THE SIMPLE ANALYTICS OF PILLAR ONE AMOUNT A

Pillar One Amount A proposes to reallocate a portion of the global profit of multinational enterprises (MNEs) from their Residence (home) and Source (host) jurisdictions to their Market (sales destination) jurisdictions. The reallocation creates a new taxing right for Market jurisdictions, enabling them to levy a corporate income tax (CIT) on their “received” share of MNE global profit. To avoid double taxation, jurisdictions with nexus under current international Residence and Source tax principles must give up the right to tax their “relieved” share of MNE global profit. This article uses a simple analytics approach to clarify several likely impacts of Amount A. First, Amount A can be separated into a direct (tax base) effect and an indirect (tax rate) effect; the direct effect appears to be the more important driver for both the jurisdictional and overall impacts of Amount A. Second, although the EIA predicts a small overall impact of Amount A on global CIT revenues, the country-level impacts can be large for both “winning” and “losing” tax jurisdictions. Third, the overall impact of Amount A on global CIT revenues is likely to be much larger than predicted due to jurisdictional tax games that boost the direct (tax base) effect. Fourth, the creation of new taxing rights under Amount A essentially applies sales-based global formulary apportionment (GFA) to MNE profit. Sales-based GFA rewards Market jurisdictions with large markets and poorly performing MNEs and punishes those where MNEs earn above the global average return on sales. In sum, Amount A has several unintended consequences including distortion of market signals and encouragement of gaming behaviors by MNEs and tax authorities, which would lead to greater tax complexity and disputes