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Does the OECD’s Digital Tax Project Need a Pillar 3?

Posted on May 22, 2020

Watch Allison Christians, the H. Heward Stikeman Chair in Tax Law at McGill University, tell Tax Notes contributing editor Robert Goulder about her proposal for a global excess profits tax as the third pillar in the OECD’s digital economy project.

 

Here are some highlights…

On why corporate income tax isn’t enough

Allison Christians: We're going to see a lot of corporations not having to pay a corporate tax in the coming year because they're not going to be profitable. A lot of firms are going to be in a situation where the corporate tax is not doing much of anything except carrying losses forward for a while.

But then again, there are going to be instances where the economy is really broken, but it is going to work to the financial advantage of some firms. That's really what the excess profits tax is trying to get at.

The idea is that the economy is broken in a fundamental way. Everything is turned upside down. Who stands to make a profit in this economy is not from their own innovative creative business advantage, but rather just this market brokenness.

On whether a global excess profits tax could be viewed as punitive

Allison Christians: I think it's more a reflection on the market than the firm. When the market is broken and a monopoly exists, that's not the firm's fault.

Every firm would like to be a monopoly. That's the nature of the business. But in the perfect market there would be no monopoly, and there would be no excess profit. There I think we can liken it to other taxes that are thinking about failures such as, for example, the failure to internalize certain externalized costs.

You could think of it as punishment, but to the extent it's punishment, it's a punishment of our collective inability to sustain a functioning market. It's not a punishment of a firm at all.

On drawing the line between a routine and non-routine profit

Allison Christians: It might be a little controversial to say that economists cannot draw that line. We all know that economists cannot draw that line. It defies the drawing. I've said it before, I've said it in different places, but you just simply can't take the dollar and refragment it. You can't take something that's the product of multiple inputs, and then fragment it out and say what it belongs to. It's really hard to draw that line.

That tells us that we're going to draw a political line. We're going to make a compromise. We're going to say we'll use some economic studies and estimates to try to figure out what's normal. In an excess profits tax, we're going to call that the normal routine. In pillar 1, we're going to call that the routine profits. We have normal and routine as cognates in this world. Then in the OECD framework, in the digitalization project framework, we have this excess, which is called non-routine or residual.

On apportionment of taxes

Allison Christians: A GEP tax is, if not a solution, at least a nod in the direction that the problem is universal and so should the solution. The inclusive framework is, if nothing else, positioned with an ear at the OECD, and it should have a mouth at the OECD as well. I think this is where the political decision about how you collect that tax and how you distribute it comes in.

Here we'll finally pull in pillar 2. Pillar 2 envisions that there's an idea that if one country doesn't use its taxing power that another country has the backup source jurisdiction or residence jurisdiction can do backup taxation.

I think this is the idea that should carry through to the GEP tax. That is you would think if you're using [country-by-country] reporting, then the GEP tax is probably being collected at the level of the parent. But if the parent country doesn't want to tax, it should drop down the chain. That's how pillar 2 kind of envisions the world.

On earmarking proceeds of a global excess profits tax

Allison Christians: We know that earmarking can be a powerful emotional tool or instinctive tool to help explain what it is that we're doing with a tax.

I think earmarking is one of those things that again, it's the global decision-making process that has to go into that. Would I personally support it? Yes. If the inclusive framework members decided that the GEP tax money should be 100 percent used to purchase personal protective equipment (PPE) and distribute it to those on the front lines in the neediest countries, I would not be adverse to that.

Does that make economic sense? Do you raise a GEP tax, which is supposed to be market fixing, for the purpose of the health needs of the poorest countries? I don't know if there's an economic argument there.

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