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Taxing the Top 100

September 22, 2021

Matthew DeMello:

Dr. Eden, what is the aim of this recently altered initiative? Why would the US propose this change?

Dr. Lorraine Eden:

Well, I think the reason is when the Biden administration came in, they were very worried about US multinationals, not paying enough corporate income tax. That profits were being shifted outside of the United States abroad. And the solution they sought to it was not go back to worldwide taxation. The US is basically on a territorial tax system where a foreign source income earned by US multinationals abroad is basically not taxed other than through the GILTI provisions. So when the Biden administration came in, they wanted to increase corporate income taxation on US multinationals as a way to finance the infrastructure package. [They said,] “We have this huge amount of spending because of COVID and for a variety of other reasons,” and getting more taxes from multinationals on their income earned abroad was perceived as a way to do that.

So in other words, the short form is Janet Yellen was very interested in getting closure on Pillar Two, involves closing some loopholes, but basically creating a global minimum tax that’s along the lines of the US GILTI proposal. And in order to get Pillar Two, which the US wanted, in other words, in effect that everybody else is going to do GILTI too…. we’ll all be guilty! (Matt laughs) That so in getting everyone else to be GILTI too, then the way to do that was to compromise on Pillar One, the European Union very much wants Pillar One for a variety of reasons. So it was a compromise!

I don’t think, frankly, the US administration is strongly tied to Pillar One. The Republican senior members of Congress and the Senate are clearly against Pillar One. They don’t want to see US multinationals being taxed more highly, but I think Pillar One was the carrot that Yellen offered to the European Union in order to get Pillar Two of global minimum tax.

Matthew DeMello:

And we’ve seen much more discussion of that of late. In the Pillar One blueprint, the financial insurance and mining industries are excluded your article argues for the inclusion of these three industries and compares their presence to manufacturing wholesale retail, automated digital services, and others. Based on your research, why would the elimination of any one of these industries put strain on the remaining industries in the scope and the remaining multinationals?

Dr. Lorraine Eden:

Well, it’s interesting to think about it, just conceptually, Matt. And then I think that the answer becomes very clear Pillar One is designed to take a group of multinationals around the world, define it as you like: based on their sales, based on their profits, based on their assets. You know, you basically set the criteria for what multinationals and these are designed to be in scope. And then you take a formula and use that formula to move the tax base, in other words, taxable profits among the jurisdictions.

So for example, I could just say, as the original proposal was way back at the beginning: remember what started this off was Action Item One: Taxing the Digital Economy. And the original proposal was, ‘Okay if we want to tax digital multinationals, why don’t we start with those?’ They were called automated digital services firms. So the original proposal was the only in scope where ATS firms and then all the countries in the world that would were, were somehow going to be allocated or lose some portion of the tax base of automated digital services firms.

So the first question was scope: who’s in and who’s out.

So the original proposal was only ADSBN and everybody else was out. Now what happened? And that was, I think, very much a European proposal because it was designed specifically to go after the large American multinationals in automated digital services, in the digital economy, what I’ve called the “born digital multinationals.” Those that started out being digital from the beginning. And they were the only ones that were to be in scope. And there was a perception, very much that other countries thought they could get a bit of the tax pie of these American multinationals through setting up Pillar One Amount A to go after ADS as expected, the United States turned around and said, you can’t just tax my multinationals. You got to expand the scope. You got to bring others in.

So then you get horse trading and the decision finally was to go after consumer facing businesses. The problem is consumer facing businesses. In other words, what do we think was B2C business to consumer or the tail end where you’re actually selling to consumers. Problem is that’s a really fuzzy, messy definition and in trying to segment and decide who was in and who was out, I think everybody agreed that there would be huge incentives for firms to be out. And so there’d be a lot of messiness going on here. So I think in order to cut through this, what happened is the Biden administration said, “Look, you can’t just tax ADS. Adding consumer facing businesses is far too complex. Let’s go the following. Let’s just tax the biggest ones, the biggest and the most profitable. And the original decision was 100 and some nice round number, pick it out of the air, and let’s go after the top 100.”

