Building On Pillar One’s Amount A To Reform Taxation Of Multinational Enterprises

Tax avoidance by multinational enterprises (MNEs) has severely hit tax revenues, particularly for developing countries which greatly rely on corporate taxation. In 2013 the G20 called for reforms to ensure that MNEs could be taxed in line with where their real economic activities occur. In 2019 the G-24 developing countries proposed that MNEs should be taxable wherever they have a significant economic presence by apportioning their global profits using factors reflecting both supply and demand. Much progress has been made with the Two-Pillar proposals, which now accept the principle that multinationals should be taxed as unitary firms by apportioning a share oftheir global profits according to where they have sales, combined with a global minimum corporate tax that could restrict competition between states to reduce corporate tax rates, but these fall short of an effective solution. The G20 should now support an initiative for states to adopt concerted measures building on Amount A of Pillar One, but with a more comprehensive scope, and that can be compatible with the Multilateral Convention (MLC) for Amount A. In lieu of digital services taxes and other withholding taxes on payments, MNEs with revenues from sales above a specified threshold should be required to do business through a locally formed affiliate, to which net income could be attributed on a formulary basis. This could be either by applying the MNE’s global profit rate to its local revenues, or by adjusting its global consolidated financial profits for tax purposes, and apportioning them based on factors reflecting its real activities in each country (assets, employees and sales). Coherence could be ensured by applying the detailed technical standards developed for the two Pillars: the threshold for tax nexus, the adjustments for tax purposes of consolidated accounts, the sourcing rules for sales revenues, and the definitions for quantifying employee remuneration and physical assets. This would finally achieve the effective and comprehensive reform called for by the G20 in 2013.