Abstract
More recently, amongst the international community, there has come to be a concern that many multinational enterprises (“MNEs”) are not appropriately remitting tax revenues to all of the countries in which they operate, but instead, are reverting their residual profits (being the amount of proceeds from business activities remaining once all related expenses are satisfied), for the purposes of taxation, back to their primary country of corporate registration. This notable increase in the reversion of residual profit is enabled by the continuous rise of the digital economy. In response to these concerns, the international tax community has proposed a global tax regime for MNEs, referred to as Pillar One and Pillar Two, which address the tax base cyberization problem and (associated) tax base shifting problem, respectively.[1]
This paper will first lay out, at a high level, the current system for determining the allocation of MNEs’ revenues for the purposes of taxation, followed by a layered example to aid in clarification, a discussion on the concerns the current system enables, a brief overview of the OECD’s response of Pillar One, and some of the practical implementation issues Pillar One faces, concluding with views on how to more easily achieve the Pillar One aims in a fashion that may be met with less resistance.
Contents
Introduction [1]
The Current Structure [2]
Understanding the Current Structure, with an Example [3]
The Concern relating to the Current Structure [4]
The OECD’s response: the Pillar One Blueprint [5]
Bigger Picture Issues with Pillar One [6]
Sovereign Nations are Best Suited to Make their Own Choices [7]
Conclusion [8]
In an increasingly globalized economy, the multinational enterprise (“MNE”) is less the exception, and increasingly the norm; this is especially true in the digital age, where, with the click of a button, or the tap of a screen, many people can have access to almost any good or service from anywhere in the world.
The marketplace for goods and services was previously small, and primarily locally derived, with imported goods commanding a higher price based on those goods having been bought and paid for elsewhere, along with the additional inputs of transport and human capital necessary to bring those goods to the local market for resale. It was during that same time in history when many countries, and certainly those countries which are the largest economic players and home to many of the world’s MNEs of today, developed their initial pieces of modern taxation legislation.[2] Those same pieces of legislation are fundamentally still in place today, but certainly with more additions, adaptations, and revisions than the law makers of the time ever contemplated.
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