And the argument was that this would be easier. So in effect, we went from a really narrow scope of ads to a broader scope of income of including consumer facing businesses. But the perception was, this was a really messy one. And then the definition was changed. Let’s just go to 100. Well, in the second phase, the phase, which was ADSL plus consumer facing businesses, two groups got out. They negotiated well and they got out. Finance and insurance got out and all the extractive industries, the natural resource industries, what the Bureau of Economic Analysis in the US calls mining. So finance and insurance and mining got out in the second phase and having got out, clearly they wanted to stay out.

So in the top 100, when I wrote my article on taxing the top 100, I did the calculations with everybody in, but I knew finance insurance, which includes banking, of course, and in a natural resource industries, you’re going to say we were out before we want to stay out now. And it looks like they’re going to get it. So that means I’m now changing the scope again and shrinking it back to where I started and what happens is anybody who’s in has to really bear the burden of this and everybody who’s out escapes, what I’ve called the Pillar One fishing net. So the size of the net keeps changing everybody, all the firms want out, but the tax authorities want the net as wide as possible. And so that’s part of the conundrum.

Matthew DeMello:

And in part two of your article, you discuss the potential roadblocks to taxing the top 100. What are those roadblocks and how can they be resolved?

Dr. Lorraine Eden:

Well, the first roadblock I think is implicit in kind of what I just said, which is that no multinational, I think, really wants to be (laughs) included in Pillar One Amount A in effect. I think going to be an extra tax on those firms, they are simply going to end up having to pay a greater tax. And so the first problem is that the multinationals themselves are going to lobby hard to get out. Some will get out in the beginning. As I said here, they’re just able to negotiate out. For example, what I’ve read in the papers is that finance and insurance are out simply because the UK insisted on it. London’s a financial hub. Most of the revenue comes from finance and insurance multinationals that are headquartered in London. They wanted out. So getting out at the beginning is one of the first things, but if you didn’t get out and you actually are caught in that net of the top 100, you yourself can do things to influence that, engage in what I call Pillar One tax games to be changed so that you could be out.

So, for example, let me just give you a simple one. The list of who’s in and who’s out is going to be determined based on size, based on revenue and profitability. Well, one year is different from another. And just to give you a very simple example, look at Zoom. If you go back to the beginning of the COVID-19 pandemic, Zoom was a little tiny multinational, it’s huge now, and far more profitable. Many firms are far larger and more profitable now, think of Amazon and Amazon’s online services, AWS services. Many of these firms are far larger and more profitable this year than they were last year. On the other hand, many other firms have come close to bankruptcy. So if the definition is size and profitability, clearly it’s going to change every year.

I did a simple calculation by looking at the Forbes 100 and the Forbes 200 firms just to see who was in and out for one year in the next, in the top 100 and the top 200, there was a 50 percent flip between who was in one year and who was in two years later. [Matt exhales traumatically.]

So what’s going to happen here is firms are going to bounce in and out of being inside the Pillar One net and outside the Pillar One net. And does that matter? Absolutely. And I explained to you why for two reasons of why it matters. Reason number one: Suppose I am one of the market jurisdictions that are receiving tax space and I’m getting tax space from, I don’t know, 20 multinationals that were in this year. Two years later, these multinationals are not in the top 100 they’re out. Well, I’ve been getting a nice piece of free text base for those multinationals. And now, they’re out! You think I’m going to let that go? Do you think a tax jurisdiction is just going to lose that base that they got for the last couple of years? No.

Matthew DeMello:


Dr. Lorraine Eden:

I think they’re going to try to any way possible, keep it they’ll audit law even higher, more intensively go after that multinational in other ways. So that’s the sort of first reason here.

The second reason I think why this is a problem is think about if you’re a tax jurisdiction and from a government perspective here, and you’ve got some all foreign multi-nationals in your jurisdiction. Some of them are really highly profitable and are supposed to lose tax base. You’re supposed to be giving up tax base. Others of those multinationals are underpaying tax. And so you’re supposed to get more from them. What is the tax authority going to do? Well, I think the tax authority is going to say “Those of you that aren’t paying enough, pay me more! And those of you that are paying me too much, too bad! You need to just keep on paying me what you paid before.”

