procedure Act (APA)  Congress may wish to address a number of issues with respect to IEEPA; two are addressed here  The first pertains to how Congress has delegated its authority under IEEPA and its umbrella statute, the NEA  The second pertains to choices made in the Export Control Reform Act of 2018  Although the stated aim of the drafters of the NEA and IEEPA was to restrain the use of emergency powers, the use of such powers has expanded by several measures  Presidents declare national emergencies and renew them for years or even decades  The limitation of IEEPA to transactions involving some foreign interest was intended to limit IEEPA's domestic application  However, globalization has eroded that limit, as few transactions today do not involve some foreign interest  Many of the other criticisms of TWEA that IEEPA was supposed to address—consultation, time limits, congressional review, scope of power, and logical relationship to the emergency declared—are criticisms that scholars levy against IEEPA today  In general, three common criticisms are levied by scholars with respect to the structure of the NEA and IEEPA that may be of interest to Congress  First, the NEA and IEEPA do not define the phrases "national emergency" and "unusual and extraordinary threat" and Presidents have interpreted these terms broadly  Second, the scope of presidential authority under IEEPA has become less constrained in a highly globalized era  Third, owing to rulings by the Supreme Court and amendments to the NEA, Congress would likely have to have a two-thirds majority rather than a simple majority to terminate a national emergency  Despite these criticisms, Congress has not acted to terminate or otherwise express displeasure with an emergency declaration invoking IEEPA  This absence of any explicit statement of disapproval, coupled with explicit statements of approval in some instances, may indicate congressional approval of presidential use of IEEPA thus far  Arguably, then, IEEPA could be seen as an effective tool for carrying out the will of Congress  Neither the NEA nor IEEPA define what constitutes a "national emergency " IEEPA conditions its invocation in a declaration on its necessity for dealing with an "unusual and extraordinary threat … to the national security, foreign policy, or economy of the United States " In the markup of IEEPA in the House, Fred Bergsten, then-Assistant Secretary for International Affairs in the Department of the Treasury, praised the requirement that a national emergency for the purposes of IEEPA be "based on an unusual and extraordinary threat" because such language "emphasizes that such powers should be available only in true emergencies " Because "unusual" and "extraordinary" are also undefined, the usual and ordinary invocation of the statute seems to conflict with those statutory conditions  If Congress wanted to refine the meaning of "national emergency" or "unusual and extraordinary threat," it could do so through statute  Additionally, Congress could consider requiring some sort of factual finding by a court prior to, or shortly after, the exercise of any authority, such as under the First Militia Act of 1792 or the Foreign Intelligence Surveillance Act  However, Congress may consider that the ambiguity in the existing statute provides the executive with the flexibility necessary to address national emergencies with the requisite dispatch  While IEEPA nominally applies only to foreign transactions, the breadth of the phrase, "any interest of any foreign country or a national thereof" has left a great deal of room for executive discretion  The interconnectedness of the modern global economy has left few major transactions in which a foreign interest is not involved  As a result, at least one scholar has concluded, "the exemption of purely domestic transactions from the President's transaction controls seems to be a limitation without substance " Presidents have used IEEPA since the 1980s to control exports by maintaining the dual-use export control system, enshrined in the Export Administration Regulations (EAR) in times when its underlying authorization, the Export Administration Act (EAA), periodically expired  During those times when Congress did not reauthorize the EAA, Presidents have declared emergencies to maintain the dual-use export control system  The current emergency has been ongoing since 2001  While Presidents have used IEEPA to implement trade restrictions against adversaries, it has not been used as a general way to impose tariffs  However, as noted above, President Nixon used TWEA to impose a 10% ad valorem tariff on goods entering the United States to avoid a balance of payments crisis after he ended the convertibility of the U S  dollar to gold  Although the use of TWEA in this instance was criticized at the time, it does not appear that the subsequent reforms resulting in the