Pillar one: first step towards a destination-based tax?
The key innovation in the ‘Secretariat’ pillar one proposals is to allocate a share of deemed residual profit to market jurisdictions. As someone who has long advocated a shift to a ‘destination’ or ‘market’ basis, I see this proposal as a step in the right direction.
But that support comes with two strong caveats. First, the proposal is overlaid on top of the existing system, without any detail as to how the allocation under the existing system will be modified, as it must be – so the proposal is only half of the story. Second, since the existing structure will remain, complexity will be even greater.
The idea of allocating rights on a destination, or market, basis remains controversial. In my view, such a move is justified by the relative immobility of a third party purchaser of goods and services. That reduces economic inefficiencies created by tax-induced distortions to real location decisions and it also reduces options for shifting profit.
But the proposal instead seems to be based more closely on the BEPS concept of taxing profit where value is created – reflected in only part of the residual profit being allocated to the market, for example, because of ‘marketing intangibles’. But at the recent London IFA Congress, even Pascal Saint-Amans rejected this concept as justifying a general allocation of taxing rights, stating that it was useful only in identifying that profit did not arise in havens that had little or no real activity.
It is simply not credible to believe that we need fundamental reform of the system because we have just discovered that ‘value’ is being created in ‘markets’. What is credible is that governments have understood that the immobility of the consumer – or the user in the case of some digitalised services – gives them an opportunity to tax the very large profits of some multinationals. That is why there are unilateral proposals for digital services taxes. Acknowledging that would be a first step to a more comprehensive and stable system.
Professor Michael Devereux, Oxford University Centre for Business Taxation
Home >Articles > Pillar one: first step towards a destination-based tax?
Pillar one: first step towards a destination-based tax?
The key innovation in the ‘Secretariat’ pillar one proposals is to allocate a share of deemed residual profit to market jurisdictions. As someone who has long advocated a shift to a ‘destination’ or ‘market’ basis, I see this proposal as a step in the right direction.
But that support comes with two strong caveats. First, the proposal is overlaid on top of the existing system, without any detail as to how the allocation under the existing system will be modified, as it must be – so the proposal is only half of the story. Second, since the existing structure will remain, complexity will be even greater.
The idea of allocating rights on a destination, or market, basis remains controversial. In my view, such a move is justified by the relative immobility of a third party purchaser of goods and services. That reduces economic inefficiencies created by tax-induced distortions to real location decisions and it also reduces options for shifting profit.
But the proposal instead seems to be based more closely on the BEPS concept of taxing profit where value is created – reflected in only part of the residual profit being allocated to the market, for example, because of ‘marketing intangibles’. But at the recent London IFA Congress, even Pascal Saint-Amans rejected this concept as justifying a general allocation of taxing rights, stating that it was useful only in identifying that profit did not arise in havens that had little or no real activity.
It is simply not credible to believe that we need fundamental reform of the system because we have just discovered that ‘value’ is being created in ‘markets’. What is credible is that governments have understood that the immobility of the consumer – or the user in the case of some digitalised services – gives them an opportunity to tax the very large profits of some multinationals. That is why there are unilateral proposals for digital services taxes. Acknowledging that would be a first step to a more comprehensive and stable system.
Professor Michael Devereux, Oxford University Centre for Business Taxation
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