And so again, the incentive is to tax the foreign firms in your jurisdiction more highly. In effect that becomes, if you think about it, if I start taxing the foreign firms in my jurisdiction more intensively, more highly than I did before, it becomes a barrier to inward foreign direct investment. It becomes what we call an investment related tax measure that could potentially be illegal under the WTO. If the WTO were to pick it up under, for example, the General Agreement on Trade and Services.

Matthew DeMello:

Just a quick summary for our listeners so far, because we know Pillar One and Pillar Two can get very, very complicated. Pillar One has seen its fair share of speculation and review. Since the blueprint came on the scene in October 2020. Now nearly a year later, the United States is taking its own stab at it proposing to narrow the scope of MNEs from 2,300 to 100. As Dr. Eden explores in her article, the roadblocks to this initiative include determining which industries make the cut, the constant change of multinationals on the top list and the selection criteria for the top 100. Dr. Eden, you have written extensively and been on several Fiona Show Transfer Pricing episodes, might I add, discussing the OECD initiatives in particular Pillar One and Pillar Two. What did you find particularly interesting during your research for this article? Did anything surprise you or stop you in your tracks?

Dr. Lorraine Eden:

Let me give you one example, Matt, of what surprised me. When I first started out doing this research, I was really interested in trying to think about why the arm’s length standard, that system that we’d had for nearly a hundred years, was a very principle-based system, which I think it was very flexible and that has morphed and changed over time. How that could adapt to the digital economy? I really truly believe it can adapt and can handle the digital economy.

And I guess I was surprised to see so many tax authorities willing to say, you know, “Situation’s changed time to throw out the old, bring in the new. Let’s jump to a system that we’ve had very little experience with before!” Which is global formulary apportionment. Now let me explain what I mean by that. There’s really very few countries in the world that have had any experience with formulary apportionment.

In the United States at the state level, we have a state level compact in about 40 states are in a compact where they share corporate income tax base based on a formula. And it raises very little revenue and it’s a very small part of their revenues that the states themselves get. They get far more income from other sources than they do from the corporate income tax. Canada’s also had one sort of based on this and it’s run very much down from the federal top-down level and not all provinces are in. I think Quebec is out. The only under real place we’ve used a formula is in 24-hour global trading, which has been some advanced pricing agreements negotiated within the banks where they’re actually running a trading book around the world and is so interdependent, you can’t get out of it.

Now, let me say the European Union has had a proposal for a consolidated corporate income tax base on the table for oh maybe 10 years now and they can’t get their act together and get it done. And so there’s been a proposal within the EU to do this.

So I think the one thing that really kind of surprised me is how so many tax jurisdictions and the OECD Secretariat in particular decided that because of the digital economy, it wasn’t possible to take the arm’s-length standard or arm’s-like principle if you want to use a European term, why it wasn’t possible to take this very flexible standard and adapt it to the digital economy. And instead, the decision was to throw it out, bring in Pillar One Amount A which is global formulary apportionment, and then use that global formulary apportionment method to allocate income.

It’s a huge radical change with almost no real wide experiments and no experiments that I’m aware of that are done at the international level. My take on this is really frankly, since this is a European proposal, if the Europeans are really so strongly interested in global formulary apportionment, why don’t they go ahead and bring in their corporate consolidated tax space and do it within the EU and leave the rest of us alone.

[Matt laughs.]

And then we’d get five years of experiment with the EU doing it, see how it works, find out what the problems are, and then maybe think about introducing it here. So I’m really surprised that tax authorities, in particular the OECD Secretariat, have made the decision to take a really basically untried proposal, move it to the unified framework, to the global economy, and try it at that level rather than trying it at a regional level first.

And since the real push for this is coming out of the EU, I think the EU really should step up to the plate and do it themselves with a corporate consolidated tax base and let the rest of us watch how they manage it. I think it’ll be a disaster, but you know, it would be there.

Matthew DeMello:

That’s the great thing about democracy. Everything’s an experiment and you get to say, I told you so after the fact.