enactment of IEEPA would prevent the President from imposing tariffs or other restrictions on trade  However, the availability of diverse other authorities for addressing trade, including for national security purposes, makes the use of IEEPA for this purpose unlikely  The scope of powers over individual targets is also extensive  Under IEEPA, the President has the power to prohibit all financial transactions with individuals designated by Executive Order  Such power allows the President to block all the assets of a U S  citizen or permanent resident  Such uses of IEEPA may reflect the will of Congress or they may represent a grant of authority that may have gone beyond what Congress originally intended  The heart of the curtailment of presidential power by the NEA and IEEPA was the provision that Congress could terminate a state of emergency declared pursuant to the NEA with a concurrent resolution  When the "legislative veto" was struck down by the Supreme Court (see above), it left Congress with a steeper climb—presumably requiring passage of a veto-proof joint resolution—to terminate a national emergency declared under the NEA  Two such resolutions have ever been introduced and neither declarations of emergency involved IEEPA  The lack of congressional action here could be the result of the necessity of obtaining a veto-proof majority or it could be that the use of IEEPA has so far reflected the will of Congress  If Congress wanted to assert more authority over the use of IEEPA, it could amend the NEA or IEEPA to include a "sunset provision," terminating any national emergency after a certain number of days  At least one scholar has recommended such an amendment  Alternatively, Congress could amend IEEPA to provide for a review mechanism that would give Congress an active role  In the Senate during the 115 th Congress, for example, Senator Mike Lee introduced the Global Trade Accountability Act of 2017 required the President to report to Congress on any proposed trade action (including the use of IEEPA), including a description of the proposal together with a list of items to be affected, an economic impact study of the proposal including potential retaliation  Congress, using expedited procedures, would need to approve the President's action through a joint resolution within a 60-day period  The legislation would have provided for a temporary one-time unilateral trade action for a 90-day period  Similarly, in the 116 th Congress, Senator Lee introduced S  764 , a bill to provide for congressional approval of national emergency declarations, and for other purposes, which would amend the NEA to require an act of Congress within 30 days to allow a national emergency to continue  Another approach would establish a means for Congress to pass a resolution of disapproval if IEEPA authorities are invoked  An example of this approach is the Trade Authority Protection Act (H R  5760)  After the submission of similar reporting requirement to S  177 (above), Congress could, under Congressional Review Act (CRA)-style procedures, pass a joint resolution of disapproval  Congress does have the authority to pass a joint resolution under IEEPA, as noted above, but the use of CRA procedures would allow for certain expedited consideration  Alternatively, Congress could use any of these mechanisms to amend the current disapproval resolution process in IEEPA or the NEA itself  In testimony before the House Committee on International Relations in 1977, Professor Harold G  Maier summed up the main criticisms of TWEA: Section 5(b)'s effect is no longer confined to "emergency situations" in the sense of existing imminent danger  The continuing retroactive approval, either explicit or implicit, by Congress of broad executive interpretations of the scope of powers which it confers has converted the section into a general grant of legislative authority to the President…" Like TWEA before it, IEEPA sits at the center of the modern U S  sanction regime  Like TWEA before it, Congress has often approved explicitly of the President's use of IEEPA  In several circumstances, Congress has directed the President to impose a variety of sanctions under IEEPA and waived the requirement of an emergency declaration  Even when Congress has not given explicit approval, no Member of Congress has ever introduced a resolution to terminate a national emergency citing IEEPA  The NEA requires that both houses of Congress meet every six months to consider a vote on a joint resolution on terminating an emergency  Neither house has ever met to do so  In response to concerns over the scale and scope of the emergency economic powers granted by IEEPA, supporters of the status quo would argue that Congress has implicitly and explicitly expressed approval of the statute and its use  In 2018, Congress passed the Export Control Reform Act (ECRA)  The legislation repealed the expired Export Administration Act of 1979, the regulations of which had been continued by reference to IEEPA since 2001  The ECRA became the new statutory authority for Export Administration Regulations  Nevertheless, several export controls addressed in the Export Administration Act of 1979 were not updated in the Export Control Reform Act of 2018; instead, Congress chose to require the President to continue to use IEEPA to continue to implement the three sections of the Export Administration Act of 1979 that were not repealed  Going forward, Congress may wish to revisit these provisions, which all relate to deterring the proliferation of weapons of mass destruction  Appendix A  NEA and IEEPA Use


