The Organisation for Economic Co-operation and Development’s (OECD) Pillar One project has been a topic of discussion in the tax world. This project, which aims to rearrange the rights to tax the largest multinational companies’ profits, has been under scrutiny due to its potential complexities and uncertainties. The question of whether Pillar One will eliminate Digital Services Taxes (DSTs) and other relevant unilateral measures is still unclear.
According to the OECD, taxing rights on about $200 billion in profits would be shifted to jurisdictions different from where the profits are currently being taxed. This shift could lead to a tax increase between $17 billion and $32 billion, based on 2021 data. This tax increase will impact many large companies, but only certain countries will receive additional revenue.
One of the main concerns surrounding Pillar One is the continued existence of DSTs. These taxes, which are often discriminatory against U.S.-based companies, could potentially become even more common if Pillar One is not agreed upon. The United Nations may seek to fill the gap in multilateral tax policymaking, but its policy designs are difficult to predict.
Another concern is the potential for a new tax and trade war with Europe. The threat of economic damages on both sides of the Atlantic is very real. Policymakers should prioritize resolving disputes using either multilateral tax negotiations or leaning on the World Trade Organization, rather than resorting to retaliation.
Since 2018, many countries have sought to use novel tools to tax the profits of large multinational companies in the digital sector. The most common of these tools has been the DST. These policies usually apply a single-digit tax rate to the revenues of a large company. However, they are problematic for two reasons. First, they are discriminatory. Second, they tax companies on gross revenues rather than income.
One clear goal for U.S. policymakers has been to eliminate DSTs either through a multilateral agreement or through trade threats and a potential trade war. In 2020, the Trump administration announced 25 percent tariffs on $1.3 billion worth of trade with the European Union in response to the French DST. These tariffs had a delayed implementation date and are currently still on hold.
As we continue to monitor the development of Pillar One, it is crucial to understand its potential impacts on the U.S. tax base. U.S. Treasury Secretary Janet Yellen has previously written that she believes Amount A would be roughly revenue neutral for the U.S. However, more recently, she has said that “significant disagreements” make determining the fiscal impact difficult.
As tax professionals, it is our responsibility to stay informed about these developments and understand their potential impacts on our clients and the broader tax landscape. The complexities and uncertainties surrounding Pillar One and DSTs underscore the importance of ongoing education and vigilance in the field of tax law.