Dr. Lorraine Eden:

I just don’t want them to experimenting with us.

Matthew DeMello:

[Laughs.] Yes, yes, yes, of course.

And actually reading your executive summary, I couldn’t help but be reminded of the title of your last article that we had you on the show to discuss. And that was “winners and losers” (in the title), winners and losers specifically from Pillar One Amount A given the new dynamic, narrowing it down to 100. Does that impact who wins and who or the conclusions you’re drawing here?

Dr. Lorraine Eden:

Absolutely, of course it does, Matt. Two things, I think, matter if in the original proposals that I was working with, I was working on the assumption that the scope included automated digital services and consumer facing businesses. And so there’s a large number of multinationals, but in more constrained sectors, the new proposal is really opening this to all sectors, but a very small number of the largest and richest multinationals.

The problem is, as I said, it isn’t really all sectors because it’s finance and insurance [laughs] and natural resource industries are going out. But in effect, if you look past those two sectors, the next largest sector is not automated digital services, it’s manufacturing. So in fact, what comes in scope here is all manufacturing industries, not just business-to-consumer, but also B2B. In other words, assuming the formula is still based on destination-based sales and profits earned at that destination, right?

It’s the gap between destination-based sales and destined-based profits, your share (as) a share of the world of those.. What it means is you’ve got to look at sales of not just business-to-consumer, but all kinds of sales, business-to-business sales. And when it does is it means all of a sudden large manufacturing multinationals that were further back up the value chain that didn’t sell directly to consumers are now going to be in scope here. That I think changes the dynamics significantly.

It also means that then the location of these firms change. So I think the big changes are, assuming that what I hear is correct that they are going to leave finance and insurance, they are going to leave out natural resource industries, then the two sectors that will be most affected will be manufacturing and automated digital services. And they will be a smaller group of multinationals, but that they will then be on the list here for paying more tax. And so that I think is a major change.

Now, my results in the earlier paper – one of the things I had done in the earlier papers, I simply did all industries and I knew it was going to be ADS plus CFP, but I did all industries just to show all industries. Well, what happened, of course, when we moved to the top 100 – then it did expand it to all industries. So what I discovered is my earlier results still were a viable and useful results. And I was able to show what happens if you leave finance and insurance and natural resources in, and what happens if you actually take them, pick them out here. There is a second big thing that I think is major change, really in the last two papers I’ve written on this and in the earlier one, and it was a puzzle that bothered me for a long time.

In other words, if you look at all my original papers that were done, as I sorta parsed through trying to understand how Amount A would actually work in practice, the big problem is in some sense, the step on who provides tax relief. I talked about “the game.” You know, “Who me? Not me!” “Yes, you!” You know, “You have to pay!”…  There’s a chapter seven in the Pillar One blueprint that explains the tax relieving process.

And it’s a four-step process… and I didn’t understand it! I talked to multiple people, all right! I talked to multinationals, I talked to tax authorities. I talked to experts, nobody understood chapter seven! It was fuzzy, murky… And what I said, what happened in the last two papers is it really struck me the importance of a territorial tax system. If almost everybody in the world is on a territorial tax system, they’ve given up the right to tax offshore income already.

In other words, they already gave. So I was reminded of this other little… you know, I like children’s nursery rhymes and things like that as a way to explain it. [Matt laughs.] But let me give you another one. Do you remember … the little game that you play with the napkin or the handkerchief where you have the villain and you have the victim and you have the hero, do you remember that one, Matt? [Matt chuckles.]

You know, your napkin in your home, the napkin is a mustache, right? And you say, you say, “You must pay the rent!” Right? The villain says, “You must pay the rent!” And you make it into a bow tie. [Matt laughs.]

Matthew DeMello:

Yeah! I remember this… [Laughing.]

Dr. Lorraine Eden:

And the, the victim says, “I can’t pay the rent!” “Pay the rent!” And the victim says, “I can’t pay the rent!” And then the third one, you make it into a bow tie.

Matthew DeMello:

Right. [Laughs.]

