Robert Kiggins in Thomson Reuters’ Journal of Corporate Taxation: OECD’s Proposed Pillar One Issues

Culhane Meadows’ New York partner Robert Kiggins recently authored an article for Thomson Reuters’ Journal of Corporate Taxation about OECD’s Pillar One proposal and the potential changes for large corporations doing business in markets where they have no physical presence.

Here are a few excerpts from the article:

The Pillar One (Profit Allocation and Nexus) and Pillar Two (Global Minimum Tax) income tax proposals of the Organization of Economic Development (“OECD”), if implemented, would represent a sea change to the current system of international income taxation for affected business.

Classically, international businesses or multinational enterprises (“MNEs”)3 have typically been subject to income taxation only in tax jurisdictions in which they have a “physical” presence where they carried out the functions or owned the assets which produced the income. This largely worked in an equitable and fair fashion in an era in which MNEs were engaged in the production of tangible goods and services in a given tax jurisdiction or in several tax jurisdictions, used “brick and mortar” plants and equipment located in a specific taxing jurisdiction or jurisdictions to do so, and used corporeal human workers and management located in such a taxing jurisdiction or jurisdictions to earn revenue. Legal international tax constructs designed to allocate taxes in this world were, for example, the residence of the MNE, or the source of a MNEs’ revenues, using for example, the notion of Permanent Establishment (PE) and that of the Arm’s-Length Principle (ALP).

However, with the global economy becoming increasingly digital, based on an amalgam of MNE originated goods and services, often in the form of revenue producing digital goods and services traveling freely around the globe with no classical “physical” location, many MNEs can now be seen as having sufficient nexus through a non-classical presence in a market jurisdiction where they are selling so that there can be enough presence of this sort and enough economic benefit to an MNE from this “presence” in or directed into a given market taxing jurisdiction to make it equitable for such an MNE to be subject to income tax in such a jurisdiction.

… as of the date of this article, there are still numerous unresolved issues. Also, some have questioned whether the Pillar One solution itself may raise unintended outcomes and unforeseen new tax controversies. In that latter regard, not insignificantly, there has been criticism in the literature that Pillar One could be “gamed” by nations and MNEs so as to obtain unforeseen anomalous and unfair results if not mitigated by a well-functioning dispute resolution process.

There is a lot of work to do on Pillar One. Numerous issues are still open or unresolved. All eyes will be focused on this coming October when the OECD takes Pillar One up again—along of course with the Pillar Two minimum tax. 

The fate of Pillar One’s Amount B seems uncertain as action on it has been delayed and it has not gotten much attention so far. Perhaps Amount B will end up quietly going away. 

The OECD’s goal to eliminate unilaterally imposed digital services taxes (DSTs) is a worthy one. But it remains to be seen if this can be achieved.


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