Pillar one has a “fundamental flaw” which will lead to international unpredictability, The Cato Institute’s tax policy studies director Adam Michel has asserted.
In a critique published on Monday, October 30, he argued pillar one introduces new arbitrary formulas and thresholds for allocating taxing rights to achieve political ends.
His criticism came after last month’s publication of The Multilateral Convention to Implement Amount A of Pillar One (MLC), which showed a consensus by OECD members on the technical aspects of amount A.
Amount A applies to in-scope multinational enterprises. It seeks to allocate parts of their profits to countries where they sell products and provide services.
"The new tax introduces unpredictability and new political incentives into a system previously governed by understood norms,” Michel argued.
A central aspect of this “arbitrariness”, according to Michel, is the criteria that defines which businesses come under the scope of the new rules.
"The chosen thresholds, based on profit margins and annual revenues, are not rooted in a new or consistent theory of taxation; they are chosen out of political convenience to maintain consensus and target certain types of firms, such as US‐based technology firms,” he contended.
“While lengthy and complex with many additional specific problems, the fundamental flaw in pillar one is conceptual,” Michel added.
He believes the rules will not fully replace digital service taxes and will create confusion on a global scale.
"It is more apparent than ever that the OECD’s proposal will only add to the political disagreements over the international tax system, making them worse,” Michel said.
The amount B proposal also comes under pillar one, the first part of the OECD's two-pronged approach to international tax reform. It is aimed at simplifying and streamlining the arm's-length principle as part of new profit allocation rules and would adapt longstanding TP rules to the OECD’s two-pillar solution.