Dr. Lorraine Eden:

And the heroes says, “I’ll pay the rent!”

Let’s take that little children’s analogy and play it out here.

Matthew DeMello:


Dr. Lorraine Eden:

“You must pay the rent” is the market jurisdictions or the OECD Secretariat on behalf of the European Union. You must pay me Pillar One Amount A…

Matthew DeMello:


Dr. Lorraine Eden:

… for a variety of reasons. I believe I’m owed the rent, you owe me the rent.

So you need the rent. Here’s the tax base. “You must pay the rent.” [Matt laughs.] You must give me taxes. Okay. The victim says, “I can’t pay the rent.” In other words, why can’t I pay the rent? Well, one reason why I can’t pay the rent is I already paid the rent. Yes, if I’ve gone to an exemption based tax system and an exempt foreign source income, I’ve already paid tax space.

I’ve forgiven you. I say, “You go tax it.” I’m not going to tax this foreign source income. You tax it. So residence jurisdictions, I think, are going to say, “I already paid the rent.” Then you still say the market jurisdictions: you must pay tax, right?

Matthew DeMello:

You must pay your taxes, yup.

Dr. Lorraine Eden:

So who’s the hero here? Well, the hero I think, is going to have to be one of two possibilities other source jurisdictions, and they will not want to be heroes. Their argument was you could have taxed them, right? And you didn’t. And we can talk about why you didn’t and therefore, why should other source jurisdictions be asked to pay tax space here? The other possibility is the OECD comes in and says, we need a new multilateral agreement. And in that multilateral agreement, even if you are a residence jurisdiction on a territorial system, you must pay the rent anyway. You MUST give up tax base.

And if you read between the lines in some of what’s been said in the blueprint, it sure looks like there’s going to be a new multilateral agreement, which will force residence jurisdictions to not only having given up the right to tax foreign source income will have to pay additional on top. Now, I don’t think they’re going to be very happy, but that in practice. So in theory, that’s how the formulary apportionment system under Amount A would work in practice.

I think there would be all kinds of what I’ve called Pillar One tax games, but the long and the short of it is I think two groups will really get hit. One tax havens are going to end up paying more. I don’t think there’s any way around it.

Matthew DeMello:

Right, time’s up.

Dr. Lorraine Eden:

And the long and the short of it is time is up. It’s been a nice free ride for a very long time. And time is up.

Matthew DeMello:


Dr. Lorraine Eden:

Number two, I think multinationals themselves are going to pay more tax. And number three, in the long run, what gets hurt here? I think frankly is the arm’s length standard in the international tax principles on which that system has been based. I firmly believe that there are problems. There were other ways to fix this, fixing the loopholes in the system, whether you put on a global minimum tax or you simply, you know, stop allowing stateless income to go untaxed anywhere. In other words, the BEPS One proposals I think were really necessary and very useful.

So doing that I think was a necessary one. I mean, I could even see an argument for a Pillar One Amount B where you think about at least a minimum for routine distribution and sales services in host countries.

The other big piece of this is – remember, there’s sort of three things here. Amount A has really three parts. One is scope. And we spent a long time today talking about scope.

The second is nexus. Nexus is the right to tax. And market jurisdictions are basically saying we don’t have the right to tax. Well, in automated digital streaming services, they really haven’t because the definition of permanent establishment is a 20th century definition based on brick-and-mortar multinationals. You don’t have a permanent establishment. You don’t have nexus to tax unless you actually have some physical there there. And of course, with born digital multinationals, they can make income in countries and they don’t necessarily have to have a permanent establishment. So I do think there are problems with the PE definition. And one of the early proposals was to actually fix the PE definition.

Now let’s just talk about what Amount A did with nexus. Amount A said, basically, “If you’ve got a million dollars of sales in your jurisdiction, you have nexus.”

I mean, what?  If the old definition is too narrow, it’s brick and mortar, and you’ve got something physical there for PE, the new definition in Pillar One Amount A is gimme a million dollar sales, then you’ve got sufficient nexus and you get part of this tax base. It’s like almost every jurisdiction in the world. Name them all, anyone that’s the right to get some tax base here. And of course, there’s going to be huge incentives for jurisdictions to do that.