Report 2: 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

ground_truth: The International Emergency Economic Powers Act (IEEPA) provides the President broad authority to regulate a variety of economic transactions following a declaration of national emergency. IEEPA, like the Trading with the Enemy Act (TWEA) from which it branched, sits at the center of the modern U.S. sanctions regime. Changes in the use of IEEPA powers since the act's enactment in 1977 have caused some to question whether the statute's oversight provisions are robust enough given the sweeping economic powers it confers upon the President upon declaration of a state of emergency. Over the course of the twentieth century, Congress delegated increasing amounts of emergency power to the President by statute. The Trading with the Enemy Act was one such statute. Congress passed TWEA in 1917 to regulate international transactions with enemy powers following the U.S. entry into the First World War. Congress expanded the act during the 1930s to allow the President to declare a national emergency in times of peace and assume sweeping powers over both domestic and international transactions. Between 1945 and the early 1970s, TWEA became a critically important means to impose sanctions as part of U.S. Cold War strategy. Presidents used TWEA to block international financial transactions, seize U.S.-based assets held by foreign nationals, restrict exports, modify regulations to deter the hoarding of gold, limit foreign direct investment in U.S. companies, and impose tariffs on all imports into the United States. Following committee investigations that discovered that the United States had been in a state of emergency for more than 40 years, Congress passed the National Emergencies Act (NEA) in 1976 and IEEPA in 1977. The pair of statutes placed new limits on presidential emergency powers. Both included reporting requirements to increase transparency and track costs, and the NEA required the President to annually assess and extend, if appropriate, the emergency. However, some experts argue that the renewal process has become pro forma. The NEA also afforded Congress the means to terminate a national emergency by adopting a concurrent resolution in each chamber. A decision by the Supreme Court, in a landmark immigration case, however, found the use of concurrent resolutions to terminate an executive action unconstitutional. Congress amended the statute to require a joint resolution, significantly increasing the difficulty of terminating an emergency. Like TWEA, IEEPA has become an important means to impose economic-based sanctions since its enactment; like TWEA, Presidents have frequently used IEEPA to restrict a variety of international transactions; and like TWEA, the subjects of the restrictions, the frequency of use, and the duration of emergencies have expanded over time. Initially, Presidents targeted foreign states or their governments. Over the years, however, presidential administrations have increasingly used IEEPA to target individuals, groups, and non-state actors such as terrorists and persons who engage in malicious cyber-enabled activities. As of March 1, 2019, Presidents had declared 54 national emergencies invoking IEEPA, 29 of which are still ongoing. Typically, national emergencies invoking IEEPA last nearly a decade, although some have lasted significantly longer--the first state of emergency declared under the NEA and IEEPA, which was declared in response to the taking of U.S. embassy staff as hostages by Iran in 1979, may soon enter its fifth decade. IEEPA grants sweeping powers to the President to control economic transactions. Despite these broad powers, Congress has never attempted to terminate a national emergency invoking IEEPA. Instead, Congress has directed the President on numerous occasions to use IEEPA authorities to impose sanctions. Congress may want to consider whether IEEPA appropriately balances the need for swift action in a time of crisis with Congress' duty to oversee executive action. Congress may also want to consider IEEPA's role in implementing its influence in U.S. foreign policy and national security decision-making.

