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It’s Time for Pillar 3: A Global Excess Profits Tax for COVID-19 and Beyond

Posted on May 4, 2020
Tarcisio Diniz Magalhaes
Tarcisio Diniz Magalhaes
Allison Christians
Allison Christians

Allison Christians is the H. Heward Stikeman Chair in Tax Law at McGill University in Montreal, where she writes and teaches in the area of national and international tax law and policy. You can follow her on the Tax, Society & Culture blog at or on Twitter (@profchristians). Tarcísio Diniz Magalhães is a postdoctoral researcher with the McGill University Faculty of Law.

In this article, the authors consider proposals to rebuild revenue coffers using excess profits taxes during the COVID-19 pandemic and argue that, owing to emerging global tax data, norms, and governance structures, a global excess profits tax has better prospects than a series of unilateral measures.

Even as the COVID-19 pandemic continues to wreak havoc around the globe, some industries reap outsized financial rewards. In response, the prospect of excess profits taxes looms as a punishment for price gouging, a curb on socially unacceptable profiteering, or a viable source of funds to meet the cost of the enormous revenue shortfalls to come. Excess profits taxes can be a satisfying policy prescription in a time when a few bask in windfalls while the masses are gripped by fear and loss, and those on the front lines of public health sacrifice everything to keep the novel coronavirus at bay.

Yet there is no reason to think that national excess profits taxes would accomplish any of their stated goals, because even as national borders have closed, capital remains mobile and follows the same economic logic as ever. This includes using every available mechanism to avoid paying taxes, including shifting profits to more favorable tax regimes abroad. While the international community has been busy working to curb some of these practices over the past decade, the most difficult challenges remain, especially regarding firms built on high tech and unique intangibles. These are some of the very firms most likely to be targeted by an excess profits tax, even though their regular profits have proven extremely hard to tax without global cooperation.

As such, now is not the time for national excess profits taxes. Instead, it is the time for a “global excess profits tax” — a GEP tax.

A GEP tax is appropriate because now, more than ever, we can see that the construction of a global capital market is the product of countries working cooperatively in the common interest. Now, more than ever, we can see that richer countries consistently capture more than their fair share of this common interest — the use of market power to wrest medical supplies from poorer competitors is a particularly vivid display of the dynamics at work. Now, more than ever, we can see that the ability to avoid taxation by those that stand to profit the most from social order and public goods must be made to pay a commensurate share to protect these things. And now, more than ever, we have the information flows necessary to design a GEP tax, to figure out how much it could raise, and to have a discussion among all stakeholders about how it should be distributed.

Using the structures we have available for immediate action today, a GEP tax could be formed as a stabilizing third pillar in the ongoing global consensus-building program on revising international tax rules to cope with the digital economy. Indeed, owing to the combination of new data sources, evolving profit measuring and distribution norms, and cooperative governance structures, a GEP tax is far more likely to be successful if coordinated at the international level than it would be if left to unilateral domestic action.

New Data Sources

The first consideration in building an excess profit tax is the design of the tax base. Typically, an excess profits tax base consists of net income as calculated under normal tax rules. Undertaking this calculation at the domestic level would simply bake in existing problems associated with base erosion and profit shifting. However, we now have profit assessment tools at the international level that were not available during prior economic crises and that largely arose because of the global revenue impacts created by the last fiscal crisis.

In particular, we now have country-by-country reporting by large multinationals, one of the four binding standards of the grand international bargain on mutually agreed measures to counter base erosion and profit shifting. This reporting standard provides worldwide data that overcomes the kinds of intercompany profit shifting that would otherwise mask the existence of excess profits in any one country. In place since 2016, CbC reporting provides a base of information that would make it possible to calculate the global profits earned by large multinational companies over at least the past few years.

Once the starting tax base is established, the next step is to determine what part of the profits should be considered “excess” and therefore subject to the surtax. Using an average-earning approach, current-year profits could be reduced (credited) by the average profit of the firm over a few prior years, thus characterizing as a windfall all profit above the firm’s own average over the period. Using an invested capital approach, a specified return rate could be established as “normal,” and everything earned above that amount treated as excess. For example, in 1918 the United States instituted a wartime excess profits tax that characterized returns on tangible assets above 8 percent as abnormal and subject to a tax rate of up to 80 percent.

Either approach would be aided by CbC reporting. An adjusted earnings approach would make far more sense using global consolidation than national income measurements. A twist on an invested capital approach would be possible by combining CbC reporting with international efforts to identify and globally reallocate the residual profits of consumer-facing and highly digitalized firms.