So we have three pieces: Scope, which keeps getting narrower and broader, and that’s both numbers of multinationals and the sectors that they’re in. Second is nexus, which is who are the market jurisdictions that are going to get this right to tax, which has now become extraordinarily broad under Pillar One Amount A.

And the third is the formula, how the money moves from Point A to Point B, which is a formulary apportionment system that relies on a mechanism providing tax base relief that is fuzzy at best and extraordinarily problematic and leaving itself open to lots of tax games. So this process was designed to create tax certainty and simplicity and I think it’s actually going to do the exact opposite on all three levels on scope on nexus and on the formula.

Matthew DeMello:

Indeed, and just in light of the changing dynamics between winners and losers with this proposal, do you think the proposal itself for this top 100 incentivizes companies to stay out of that top 100?

Dr. Lorraine Eden:

Of course, if you can stay out, it really kind of has two benefits for you. One, you don’t have to play the game. And so you can simply go on paying your tax under the arm’s length standard and under the existing rules. That’s the first thing. So any firm would like to do that.

The second thing is, remember when I talked about, about the possibility for non-tariff barriers here? Suppose we have two firms and one is caught in the Pillar One net and does have to pay this extra tax and the other one’s out any effect. You’ve created a difference in the tax treatment of those two firms that are inside a country. You’ve privileged one, the multinational that’s out over the multinational that’s in, and that creates all kinds of, A. to be out and B. also to take advantage of this. So I think for where taxes are this Pillar One Amount A could easily regenerate and turn into a non-tariff barrier that is actually discriminatory against foreign firms and in favor of domestic, and then between foreign firms, depending upon if some are in or some are out.

Matthew DeMello:

Let’s get to at least the heart of the interests of listeners on this show, what issues or concerns would this pose to transfer pricing?

Dr. Lorraine Eden:

I think it still leaves incentives there to manipulate transfer prices. And let me just talk to you about why now remember all stages of the value chain, except possibly the natural reserve stage financing insurance stages are going to be in scope. So that still leaves transfer pricing along that chain, as a possibility for moving tax base between jurisdictions. On top of that, you’re still going to have to file in individual jurisdictions are going to have to follow the existing transfer pricing rules. So in effect, you’ve got one system layered on top of another. And I mean, I’ve listened to both US tax officials and OECD officials talk about how this is going to work in that it is possible to layer one system on another. I think more of it is tectonic plates, grinding against one another, both causing additional tax problems and providing their own loopholes.

Tax professionals are a very bright bunch. And I think they’re mostly Type A personalities. [Matt laughs.] So you put a room full of tax professionals together that are very bright, mathematically trained whizzes and Type A personalities and there are loopholes to be found. They will find them. [Matt laughs.]

So I think with the potential for disputes – and remember, as when I started in this field, there were almost no regulations and almost nobody in it. Now there are multiple countries taxing and they will have both the old rules and there will be some group of them, maybe most of them, would be involved in this Pillar One Amount A and Pillar Two. Don’t forget about the global minimum tax, which is going to hit everybody also!

Matthew DeMello:

Of course.

Dr. Lorraine Eden

So there’s an additional complication or complications coming here that I think if you wanted just to ask yourself is this a good time to get into a transfer pricing career? It’s just getting progressively messier and more difficult and more complicated. And that provides lots of room for professionals.

Matthew DeMello:

Yeah, and lots of planning opportunities.

Now you mentioned that you know we have a very smart group of listeners. I’m sure there’ll be tasked with part of finding those loopholes, but what else can be done to combat these potential problems?

Dr. Lorraine Eden:

Well, my proposal originally from the get-go was to approach this in a different manner, the real original problem here was taxing digital multinationals and digital transactions. And I thought the existing arm’s-like rules could be written given their flexibility and given they are based on sound economic and business principles that they could be adapted to take into account. I also thought it was possible to adapt the definition of nexus of permanent establishment for a 21st Century definition that would also help provide market jurisdictions, where there were ADS sales, get a tax bite and be able to generate some revenue on their own here. I also thought it was possible to deal with tax havens in a variety of ways. My proposal would frankly [laughs] would be going back and tax worldwide income and get rid of, get rid of deferral and get rid of check the box!