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



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



Report 2:  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:  According to FERC officials, for dams not subject to an independent consultant inspection, FERC staff review engineering studies on an as needed basis, depending on whether the underlying assumptions and information from the previous studies are still relevant  For example, for the 20 dams in our study not subject to an independent consultant inspection, we found that most (15) of these studies were reviewed by FERC within the past 10 years, usually during the project’s relicensing  Multiple levels of supervisory review  As part of FERC’s quality control and internal oversight process, multiple FERC staff are to review the studies produced by the licensee and its consultant, with the number of successive reviews proportional to the complexity or importance of the study, according to FERC officials  FERC’s Operating Manual establishes the general procedure for the review of engineering studies  To begin the review process, the staff assigned to a dam is to review the engineering study and prepares an internal memo on its findings; that memo is then to be reviewed for accuracy and completeness by both a regional office Branch Chief, and the Regional Engineer  If necessary, Washington, D C , headquarters office staff are to review and approve the final memo  Upon completion of review, FERC staff are to provide a letter to the licensee indicating any particular areas where additional information is needed or where more studies are needed to evaluate the dam’s performance  According to FERC officials, each level of review adds successive quality control steps performed by experienced staff  We have previously found in reporting on other regulatory agencies that additional levels of review increases transparency and accountability and diminishes the risk of regulatory capture  Rotation of FERC staff responsibilities  As part of an internal quality control program to help minimize the risk of missing important safety- related items, FERC officials told us they rotate staff assignments and responsibilities approximately every 3 to 4 years  According to FERC officials, this practice decreases the chance that a deficiency would be missed over time due to differences in areas of engineering expertise between or among staff  We have previously found in our reporting on other regulatory agencies that strategies such as more frequently rotating staff in key roles can help reduce the risk to supervisory independence and regulatory capture  Some FERC regional offices have developed practices to further enhance their review of these studies  For example, the New York Regional Office established a subject matter expert team that helps review dams with unusually complex hydrology issues  This team was created, in part, because FERC staff noted that some of the hydrology studies conducted in the 1990s and 2000s were not as thorough as they would have wanted, and warranted a re-examination  Currently, the New York Regional Office is reviewing the hydrology analysis associated with 12 dam break studies to determine if the hydrology data used in developing these studies were as rigorously developed and validated  According to the FERC staff in this office, utilizing a team of subject matter experts has reduced Regional Office review time and improved the hydrology studies’ accuracy  FERC staff in the New York Regional Office also told us that they are working with other regional offices on setting up similar technical teams  For example, FERC staff in the New York Regional Office have been working with the Portland Regional Office to set up a similar team  FERC procedures require the use of engineering studies at key points over the dam’s licensing period to inform components of its safety oversight approach, including during the potential failure mode analyses of individual dams as well as during relicensing  Potential failure mode analysis  The potential failure mode analysis is to occur during the recurring independent consultant inspection and is conducted by the licensee’s independent consultant along with other key dam safety stakeholders  As previously explained, the analysis incorporates the engineering studies and identifies events that could cause a dam to potentially fail  During the potential failure mode analysis, FERC, the licensee, the consultant, and other key dam safety stakeholders are to refer to the engineering studies to establish environmental conditions that inform dam failure scenarios, the risks associated with these failures, and their consequences for an individual dam  Further, according to a FERC white paper on risk analysis, FERC is beginning to use information related to potential failure modes as inputs to an analysis tool that quantifies risks at each dam  With this information, FERC expects to make relative risk estimates of dams within its inventory and establish priorities for further study or remediation of risks at individual dams, according to the white paper  Relicensing  During relicensing, FERC staff are to review the engineering studies as well as information such as historical hydrological data and extreme weather events, which also inform their safety evaluation of the licensee’s