Winners and Losers: U.S. Country and Industry Estimates of Pillar One Amount A
Reproduced with permission from Tax Management International Journal, 50 TMIJ 5, 05/07/2021. copyright 2021 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com.
23 Pages Posted: 11 May 2021
Date Written: May 7, 2021
This project started with a clue and a hunch. The clue: The OECD’s Economic Impact Assessment (EIA) mentions that its estimates for automated digital services (ADS) use U.S. Bureau of Economic Analysis (BEA) data on the information sector. The hunch: BEA data might provide fine-grained estimates of the impacts of Pillar One Amount A at the country and industry levels for ADS and consumer-facing businesses (CFB). The hunch was correct. To the best of my knowledge, this article is the first to provide public estimates of the impacts of Amount A at the individual country and industry levels, from a single-country perspective. Corporate income tax (CIT) base gains and losses, by country and industry, are provided for both jurisdictions with MOFAs (majority-owned foreign affiliates with U.S. parents) and MOUSAs (U.S. majority-owned affiliates with foreign parents). Estimates using 2018 preliminary BEA data are provided for ADS, four CFB industries (pharma, retail trade, transportation, and wholesale trade), and all industries. The key results are: (1) From the U.S. perspective, Pillar One Amount A is primarily a U.S.-Europe story since MOFAs in Europe and European MOUSAs in the United States dominate foreign affiliate sales and profits for ADS, CFB, and all industries. (2) Europe in its role as host to MOFAs and the United States as host to European MOUSAs would, for most industries, be tax-relieving jurisdictions expected to give up CIT base under Amount A. Comparing the relative sizes of U.S. and European CIT base changes across industries suggests that Europe would lose relative to United States. (3) Amount A shifts the CIT base from jurisdictions with more profitable affiliates to jurisdictions with less profitable affiliates, as measured by their return on sales (ROS). An unintended negative consequence of using ROS to re-allocate MNE taxable profits could be discouraging investment and growth. (4) Most Residence jurisdictions including the United States follow a territorial CIT system that exempts foreign source income from tax. Thus, CIT base relief under Amount A must come from other Source jurisdictions. Since Source jurisdictions have incentives to game the Amount A formula, the net effect would be to increase the MNE global tax base. (5) The United States, as a large country with market power, could reap additional benefits from gaming the Amount A formula by underproviding or refusing to provide tax base relief for high-performing MOUSAs while also levying more Amount A taxes on low-performing MOUSAs. U.S. tax games could, however, trigger tit-for-tat retaliation by other large jurisdictions (e.g., the European Union) against MOFAs. (6) Amount A could be used by tax authorities to discriminate against foreign-owned affiliates, which would favor domestic firms and violate the national treatment and most favored nation principles; thus Amount A could have the unintended consequence of becoming a trade-related investment measure (TRIM).
Keywords: Pillar One, OECD, BEPS, Digital Economy, MOFA, MOUSA, Corporate Income Tax, Amount A, TRIM, Tit-for-Tat, Optimal Tariff, BEA Data
JEL Classification: F23, H25, H26, K34, K420, K330, L11
Suggested Citation: Suggested Citation