We moved in a different direction with the 2017 Tax Act. And we moved to a territorial system. We really kind of got rid of check the box. We put in things like BEAT and GILTI. And I think with the US having gone that way, we’re down that road now.

So yes. What else could we be doing? Well, I think we probably do need a global minimum tax. I’ve already written on this. And some of the things that were in my proposal actually have come down and been followed in the new statement. In other words, I do think it needs to be on a country-by-country basis. Not the way GILTI was done, where you allowed everybody to pool on a worldwide basis.

There is talk about carve-outs and I think carve-outs are a real problem because they just allow more problems.

So what could we do well now in the real world? I still think Amount A is a bad idea, and I hope that it dies on the drawing board. I think Pillar One amount B has some legs and it could be put in place. I do think Pillar Two, both the tax and the other proposals on the subject to tax rule, for example, those are possibilities.

So I think there are ways to fix what I see is the real problem here, which is the top level stage of the international tax rules are full of loopholes. And those loopholes have encouraged transfer price manipulation. If you plug the loopholes, then the incentives to manipulate transfer prices go away. And the managerial reasons for transfer pricing become more important. If the problems are at the international tax regime level, where there are full of loopholes and opportunities to game the system, transfer pricing is one of the ways you can game the system.

If you fix the problems at the top level, the international tax regime level – and I think BEPS one was designed to do that and really most of Pillar Two is designed to do that. And you could even argue that possibly Pillar One Amount B may have something to do that, but if you can fix them there, then what happens is taxes don’t drive transfer pricing anymore. It’s not the rates and the preferences and the holes that drive transfer pricing. It’s the managerial reasons, the economics and business reasons for setting transfer pricing that come to the fore. And that’s a good thing. That would be a good thing. So I’m for fixing it at the top stage and then letting the transfer pricing rules work, adjusting the PE definition. And for thinking more generally about how we do tax digital, the digital economy here.

Maybe that means digital services and sales taxes possibly? That’s on my agenda to write about too. If we end up doing digital sales and services taxes, realize they’re governed by the WTO and that’s okay!

The WTO has handled tariffs very well and has handled most non-tariff barriers very well. And I think the WTO could beef up the GATS and really think about how to handle digital sales and services taxes. They could be more general like VAT taxes. I mean, the United States is the only country in the world that still doesn’t have a VAT. Yeah, no, it’s time to get a VAT here or a national sales tax here as a way to raise the revenue. So I do believe there were other ways to go that would have been less invasive and less destructive and create less distortions than the proposal that’s currently on the table.

Matthew DeMello:

That sounds like your answer to the next question, which is, have you been encouraged by the evolution of Pillar One or might it be a mixed bag? On the one hand, in some areas they were taking your advice both within Pillar One and without. Elsewhere, we seem to be moving more and more in directions that you’ve been telling us for a while now are kind of non-starters from where you sit.

Dr. Lorraine Eden:

I think it is a mixed bag. I think we’ve moved a long, long way from the original problem and the solution has nothing to do with the original problem [laughs]. And maybe that’s okay. I don’t know. But if the problem was taxing, the digital economy, that Pillar One Amount A is no solution to that problem. I don’t think, I think it’s moved along. And the taxing the top 100 has moved and seems to me even further away.

One of my real worries is it’s really going to tax manufacturing, multinationals, and it’s going to tax them up at the B2B stage as well as the final stage of at the end consumer stage. So lots of very large, very productive firms are going to be in the radar screen for taxes here that weren’t before. I think if you’re going to do this banking and insurance and natural resources, everybody should be in.

And then just a very limited number of the very largest firms should be in, or maybe, you know, if I really had my druthers, we, we just simply don’t do this at all. Now I’m not talking about the politics of getting this through in the United States, right. Which looks to be extraordinarily difficult mid-term elections in another year. I mean, no congress likes to deal with big tax measures in a, in a potential election year. So am I pleased with the new directions? No, I think that it doesn’t solve the problem in many ways, moves us away from the original problem.