application  FERC officials also stated that as a result of their relicensing review, they might alter the articles of the new license before it is issued should their reviews indicate that environmental conditions affecting the dam’s safety have changed  We found that FERC generally met its requirement to evaluate dam safety during the relicensing process for the 42 dams we reviewed  During the relicensing process, we found that for the dams we reviewed, FERC staff review safety information such as the past reports, inspections, and studies conducted by FERC, the licensee, and independent consultants and determine whether or not a dam owner operated and maintained its dam safely  According to FERC staff, the safety review for relicensing is generally a summary of prior safety and inspection information, rather than an analysis of new safety information, unless the licensee proposes a change to the operation or structure  FERC’s review during relicensing for the high hazard and significant hazard dams we reviewed was generally consistent with its guidance and safety memo template, though the extent of its review of low hazard dams varied  (See fig  3 ) For example, for the 22 high and significant hazard dams we reviewed, the safety relicensing memos followed the template and nearly all included summaries of hydrology studies, stability analyses, prior FERC inspections, and applicable independent consultant reports  For the 20 low hazard dams, FERC staff noted that some requirements in the template are not applicable or have been exempted and therefore were not reviewed during relicensing  While low hazard dams were more inconsistently reviewed during relicensing, FERC staff also noted that there has been a recent emphasis to more closely review, replace, or conduct engineering studies, such as the stability study, for low hazard dams during relicensing  Moreover, FERC staff told us that the safety risks associated with these dams are minimal, as the failure of a low hazard dam, by definition, does not pose a threat to human life or economic activity  According to FERC staff, if a licensee proposed altering the dam or its operations in any way as part of its application for a new license, FERC staff would review the proposed change and may recommend adding articles to the new license prior to its issuance to ensure dam safety  FERC officials noted that, as part of their review, any structural or operational changes proposed by the licensee during relicensing are reviewed by FERC  These officials also noted that FERC generally recommends modifications to the licensees’ proposed changes prior to their approval and inclusion in the new license  However, FERC officials noted that, in some cases, additional information is needed prior to approving the structural or operational change to ensure there are no risks posed by the changes  In those instances, FERC may recommend that articles be added to the new license, that require the licensee to conduct additional engineering studies of the issue and submit them to FERC for review and approval  For example, during the relicensing of the Otter Creek project in Vermont in 2014, the licensee proposed changes to the project’s operation resulting from construction  As a result, FERC’s staff recommended adding a number of articles to the license, including that the licensee conduct studies to evaluate the effect of the change on safety and to ensure safety during construction  During relicensing, third parties—such as environmental organizations, nearby residents and communities, and other federal agencies, such as the U S  Fish and Wildlife Service—may provide input on various topics related to the project, including safety  However, FERC officials said that very few third parties file studies or comments related to dam safety during relicensing  FERC’s template and guidance do not specifically require the consideration of such analyses as part of its safety review, and we did not identify any safety studies submitted by third parties for dams or reviewed by FERC in our sample  According to FERC officials, when stakeholders submit comments during relicensing, the comments tend to focus on environmental aspects of the project, such as adding passages for fish migration  Further, FERC is not required under the Federal Power Act to respond to any comments, including those related to dam safety, from third parties, according to FERC officials  However, according to FERC officials, courts have held that the Administrative Procedure Act precludes an agency from arbitrarily and capriciously ignoring issues raised in comments  Furthermore, these officials stated that if a court determines that FERC did not sufficiently address issues raised during the relicensing process, its orders are subject to being reversed and remanded by applicable United States courts of appeals  Moreover, FERC officials noted that the information needed to develop third party safety studies, such as the dam design drawings and engineering studies, are property of the licensee, rather than FERC  In addition, this information may not be readily available to third parties or the public if FERC designates it as critical energy infrastructure information, which would preclude its release to the general public  FERC staff we interviewed stated that there have been no instances where the Commission