New Norms for Residual Profits

Within the OECD’s ongoing work on a new consensus to measure and distribute the profits of digital-centric and consumer-facing multinationals is a project to distinguish between routine and residual profit. The framework is laid out as “amount A” in pillar 1 of the OECD secretariat’s proposed rubric. The general idea is that it is possible to establish average returns to various core functions undertaken by firms, such as marketing and distribution, whether on a country, industry, firm, or line-of-business basis. Doing so defines a firm’s “normal” or routine return, while its residual return is deemed to be everything that remains.

There is no doubt that the line between routine and residual is virtually impossible to ascertain with economic certainty. As such, the consensus to be forged under pillar 1 will be a compromise borne of necessity rather than reality — much like those forged in the original negotiations leading to the rise of the international tax system a century ago. Yet if the OECD manages to establish such a consensus, there can hardly be an argument against applying the same principles to an excess profit tax. Some translation will be required to do so.

The distinction between routine and residual (or nonroutine) profits in the OECD’s digitalization work contemplates the value added by specialized assets and functions. Residual earnings are typically attributed to business models that, even under normal circumstances, provide a firm a unique advantage over its competitors. In contrast, the distinction between normal and abnormal profits in an excess profits tax is typically drawn by market-spanning distortions caused by exogenous shocks. There is a distinction to be drawn between the economic forces that produce residual versus abnormal returns, but the underlying line-drawing principle is identical.

We can therefore combine the OECD’s pillar 1 line-drawing exercise with the availability of global corporate profit data to come up with a rubric for a GEP tax. For example, using aggregate CbC data, researchers determined that between 2016 and 2019, U.S. multinationals earned on average a 22 percent return on assets, of which 8 percent can be attributed to routine profits and 14 percent to nonroutine profits.1 Recent research by KPMG LLP providing industry and country-level analysis of average routine and nonroutine profit amounts generally confirms these findings.2 The percentages are averaged across industry and country; it could make more sense to work with more granular numbers. However, the implication is that in a “normal” market, a return above 8 percent is typically a residual profit, and that most firms earn residual profits at an average rate of 14 percent.

The same logic can be applied to the present economic crisis, in which most firms will not be expected to see anything like a 22 percent return in 2020. As such, a firm earning worldwide profits in 2020 that exceed this 2016-2019 average could reasonably be considered to have earned an excessive profit, and therefore could be subject to additional taxes in the form of a GEP tax. This is a conservative proposal. One could certainly argue that some amount of residual profit, even within the pre-crisis global average of 14 percent, is already excessive because it is attributable to undue market advantages enjoyed as a result of quasi-monopolistic conditions, some of which have only been enhanced by the pandemic. However, the combined 22 percent figure at least provides an objective and reasonable starting point for a GEP tax.

Allocation and Backstop

Finally, it is necessary to determine which countries should be eligible to impose the GEP tax and on what amount of the available base. This requires contending with the possibility that some governments are not likely to want to tax their highly successful multinationals at extranormal rates themselves, and certainly do not want other countries doing so. Again starting with the tools we will have available in the immediate future, some of the principles forming within the OECD’s digitalization project should be consulted.

In particular, a GEP tax could take advantage of the ideas developing within pillar 2, also called the global anti-base-erosion proposal (GLOBE). GLOBE aims to set a floor for tax competition according to the principle that if one jurisdiction does not tax the profits of a multinational at least at a minimum rate agreed among countries, the other jurisdiction (in which a parent, a subsidiary, or a permanent establishment is located) can do so. Pillar 2 thus proposes four complementary rules:

1) an income inclusion rule;

2) an undertaxed payments rule;

3) a switchover rule; and

4) a subject-to-tax rule.

A GEP tax could be built as a pillar 3 alongside pillars 1 and 2, combining the income characterization and allocation principles of pillar 1 with the backstop taxation setup of pillar 2. Pillar 1 establishes that it is possible to differentiate and allocate distinct categories of profits on a global basis. In turn, pillar 2 establishes that wherever profits are allocated, all profits can ultimately be taxed at a specified minimum rate. Accordingly, as a stabilizing third pillar, a GEP tax base could be calculated using global tools, with global cooperation, in a way that stands to be more effective than any one national approach.

As a final component, because a GEP tax would be an emergency measure, the countries involved in its development have an equal stake in not only building out the framework but also ensuring that the revenues it raises are appropriately deployed to meet the global crisis presented by the pandemic. The inclusive framework, now with 137 member countries, could be invited to consider how money collected by the GEP tax might be used to fund measures to counter the effects of the pandemic at the national and international level.


1 Alex Cobham, Tommaso Faccio, and Valpy FitzGerald, Global Inequalities in Taxing Rights: An Early Evaluation of the OECD Tax Reform Proposals (Oct. 2019).

2 See Ryan Finley and Stephanie Soong Johnston, “KPMG Study Casts Doubt on Key OECD Global Tax Deal Design Issue,” Tax Notes Int’l, Mar. 2, 2020, p. 1024.


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