Matthew DeMello:

What do you want multinationals to take away from your findings? How can the potential say top 100 companies prepare themselves for the legislation if it’s past?

Dr. Lorraine Eden:

Well, it’s interesting. I’ve talked to a variety of multinationals on that and where they all come down to is they’ve been told by all the tax authorities that their overall tax base will not change. If you look at the empirical estimates on Pillar One Amount A the amount of revenue that it raises worldwide is peanuts. And the reason is because if the formula works like it’s supposed to, then the tax gains that go to the market jurisdictions in terms of base are just offset by the tax base losses that go to the so-called tax relieving jurisdictions. In other words, we move the money around in the game it ends up at zero, right? The multinationals I’ve talked to have all told me, that’s what they’ve been told. Their overall global taxes will not go up.

My takeaway from multinationals is you’ve been sold a bill of goods that is not going to happen!

I think the tax relieving mechanism is fuzzy at best and potentially really problematic in terms of who actually gets to give up base. Because I don’t think any of the tax authorities really want to give up tax base. To the extent they don’t give up tax base, the question is where’s this money for the market jurisdictions going to come from? Particularly remember a market jurisdiction is now any jurisdiction that has more than a million dollars from the sales! So really, you know, all these countries now can claim a bit of the tax pie, a bit of the corporate income tax base. My takeaway is the taxes on the multinationals that are in scope for this are going to go up. Their overall global tax payments are going to increase. They can’t not increase.

And I think my advice to multinationals is to step up, speak up. This is a bad idea and you can go forward. Remember when we started this conversation, I said, Janet Yellen came in with this under the new Biden administration and needed to raise some tax revenue and really felt the way to do this was to fix GILTI by getting other countries also to move on the global minimum tax. You wanted to move on Pillar Two. Pillar Two is something that the US wanted in order to give it up, to get Pillar Two, they needed to give Pillar One to the European Union. The European Union wanted Pillar One.

My take on this is that the multinationals really should step up and say, Pillar One is going to tax American multinationals much more heavily. We are the ones who are going to be in scope. If you look at my numbers in, when I did it on the, who are in the top 100, the U S share is really high in here.

And if you take a finance and insurance and you take out natural resources that the US share gets over 50 percent, that means manufacturing and ADS firms in the United States are going to get hit with more taxes under Pillar One Amount A. Anyway you look at it, I don’t see a way around this. More will be paid by the tax havens.

Yes, the tax havens I think are going to lose base. But overall, the taxes on American multinationals, in manufacturing and ads in retail trade and wholesale trade, and in other industries are going to increase. You can’t not do that because of the way this I think will play out in practice. My suggestion is we should really try to uncouple Pillar One and Pillar Two, move on to minimum tax. I think that maybe it’s day is come. It’s not a first best solution, but it does help backstop the tax system.

And it will mean the tax havens, simply, their day in many ways is over, unless they have real competitive advantages on the ground, which I think Ireland has by the way but lots of other countries do not, which raises issues on its own that we could talk about some other time.

But I want multinationals to take away they should recognize that the idea that you can have Pillar One Amount A and not pay a much larger global corporate income tax base is not going to happen. Their taxes are going to increase significantly and American multinationals in particular, not just the big digital born digital firms, but all manufacturing, multinationals that are the biggest ones are going to be in scope here. And they should prepare themselves by talking more about, let’s see if we can unbundle this package, move on some things and get rid of Pillar One amount. A

Matthew DeMello:

And if I can summarize a little bit more comprehensively our entire episode: While the US proposal to tax the top 100 global multinationals is still in transit, its presence in the global tax conversation indicates how international tax reform is unfolding before us in an effort to keep up with the digitalized economy. But like any pioneering endeavor, it doesn’t come without pitfalls, which could impact transfer pricing and trigger reactionary pushback from jurisdictions. The technical framework around Pillar One, along with Pillar Two is expected to finalize by October 2021 and be implemented in 2023. So now all we can do is wait.