denied a new license to a licensee as a result of its safety review during relicensing  FERC staff stated that given the frequency of other inspections, including the FERC staff inspections, and independent consultant inspections, it is unlikely staff would find a previously unknown major safety issue during relicensing  FERC staff told us that rather than deny a license for safety deficiencies, FERC will keep a dam owner under the terms of a FERC license to better ensure the licensee remedies existing safety deficiencies  Specifically, FERC staff noted that under a license, FERC can ensure dam safety by (1) closely monitoring the deficiency’s remediation progress through its inspection program, (2) adding license terms in the new license tailored to the specific safety deficiency, and (3), as necessary, pursuing compliance and enforcement actions, such as civil penalties or stop work orders, to enforce the terms and conditions of the license  For example, prior to and during the relicensing of a FERC-licensed project in Wisconsin in 2014, FERC’s review identified that the spillway capacity was inadequate  While the project was relicensed in 2017 without changes to the spillway, FERC officials stated that they have been overseeing the plans and studies of the remediation of the spillway through their ongoing inspection program  However, if an imminent safety threat is identified during the relicensing review, FERC officials stated that they will order that the licensee take actions to remedy the issue immediately  Moreover, FERC officials noted that, if necessary, a license can be revoked for failure to comply with the terms of its license  FERC designed a multi-layered safety approach—which uses inspections, studies, and other assessments of individual dams—to reduce exposure to safety risks  However, as the spillway failure at the Oroville Dam project in 2017 demonstrated, it is not possible to eliminate all uncertainties and risks  As part of a continuing effort to ensure dam safety at licensed projects, FERC could complement its approach to evaluating the safety of individual dams by enhancing its capability to assess and identify the risks across its portfolio of licensed dams  Specifically, while FERC has collected and stored a substantial amount of information from its individual dam safety inspections, FERC’s approach to recording this information is inconsistent due to a lack of standard language and procedures  By clarifying its approach to the recording of information collected during inspections, FERC officials could help ensure that the information recorded is comparable when shared across its regions  Moreover, the absence of standard language and procedures to consistently record inspection information impedes a broader, portfolio- wide analysis of the extent of and characteristics associated with common safety deficiencies identified during FERC inspections  While FERC has not yet conducted such an analysis, a proactive assessment of common safety inspection deficiencies across FERC’s portfolio of licensed dams— similar to its identification of dam spillways with safety concerns following the Oroville Dam incident—could help FERC and its licensees identify safety risks prior to a safety incident and to develop approaches to mitigate those risks  We are making the following two recommendations to FERC: FERC should provide standard language and procedures to its staff on how to record information collected during inspections, including how and where to record information about safety deficiencies, in order to facilitate analysis of safety deficiencies across FERC’s portfolio of regulated dams  (Recommendation 1) FERC should use information from its inspections to assess safety risks across its portfolio of regulated dams to identify and prioritize safety risks at a national level  (Recommendation 2) We provided a draft of this report to FERC for review and comment  In its comments on the draft report, FERC said it generally agreed with the draft report’s findings and found the recommendations to be constructive  FERC said that it would direct staff to develop appropriate next steps to implement GAO’s recommendations  These comments are reproduced in appendix IV  In addition, FERC provided technical comments, which we incorporated as appropriate  As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date  At that time, we will send copies to the Chairman of FERC and other interested parties  In addition, the report will be available at no charge on the GAO website at http://www gao gov  If you or your staff have any questions about this report, please contact me at 202-512-2834 or vonaha@gao gov  Contact points for our Office of Congressional Relations and Public Affairs may be found on the last page of this report  GAO staff who made major contributions to this report are listed in appendix V  FERC seeks to ensure licensees’ compliance with FERC regulations and license requirements, including remediating safety deficiencies, by using a mix of preventative strategies to help identify situations before they become problems and reactive strategies such as issuing penalties  As part of its efforts, FERC published a compliance handbook in 2015 that provides an overall guide to compliance and enforcement of a variety of license requirements, including dam safety  The handbook