We have made this submission to the OECD public consultation on the Pillar One and Pillar blueprints.

Summary

These blueprints are a testament to the commitment and efforts of many dedicated government and OECD officials, and provide many building blocks for potential solutions. Regrettably however, the proposals as a whole do not deliver on the mandate for the BEPS project to align taxation of multinational enterprises (MNEs) with where their activities occur and value is created.

Instead, the new taxing right in Pillar One would cover only a small part of the profits of a small number of MNEs, while further entrenching the current ineffective separate entity concept and transfer pricing rules for allocating the vast majority of MNE profits. The need to separate in-scope from other business lines, and to manage the interaction of the new right with existing rules, would simply add further complexity and confusion to international tax and create a further level of bureaucracy. There would be self-reporting by MNEs to their home country tax authority for verification, and any unresolved disagreements over the allocation would be settled by a mandatory binding procedure, which might also apply beyond the new taxing right. The scheme could only be introduced by a binding multilateral treaty which is unlikely to have wide acceptance, let alone the universal coverage that would be necessary. A more feasible outcome would be to introduce Amount A as a presumptive safe harbour, which could be an alternative to digital services taxes on gross revenues for those MNEs which accept it.

A well-designed global anti-base erosion tax would be a major advance in curbing the competition that has spurred the ‘race to the bottom’ in effective tax rates on MNEs. The Pillar Two blueprint provides many of the building blocks for such a tax, but the current proposal is not only complex, it is grossly inequitable. It allocates the primary right to apply a top-up tax on undertaxed profits to the home countries of MNEs, which would be a direct transfer of tax revenues from host to home countries of MNEs, affecting mainly developing countries. This could only be remedied if tax haven countries that act as conduits for undertaxed income accepted changes to their tax treaties to allow application of new withholding taxes, which is unlikely.

We propose an alternative approach for a minimum effective tax rate (METR), that would provide a fair and balanced allocation of rights to apply a top-up tax based on the MNE’s real activities in each country. This could be introduced by willing states without the need for tax treaty changes, and would also be compatible with non-discrimination rules in international trade and investment, including in the EU.