includes instructions for implementing FERC rules, regulations, policies, and programs designed to ensure effective compliance with license conditions, which include dam safety, to protect and enhance beneficial public uses of waterways  FERC developed a range of enforcement actions, that include holding workshops to encourage compliance and issuing guidance, that increase in severity depending on the non- compliance issue  (See fig  4 ) More broadly, FERC’s guidance directs officials to determine enforcement actions and time frames for those actions on a case-by-case basis, depending on the characteristics of the specific compliance issue  According to FERC officials, many of these safety compliance discussions are handled informally  In addition, their compliance approach emphasizes activities that assist, rather than force, licensees to achieve compliance, according to its guidance  These activities include facilitating open lines of communication with licensees, participating in technical workshops, and publishing brochures and guidance documents, among other efforts  Also, according to these officials, FERC works with licensees to provide guidance and warnings of possible non-compliance matters, in order to avoid usage of any enforcement tools, if possible  According to FERC officials, any safety issues that endanger the public will result in immediate penalty or removal of the dam from power generation, but this action is not lightly taken  Additionally, the length of time between when a safety deficiency is identified and is resolved varies substantially depending on the specific project  As stated earlier in this report, FERC works with licensees to determine a plan and schedule for investigating safety issues and making any needed modifications  However, FERC officials stated that the majority of safety compliance issues are resolved within a month  However, FERC officials stated that if a licensee repeatedly does not take steps to address a compliance issue, FERC will explore enforcement actions through a formal process  According to officials, FERC’s enforcement options are based on authorities provided under the Federal Power Act and such options are flexible because of the variation in hazards, consequences, and dams  According to FERC officials, to ensure compliance with safety regulations, if a settlement cannot be reached, FERC may, among other things, issue an order to show cause, issue civil penalties in the form of fines to licensees, impose stop work or cease power generation orders, revoke licenses, and seek injunctions in federal court  Nevertheless, FERC officials stated that there is no specific requirement for how quickly the compliance issues or deficiencies should be resolved and that some issues can take years to resolve  For example, in 2004, the current licensee of a hydroelectric project operating in Edenville, Michigan, acquired the project, which was found by FERC to be in a state of non-compliance at that time  FERC staff made numerous attempts to work with the licensee to resolve the compliance issues  However, they were unable to resolve these issues and as a result issued a cease generation order in 2017, followed in 2018 by a license revocation order  In practice, FERC’s use of these enforcement tools to resolve safety issues has been fairly limited, particularly in comparison to other license compliance issues, according to FERC officials  Since 2013, FERC has issued one civil penalty for a safety-related hydropower violation and has issued compliance orders on eight other projects for safety-related reasons, including orders to cease generation on three projects  For the 14 projects and 42 dams we reviewed, FERC licensees and their consultants used a variety of tools to develop engineering studies of dam performance (see table 3)  These tools included programs and modeling tools developed by government agencies, such as the U S  Army Corps of Engineers (the Corps), as well as commercially available modeling tools  FERC officials stated that they also used a number of the same tools used by its licensees and consultants  Similarly, for the 14 projects and 42 dams we reviewed, FERC licensees and their consultants used a variety of datasets to develop engineering studies of dam performance (see table 4)  These datasets included data maintained and updated by various government agencies, including the United States Geological Survey and National Oceanic and Atmospheric Administration  FERC officials stated that they also used a number of the same datasets used by its licensees and consultants  This report assesses: (1) how FERC collects information from its dam safety inspections and the extent to which FERC analyzes it; (2) how FERC evaluates engineering studies of dam performance to analyze safety, and (3) the extent to which FERC reviews dam safety information during relicensing and the information FERC considers  This report also includes information on FERC actions to ensure licensee compliance with license requirements related to dam safety (app  I) and selected models and data sets used to develop and evaluate engineering studies of dam performance (app  II)  For each of the objectives, we reviewed laws, regulations, FERC guidance, templates, and other documentation pertaining to FERC’s evaluation of dam safety  In addition, we reviewed an independent forensic team’s assessment of the causes of the Oroville Dam incident, including the report’s analysis of FERC’s approach to ensuring safety at the project, to understand any limitations of FERC’s approach identified by the report  We also reviewed dam safety documentation, including dam performance studies, FERC memorandums, the most recent completed inspection report, and other information, from a non-probability sample of 14 projects encompassing 42 dams relicensed from fiscal years 2014 through 2017  (See table 5 ) We selected these projects and dams to include ones that were geographically dispersed, had varying potential risks associated with their potential failure, and had differences in the length of their relicensing process  We developed a data collection instrument to collect information from the dam safety documentation and analyzed data from the sample to evaluate the extent to which FERC followed its dam safety guidance across the selected projects  To develop the data collection instrument, we reviewed and incorporated FERC oversight requirements from its regulations, guidance, and templates  We conducted three pre-tests of the instrument, and revised the instrument after each pre-test  To ensure consistency and accuracy in the collection of this information, for each dam in the sample, one analyst conducted an initial review of the dam safety documentation; a second analyst reviewed the information independently; and the two analysts reconciled any differences  Following our review of the information from the dam safety documentation, we conducted semi-structured interviews with FERC engineering staff associated with each of the 14 projects and 42 dams to obtain information about FERC’s inspections, review of dam performance studies, and analysis of safety during the relicensing of these projects  Our interviews with these FERC staff provided insight into FERC’s dam safety oversight approach and are not generalizable to all projects  We also interviewed FERC officials responsible for dam safety about dam safety practices  In addition, to review how FERC collects information from its dam safety inspections and the extent to which FERC analyzes it, we also reviewed inspection data from FERC’s information management systems from fiscal years 2014 through 2017  To assess the reliability of these data, we reviewed guidance and interviewed FERC officials  We determined that the data were sufficiently reliable for our purposes  We compared FERC’s approach to collecting, recording and using safety information to federal internal control standards for the design of information systems and related control activities  We also reviewed our prior work on portfolio- level risk management  To evaluate how FERC evaluates engineering studies of dam performance to analyze dam safety, we reviewed FERC policies and guidance  We interviewed six independent consultants having experience inspecting and analyzing FERC-regulated dams to understand how engineering studies of dam performance are developed  We selected consultants who had submitted an inspection report to FERC recently (between December 2017 and February 2018) based on the geographic location of the project they reviewed and experience conducting these inspections, and the number of reports submitted to FERC over this time period  (See table 6 ) Our interviews with these consultants provided insight into FERC’s approach to conducting and reviewing studies and are not generalizable to all projects or consultants  To evaluate the extent to which FERC reviews dam safety information during relicensing and the information it considers, we reviewed templates developed by FERC to assess safety during the relicensing and analyzed the extent to which staff followed guidance in these templates for the 14 projects and 42 dams in our sample  We also interviewed stakeholders, including the National Hydropower Association and Friends of the River to obtain general perspectives on FERC’s relicensing approach  Our interviews with these stakeholders provided insight into FERC’s approach to relicensing, and these views are not generalizable across all stakeholders  To review actions to ensure licensee compliance with license requirements related to dam safety, we reviewed FERC’s guidance related to compliance and enforcement and interviewed FERC officials responsible for implementation of the guidance  To review information on models and datasets used to develop and evaluate engineering studies of dam performance, we reviewed dam safety documentation associated with the projects in our sample (described previously), reviewed FERC documentation, and interviewed FERC officials  We conducted this performance audit from July 2017 to October 2018 in accordance with generally accepted government auditing standards  Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives  We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives  Andrew Von Ah, (202) 512-2834 or vonaha@gao gov  In addition to the contact named above, Mike Armes (Assistant Director); Matt Voit (Analyst-in-Charge); David Blanding; Brian Chung; Geoff Hamilton; Vondalee Hunt; Rich Johnson; Jon Melhus; Monique Nasrallah; Madhav Panwar; Malika Rice; Sandra Sokol; and Michelle Weathers made key contributions to this report 

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.